Managerial Accounting: Decision Making

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Questions and Answers

What distinguishes managerial accounting from financial accounting?

  • Managerial accounting is primarily concerned with historical data, whereas financial accounting projects future performance.
  • Managerial accounting focuses on external reporting to investors, while financial accounting is for internal use.
  • Managerial accounting is governed by strict accounting standards, unlike financial accounting.
  • Managerial accounting provides flexibility for companies to tailor their approaches, while financial accounting adheres to standard rules. (correct)

In calculating the total product cost, which of the following elements are included?

  • Materials, labor, and overhead (correct)
  • Labor and overhead only
  • Materials and labor only
  • Materials and overhead only

Which of the following is an example of a period cost?

  • Factory rent
  • Raw materials used in production
  • Direct labor costs
  • Manager salaries (correct)

What is the primary focus when using job-order costing for custom homes?

<p>Tracking costs for each individual house due to their unique designs. (D)</p>
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Which of the following items would be included in work-in-process inventory?

<p>Materials, labor, and overhead costs for partially completed goods (D)</p>
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What is the purpose of cost transfer between departments in a production process?

<p>To accurately track and allocate costs as a product moves through different stages of production. (B)</p>
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How do machine hours relate to activity-based costing?

<p>They directly impact costs, serving as a cost driver. (C)</p>
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What happens to total variable costs as production levels increase?

<p>They increase proportionally. (A)</p>
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What is a key characteristic of fixed costs?

<p>They remain constant regardless of production output. (D)</p>
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What does achieving the breakeven point signify for a company?

<p>The company's total revenues equal its total costs, resulting in neither profit nor loss. (D)</p>
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In managerial accounting, what is the initial step for profit planning?

<p>Determining the number of units to sell that covers all costs. (D)</p>
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What does the margin of safety indicate?

<p>The extent to which sales can decline before losses are incurred. (B)</p>
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What role does a budget play in financial decision-making?

<p>It serves as a strategic map that orchestrates income and expenditure. (C)</p>
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Which of the following is a part of execution in the master budget overview?

<p>Executing each sub-budget with precision. (A)</p>
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Which of the following is typically part of the Operating Budget?

<p>Sales Budget (B)</p>
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If a company budgets sales of 50,000 in July, 48,000 in August and 51,000 in September, and desires ending inventory to be 40% of the next month's sales, what is the desired ending inventory in August?

<p>20,400 (C)</p>
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What portion of Credit Sales are cash receipts in February, according to the graphic?

<p>60% (B)</p>
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A company anticipates cash receipts of $43,000 and cash disbursements of $32,000 in February. If the beginning cash balance is $12,000, what is the end cash balance?

<p>$23,000 (A)</p>
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What are costs directly tied to production?

<p>Product-related costs (B)</p>
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How can managerial accounting enhance decision making?

<p>By focusing on areas of success and improvement. (D)</p>
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In the Balanced Scorecard approach, which perspective evaluates efficiency and effectiveness?

<p>Internal Processes (A)</p>
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How are costs handled when a department completes its part in a production process?

<p>The department passes costs to the next department. (B)</p>
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What is analogous to fixed costs?

<p>A car incurring a yearly maintenance fee (A)</p>
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If someone needed to sell eight cookies to break even but sold ten, what is the safety margin?

<p>2 (B)</p>
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In the Jellybean Metaphor, what is the purpose?

<p>To compare a guess to the actual number to see how close you were. (A)</p>
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Flashcards

Managerial Accounting

Managerial accounting highlights critical information for better decision-making.

Important Info

Focuses on identifying important information.

Custom approaches

Involves custom approaches tailored to specific company needs.

No Product-Related Costs

Costs directly tied to production.

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Materials

Costs of raw materials used.

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Labor

Expenses of workforce.

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Overhead

Indirect costs of production.

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Not Product-Related

Costs not directly tied to production.

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Manager Salaries

Example of a period cost.

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Advertising

Another form of period cost.

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Track Costs

Each house's expenses are monitored in job-order costing.

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Unique Builds

Every home is distinct in job-order costing for custom homes.

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Materials in WIP

Added to inventory as used.

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Labor in WIP

Time spent is accounted for in work-in-process inventory.

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Overhead in WIP

Indirect costs are included in work-in-process inventory.

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Department No. 1

Completes its part and passes costs.

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Next Department

Receives costs for further processing.

