ACCT 323 Managerial Accounting PDF

ACCT 323 Chapter 1: Managerial Accounting Management Functions Duties -Planning, Directing and motivating, Controlling Role of managerial accounting To assist managers by providing them with economic and financial information to improve their decision making process. Distinction between manageria...

ACCT 323 Chapter 1: Managerial Accounting Management Functions Duties -Planning, Directing and motivating, Controlling Role of managerial accounting To assist managers by providing them with economic and financial information to improve their decision making process. Distinction between managerial and financial accounting Managerial - internal users, internal reports as needed, specific purpose, not independent audits. Financial - external users, financial statements quarterly. Annually, general purpose, audited by CPA Terminology Cost Object: anything for which cost data is desired. Direct Cost: costs that can be traced to a particular cost object in an economically feasible way. Indirect Cost: costs that can be traced to a particular cost object but not in an economically feasible way. Manufacturing costs - Direct Materials DM: raw materials that are directly consumed in the manufacturing process and are measurable in an economically feasible way. - Direct labour DL/ Factory labour: cost of salaries. Wages, and fringe benefits of employees who work directly on the manufacturing of the product. - Manufacturing Overhead / factory overhead : indirect material, indirect labour and other manufacturing costs. -Manufacturing Costs = DM, DL, MOH Prime costs= Conversion costs = Product/ inventoriable costs : costs assigned to products that were either purchased or manufactured for resale. Period Costs - all costs that are NOT product costs : costs that are matched with the revenue of a specific time period rather than included in inventory as part of the cost to produce a saleable product. Service firms -No inventory = no product costs -a;; costs are period costs and expenses as “operating expenses” on the I/S. Retailers/wholesalers - Product costs: prior to sale - B/S as inventory, at time of sale - I/S as COGS - Period Costs: same as service companies Manufacturing Companies Product Costs: prior to sale: 3 types of inventory 1. Raw materials : material purchased and waiting to be put into production. 2. Work in Process: incomplete goods at the end of the period 3. Finished goods: goods completed and awaiting sale At time of Sale DR COGS CR FG Inventory Period costs: same as service companies Cost of Goods manufactured Beginning WIP + Manufacturing Goods cost X Ending WIP Mfg Costs = RM used + DL + MOH Cost of Goods Sold Beginning FG Add: cost of goods manufactured Less: ending FG Equals: cost of goods sold Fixed and Variable cost distinctions Fixed Costs (FC) : do not change in total with regards to changes in volume or level of activity relevant to range Variable Costs (VC): change in direct proportion to changes in volume or level of activity within the relevant range. Total VC: y = a + bx Chapter 2 Measurement of Cost Behavior Cost behavior: the relationship costs and activity levels. - Cost behavior patterns/ cost functions: Y = a + bX, where: Y = total costs a = total FC b = VC/unit of the activity variable X = volume of the activity variable - Criteria for choosing a cost function/activity variable Use activity analysis to determine which cost driver explains how cost behaves: - Economic plausibility: must make sense that X causes Y - Reliability: estimates derived by the cost equation must conform with actual observed costs. 1. Total VC 2. Step VC - increases in small steps 3. Total FC 4. Step FC - different ranges 5. Semi variable or mixed costs: contains both VC and FC 6. Curvilinear cost line: marginal cost will first decrease, then increase as activity level increases. Types of fixed Cost - Discretionary costs: fixed costs arising from annual management decisions. Ex. advertising costs - Committed costs: fixed costs which are long term investments. Ex. buildings, equipment costs Cost estimation - The process of determining HOW a particular cost behaves. - 3 methods to estimate semi variable or mixed costs. 1. Scatter graph/ visual fit method Pros: simple, brings attention to outliers, uses all data points, shows correlation between dependent and independent variables. Cons: subjective 2. High low method Uses 2 data points, highest and lowest activity levels and their corresponding costs. Pros: objective, simple Cons: only uses 2 data points 3. Least Squares regression Uses statistics to determine the best fit line so that the sum of the squared deviations is minimized. Uses the goodness of fit measurement by the coefficient of determination/ r squared to determine the correlation of dependent and independent variables. Pros: objective, uses all data points, uses stats to determine the best fit time. Cons: extensive calculations, can be influenced by outliers, check for economic