Untitled

• Management accounting measures, analyzes, and reports financial and nonfinancial information to an internal target audience of managers.
• Management accounting helps managers in planning, decision-making, and risk-management, focusing on the future with budgets and forecasts.
• This type of accounting is not limited to financial information and is not GAAP compliant.
• Cost accounting measures, analyzes, and reports costs of acquiring or using resources.
• Cost accounting is part of the information collected by management accountants for decision-making, particularly strategic cost management that focuses on strategic issues.
• The value chain consists of R&D, Design, Production, Marketing, Distribution, and Customer service, with production and distribution making up the supply chain.
• The decision-making process involves identifying the problem, obtaining information, making predictions about the future, deciding via choosing alternatives, and implementing the decision.
• Planning involves selecting goals and strategies, predicting results under various alternatives, deciding how to attain the desired goals, and communicating the goals and how to achieve them.
• The most important planning tool when implementing a strategy is a budget.
• Control encompasses taking actions on planning decisions, evaluating results, and providing feedback.
• Management accounting guidelines offer value through the cost-benefit approach, behavioral and technical considerations encouraging better job performance, and alternative ways to compare costs in different decision-making situations.
• The Institute of Management Accountants (IMA) has advanced 4 standards of ethical conduct: competence, confidentiality, integrity, and credibility.

Principles of Costs

• Cost is a sacrifice or forgone resource to achieve a specific objective, with actual cost referring to a cost that has already occurred and budget cost being a predicted cost.
• A cost object is anything for which a cost measurement is desired, like a product, project, or department.
• Cost accumulation identifies the total cost of producing a product or providing a service.
• Cost assignment gathers accumulated costs to a cost object through tracing costs with a direct relationship or allocating costs with an indirect relationship.
• Cost drivers are factors or activities that cause costs to be incurred, such as activity volume.

Types of Costs

• Direct costs can be conveniently and economically traced to a cost object, including material and labor.
• Indirect costs are expenses that cannot be directly traced to a single cost object, benefiting multiple cost objects and often shared across various departments or projects items include electricity, rent, property taxes, and plant administration expenses.
• Fixed costs remain unchanged for a given time period despite activity changes in the organization.
• Variable costs change depending on the production.
• The relevant range is the span of activity levels or volume in which the assumptions about cost behavior hold true, where fixed costs remain constant, and variable costs change in direct proportion to activity levels.

Sectors and Inventory

• Sectors include Manufacturing, Merchandise, and Services.
• Direct materials are resources in stock and available for use.
• Work-in-progress represents goods partially worked on, and finished goods are completed products ready for sale.
• Prime costs are all direct costs, specifically labor and materials.
• Conversion costs include expenses incurred to convert raw materials into finished goods, encompassing both direct labor and manufacturing overhead; these are essentially the costs associated with transforming materials into a final product.
• Overtime Premium is labor costs as part of indirect overhead costs.
• Idle Time is wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, or poor scheduling
• Inventoriable/Product costs are all the costs needed to produce inventory (expensed as CGS) and are considered assets in a company's balance sheet includes direct materials and direct labor.
• Direct labor is associated with workers who directly contribute to the production process and are capitalized.
• Conversion cost = Manufacturing overhead + Direct Labor.
• Indirect manufacturing includes all manufacturing costs that are related to the cost object but cannot be traced in a feasible way.
• Cost of goods manufactured represents the total cost incurred to produce goods during a specific period (Beginning direct materials + Product/Inventoriable costs – COGS
• Period costs are not related to the product (pre-paid rent), operating costs

Direct Material Inventory

• Beginning Inventory includes starting amount of raw materials available.
• Direct Material Purchases includes the cost of raw materials purchased during the period.
• Ending Inventory includes the remaining raw materials at the end of the period.
• Direct Material Used is calculated by adding the Beginning Inventory and Direct Material Purchases, then subtracting the Ending Inventory.
• Beginning Inventory is the starting amount of partially completed goods.
• Direct Manufacturing Labor is wages paid to workers involved in the production process
• Manufacturing Overhead Costs are indirect costs like utilities and depreciation.
• Total Manufacturing Costs Incurred sum of Direct Material Used, Direct Manufacturing Labor, and Manufacturing Overhead Costs.
• Ending Inventory: The remaining work-in-process inventory at the end of the period.
• Cost of Goods Manufactured: Calculate this by adding the Beginning Inventory and Total Manufacturing Costs Incurred, then subtracting the Ending Inventory.
• Beginning Inventory The starting amount of completed goods ready for sale.
• Ending Inventory includes the remaining finished goods at the end of the period.
• Cost of Goods Sold is calculated by adding the Beginning Inventory and Cost of Goods Manufactured, then subtracting the Ending Inventory.
• Unit Cost is a total expenditure incurred by a company to produce, store, and sell one unit of a particular product or service
• Framework for cost accounting and cost management

Cost-Volume-Profit (CVP) Analysis Essentials

• CVP analysis examines how profits change with changes in the units sold of a product.
• It uses "what if" analysis to examine possible outcomes.
• Analyzes relationship between selling price, variable costs, and fixed costs. Assumes selling price, variable, and fixed costs are known as constants. Typically studies a single product case.

Formulas

• Contribution margin per unit = Selling price – Variable costs per unit
• Break even = FC/CM (number of units needed to sell to break even).
• (FC + Target Net Income)/ SP – VC
• Target = (P-VC)Q-FC.
• Operating income = Contribution margin per unit*Q – FC.
• Contribution margin ratio = Contribution margin/Revenue.
• Break-even point is the quantity at which you equal your fixed costs.
• Operating income = Net income/(1-tax rate).
• Operating income = Contribution margin – Fixed costs.
• Distance between budgeted sales and breakeven.

Operating Leverage

• MOS = Budgeted sales – BE sales.
• MOS ratio removes the effect of company size in the output.
• MOS ratio = MOS / Budgeted sales.
• Margin of safety calculation shows how far revenues can fall before the breakeven point or before the company starts losing money.
• Operating leverage = contribution margin / Operating income.
• Effects of fixed costs
• It Increases with higher proportion of fixed costs than variable costs.
• Use to estimate changes to Ol from changes in sales.
• Change in Ol (%) = Operating leverage * Change in sales (%).
• Rev - VC = CM.
• CM - All fixed costs = ΟΙ.
• Rev – CGS = Gross margin.
• Gross margin – Non manuf. FC (SGNA) = Operating income.

Costing Methods and Capacity Levels

• Variable costing is one method of costing inventory in manufacturing companies, along with absorption costing and throughput costing.
• In variable costing, all variable manufacturing costs (direct and indirect) are inventoriable costs, but fixed manufacturing costs are not. This method does not have a production-volume variance. Revenue - (VC/Production volume) * Sales = Contribution margin Contribution margin – TFC = ΟΙ
• Absorption costing absorbs all variable and fixed manufacturing costs as inventoriable costs, resulting in inventory absorbing all manufacturing costs. This method features production-volume variance; fixed costs are spread per unit.
• Managers try to reduce the undesirable effects of absorption costing through careful budgeting and inventory planning, changing the period used to evaluate performance, and including nonfinancial variables alongside financial ones.

Throughput Costing

• Only direct materials costs are inventoriable costs.

Denominator-Level Capacity

• Account for firms spending in fixed manufacturing costs for:
  • Theoretical capacity, which is based on producing at full efficiency all the time.
  • Practical capacity reduces theoretical capacity by considering unavoidable operating interruptions and scheduled maintenance time or shutdown for holidays.Normal capacity uses utilization that satisfies customer demand over a period.
  • Master-budget capacity (future) is utilization that managers expect for the current budget period.