Questions and Answers
What are the users of financial accounting reports primarily concerned with?
What is a budget?
A detailed plan for the future expressed in formal quantitative terms.
Managerial accounting reports are prepared for external users.
False
What are the three main functions of management?
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What is a value chain?
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What does the Theory of Constraints emphasize?
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Define opportunity cost.
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What does Total Manufacturing Costs (TMC) include?
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The sum of direct materials cost and direct labor cost is called ________.
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What does a job cost sheet track?
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What are indirect costs?
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What do fixed costs do within the relevant range?
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_______ costs are incurred in both manufacturing and merchandising firms.
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What are job-order costing systems used for?
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What is the formula for computing total job cost?
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Study Notes
Differences between Financial and Managerial Accounting
- Financial accounting targets external users; managerial accounting focuses on internal decision-makers.
- Financial accounting summarizes past transactions, while managerial accounting emphasizes future planning.
- Objectivity is crucial in financial accounting; managerial accountants prioritize relevant data over absolute objectivity.
- Financial accounting aims for precision; managerial accounting values timely, good estimates.
- Companywide reports characterize financial accounting; managerial accounting produces segment reports (product lines, departments).
- Managerial accounting is not bound by GAAP or IFRS, while financial accounting must comply with these standards.
- Financial accounting is compulsory; managerial accounting is optional for organizations.
Segment
- Segments refer to parts of an organization, with managerial accounting emphasizing individual reportings, such as product lines and sales territories.
Three Main Functions of Management
- Planning determines goals and the means to achieve them, often coupled with a budget.
- Controlling gathers feedback through performance reports, comparing budgeted versus actual outcomes.
- Decision making involves selecting actions from competing alternatives, guided by questions of product focus, target customers, and execution strategies.
Budget
- A budget serves as a detailed financial plan expressed in quantitative terms for the future.
Strategy
- A strategy acts as a game plan for a company, differentiating it from competitors to attract customers.
Business Process
- A business process consists of a sequence of steps taken to accomplish a business task.
Value Chain
- The value chain encompasses major business functions that add value to products and services.
Lean Production (JIT)
- Lean production, or Just-in-Time (JIT), organizes resources efficiently, producing only in response to customer orders.
Constraint
- A constraint (bottleneck) is the weakest link in a system, limiting overall gain and identified as the step with the least capacity.
Theory of Constraints (TOC)
- TOC emphasizes the importance of managing constraints for organizational success.
Corporate Social Responsibility (CSR)
- CSR involves considering all stakeholders' needs in decision-making, extending beyond legal compliance to meet voluntary expectations.
Total Manufacturing Costs (TMC)
- TMC consist of direct materials, direct labor, and manufacturing overhead, summed as TMC = DL + DM + MOH.
Direct Materials (DM)
- DM are raw materials integral to the finished product, easily traceable (e.g., aircraft engines in planes).
Indirect Materials (IM)
- IM are materials supporting production but not directly traceable to the product.
Direct Labor (DL)
- DL refers to labor directly attributed to a product, often called "touch labor."
Indirect Labor (IL)
- IL includes wages for employees not directly involved in production.
Manufacturing Overhead (MOH)
- MOH encompasses all manufacturing costs excluding DM and DL, including indirect materials and labor costs.
Selling & Administrative Costs (SG&A)
- SG&A covers costs related to non-manufacturing activities in both manufacturing and merchandising firms.
Product Costs
- Product costs involve all costs incurred to acquire or create a product, recognized as expenses upon sale.
Period Costs
- Period costs include all selling and administrative expenses.
Prime Cost
- Prime cost totals direct materials and direct labor costs.
Conversion Cost
- Conversion cost adds direct labor to manufacturing overhead costs, essential for turning materials into finished goods.
Variable Costs
- Variable costs fluctuate directly with activity levels, such as per-text costs for texting plans.
Fixed Costs
- Fixed costs remain stable within a relevant range, unaffected by activity changes, such as a monthly cell phone fee.
Mixed Costs
- Mixed costs contain variable and fixed elements, such as a utility bill with both component types.
High-Low Method
- The high-low method estimates mixed costs using the highest and lowest activity levels to determine fixed and variable components.
Relevant Range
- The relevant range refers to an activity level where cost behavior assumptions remain valid, often approximated by a straight line.
Traditional Income Statement
- A typical traditional format includes sales, COGS, gross margin, selling/admin expenses, and net operating income.
Contribution Format Income Statement
- A contribution format separates variable expenses from fixed expenses, illustrating contribution margin.
Contribution Margin
- Contribution margin reflects sales minus variable expenses, showcasing resources available for fixed costs and profit.
Differential (Incremental) Cost
- Differential costs are the cost differences between two options; differential revenue represents revenue differences.
Opportunity Cost
- Opportunity costs signify potential benefits forfeited when choosing one alternative over another.
Sunk Cost
- Sunk costs are already incurred and irrecoverable, thus ignored in future decisions.
Job-Order Costing
- Job-order costing assigns costs to unique product orders, used when producing various items or custom orders.
Job Cost Sheet
- The job cost sheet tracks all costs related to a specific job, including direct and indirect expenses, serving as a subsidiary ledger.
Predetermined Overhead Rate (POHR)
- POHR calculates manufacturing overhead by estimating total overhead costs divided by the allocation base.
Applying Manufacturing Overhead
- This involves calculating overhead applied to job costs via a four-step process using estimated overhead and production levels.
Cost Driver
- A cost driver is a factor that directly influences the cost incurred, typically the basis for applying indirect costs.
Total Job Cost Calculation
- The total job cost includes calculating applied overhead based on the predetermined rate linked to labor hours.
Inventory Types
- Raw Materials Inventory encompasses all materials for final products.
- Work in Process Inventory consists of units partially completed.
- Finished Goods Inventory includes completed units waiting for sale.
Cost of Goods Sold (COGS)
- COGS reflects costs associated with produced goods that have been sold during a reporting period.
Costs Flow and Transfers
- Cost flow through inventory accounts to COGS, detailing the transitions between raw materials, WIP, finished goods, and costs incurred.
Journal Entries
- Journal entries record material purchases, direct labor costs, and manufacturing overhead transfers to respective inventory accounts.
Schedule of Cost of Goods Manufactured
- This schedule sums direct materials, direct labor, and manufacturing overhead to calculate costs of finished goods.
Schedule of Cost of Goods Sold
- COGS calculation derives from the beginning and ending inventory figures to reflect sold costs in a period.
Under- or Over-Applied Manufacturing Overhead
- Adjustments to COGS are required based on the application of overhead compared to actual incurred overhead costs.
Additional Tips
- Non-manufacturing costs are excluded from total manufacturing costs; terms related to production typically signify product costs.
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Description
This quiz covers the key distinctions between financial and managerial accounting. Learn how these branches of accounting differ in terms of users, focus, and reporting methods. Perfect for exam preparation and deepening your understanding of accounting principles.