plausibility. ASSUMPTIONS - Costs must be linear within the relevant range - Only one activity variable can be used at a time. Chapter 3 Job Costing System Reasons for determining unit costs - Financial statement - Planning and controlling functions - Decision making Types of costing systems Process costing - Have homogeneous product and services -> they are distinct and identifiable - costing : cost added by process/ department and unit cost are calculated by dividing TOTAL PROCESS COST (during the period by units produced in that period) to determine an Average Cost. Job costing - Normal Costing DM - Actual Costs DL - Actual Costs MOH - Applied Costs “Applied MOH” - Based on the predetermined MOH rate: Estimated total MOH costs by period DIVIDED BY estimated total unit in base Applied MOH for each job Predetermined MOH rate * actual amount of base on job. What are reasons for using applied vs actual MOH? Timeliness, avoids seasonal fluctuations, and simplifies the acct process. Example: Budgeted MOH Costs = 150 Budgeted DL Costs = 100 Predetermined MOH rate = 150 / 100 = 150 Actual DL cost= 120 x 150 = 180 applied MOH When is it overapplied or underapplied MOH? When: actual < applied = over applied MOH Actual > applied = under applied MOH Close out MOH to COGS Over applied: DR MOH CR COGS Under applied: DR COGS CR MOH Chapter 6 Cost Volume Profit Basic Equation Let X = sales volume in units Unit sales price (X) - Unit VC (X) - total FC = profit Break even point - Level of activity where profit = 0 - Total revenues = total expenses - No profit, no loss - Total contribution margin = total FC Example FC = 4,000,000 VC/unit = 2,000 Selling Price/Unit = 3,000 What is the B/E in units? 3000/unit (x) - 2000/unit (x) - 4,000,000 = 0 X = 4,000 Total fixed cost / selling price per unit - vc per unit = 4,000,000 / 3,000 - 2,000 = 4,000 Total Fixed Cost / unit contribution margin (CM) = 4,000,000 / 1,000 = 4,000 Unit CM * (x) - total fixed cost = 0 No account direct labour or manufacture Contribution margin income statement Revenue (4,000 * 3,000) 12,000,000  Less: Total Variable Cost (4,000 *2,000) (8,000,000) Total Contribution Margin 4,000,000 Less: Total FC (4,000,000) Break Even 0 Changes: Taxes Before tax income = after tax income/(1-t) T =tax rate Multi Product Companies Sales mix: relative amount of each product sold B/E in dollars: FC/weighted average or overall Cm ratio Weighted or overall average Contribution Margin RATIO 1. Total CM of all the products sold / total revenue of all the products sold (CM Ratio * sales mix percentage) + (CM Ratio * Sales Mix percentage) *sales dollars of product/total sales dollars of all products sold* Operating Leverage - How sensitive the operating income is to a given change in sales revenue. *the higher the FC relative to the VC, the greater the impact on income given a change in sales revenue. Measurements of operating leverage 1. Degree of operating leverage.operating leverage factor (OLF) 2. Unit change in sales * unit CM = $ Change in income 3. $ Change in sales * CM ratio = $ change in income. Margin of Safety - The cushion, planned dollar sales - Break Even dollar sales or planned unit sales - breakeven unit sales Chapter 8: Alternative Inventory Costing Methods Absorption Costing Income Statement Revenue XXX Less: COGS (XXX) - DM - DL - VMOH - FMOH Gross Profit XXX Less: Operating Expenses Variable period costs (XXX) Fixed period costs (XXX) Income (XXX) FMOH FMOH Rate: FMOH Costs incurred /.units produced Or FMOH expensed in COGS in absorption * /units sold And FMOH in COGS = FMOH rate * actual vo;ume sold Cost of goods sold in absorption Opening FG: (Vmfg rate + FMOH rate) * actual units in beginning inventory Add: Cost of goods manufactured: (Vmfg rate + FMOH rate) * actual production in period. Equals: cost of goods available for sale Less: ending FG * actual units in ending inventory Income Statement Variable Costing Income Statement Revenue XXX Less: VC - V.COGS (XXX) - DM DL V.MOH - V. PERIOD COSTS (XXX) Contribution Margin XXX Less: FC: - FMOH (XXX) - F. PERIOD COSTS (XXX) Income XXX Variable COGS Opening FG inventory: V.mfg rate* Actual units in beginning inventory Add: Variable cost of goods manufactured: V.mfg rate*actual production in period Equals: Cost of good available for sale Less: Ending FG inventory: V.mfg rate* actual units in ending inventory Change in Income When units produced > units sold Absorption income > variable costing income FMOH expensed under: - Absorption income portion related to units sold - Variable costing income full amount incurred in period Reconciliation of incomes Absorption income - variable costing income = change in inventory from the beginning to the end of the period * FMOH rate uwhen units sold>units produced. Variable costing income>absorption income FMOH expensed under: - Absorption income-full amount of the current period PLUS a portion from beginning inventory - Variable costing income-full amount incurred in current period.