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Machine Hours

Directly impacts costs.

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Electricity Usage

Costs rise with use.

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Varies in Total

Variable costs rise as production increases.

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Constant/Fixed per Unit

Cost per unit typically remains constant.

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Fixed in Total

Fixed costs remain constant regardless of production output.

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Budget Planning

Fixed costs provide stability within budget plans.

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Breakeven Point: Units

A sale of 5000 units is imperative to achieve breakeven.

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Breakeven Point: Profit

The company neither profits nor incurs losses.

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Study Notes

  • Managerial accounting highlights critical information for better decision-making

Detective Work

  • Managerial accounting helps focus on important information like a magnifying glass
  • Managerial accounting helps discover areas of success and improvement
  • Managerial accounting improves decision making to better the business

The Balanced Scorecard Approach

  • Financial Performance measures profitability and revenue growth
  • Customer Satisfaction assesses how happy customers are
  • Internal Processes evaluates efficiency and effectiveness

Flexibility

  • Managerial accounting has no strict rules unlike financial accounting
  • Managerial accounting is not governed by accounting standards
  • Companies tailor managerial accounting to their specific needs

Total Product Cost

  • The components of total product cost are materials, labor, and overhead
  • Materials include costs of raw materials
  • Labor includes expenses of workforce
  • Overhead includes indirect costs of production

Period Costs

  • Period costs are not product-related, so not directly tied to production
  • Manager salaries and advertising are examples of period costs

Job-Order Costing

  • Job-order costing is useful for custom homes
  • Job-order costing tracks each house's expenses
  • Job-order costing is useful for unique builds as every home is distinct

Work-In-Process Inventory

  • Materials are added to inventory as used
  • Labor time spent is accounted for
  • Indirect costs are included in overhead calculations

Cost Transfer

  • Department No 1 Completes its part and passes costs
  • The next department receives costs for further processing

Activity-Based Costing

  • Machine hours directly impact costs
  • Electricity usage causes costs to rise with use

Variable Costs

  • Variable costs are inextricably linked to production levels
  • When the quantity of production increases, the total variable costs rise correspondingly
  • The cost per unit typically remains constant, despite changes in total output
  • Understanding variable costs is pivotal in pricing strategies and profitability analysis
  • Variable costs directly affect the company's bottom line
  • An analogy of this is buying ice cream, where total expenditure escalates with each additional scoop

Fixed Costs

  • Fixed costs remain constant regardless of production output
  • Rent, insurance, and straight-line depreciation of equipment are examples of fixed costs
  • Fixed costs provide stability and a predictable financial outlay within budget plans
  • This predictability is necessary for strategic forecasting
  • This is similar to a car incurring a yearly maintenance fee which is constant whether the car is used or not

Breakeven Point

  • A sale of 5000 units is usually imperative to achieve breakeven
  • The sale covers both variable and fixed costs
  • At the breakeven point the company makes neither profits nor incurs losses
  • At this point, the company maintains a financial equilibrium
  • The breakeven threshold is met when subsequent sales translate into profit
  • Selling 50 cups of lemonade equates to recouping the costs of lemons and sugar in a scenario

Profit Planning

  • Determining the number of units to sell that covers all costs is crucial
  • Identifying the sales volume required to achieve the sought-after profit margin comes into play
  • Calculate how many products to sell after covering all their costs to earn a specific profit

Safety Margin

  • The safety margin delineates the extent to which sales can decline before losses are incurred
  • The safety margin serves as a cushion against market volatility
  • Companies like Maxie's ensure profitability even when sales underperform to a certain degree, with a safety margin
  • Selling ten cookies instead of the eight needed to break even, makes two extra cookie surplus: a safety margin.

Budgets

  • A budget orchestrates both income and expenditure, laying a foundation for financial decision-making
  • Contrasting actual revenues and expenses against budgeted figures illuminates deviations and suggests corrective measures
  • A useful analogy is guessing how many jellybeans are in a jar and comparing the guess to the actual number
  • A budget is similar to guessing how much you need, then finding out how much you used

Master Budget

  • The master budget includes research, planning and execution
  • The master budget encompasses detailed analysis and groundwork to inform future financial directives
  • It involves meticulous planning, synthesizing a plethora of smaller budgets into a unified financial vision
  • Operationalizing the master budget involves executing each sub-budget with precision to achieve overarching objectives

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