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ACC 406 - Professor Santoso

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Ryerson University
ACC 406
Santoso Sugianto

Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES Chapter 1: Introduction to Managerial Accounting * What is Managerial Accounting? o Managerial accounting is a firm’s internal accounting system designed to support the needs of managers. o Managerial accounting information is used to identify problems, solve problems and evaluate performance o Managerial accounting information helps managers in planning, controlling and decision making o Planning is the detailed formulation of action to achieve a particular end. o Controlling is the monitoring of a plan’s implementation o Decision making is choosing among competing alternatives. * Comparison of Managerial and Financial Accounting Managerial Accounting Financial Accounting * Internally focused * Externally focused * No mandatory rules * Must follow externally imposed rules * Financial & nonfinancial information; (e.g. GAAP) subjective information possible * Objective financial information * Emphasis on the future * Historical information * Internal information and decision making * Information about the firm as a whole based on decisions, departments, * More self-contained products and jobs * Broad multidisciplinary * Current Focus of Managerial Accounting o It supports management focus on customer value, total quality management, and time-based competition o Information about value chain activities and customer sacrifice (such as post- purchase costs) is collected and made available 1 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Activity-based management is a major innovative response to the demand for more accurate and relevant managerial accounting information o The nature of managerial accounting information system may depend on the strategic position of the firm (e.g. cost leadership strategy, product differentiation strategy) o Lean accounting is the change in accounting that occurs when a company attempts to increase organizational value by eliminating wasteful activities that exist throughout the value chain. o Continuous Improvement is the continual search for ways to increase the overall efficiency and productivity of activities by reducing waste, increasing quality and managing costs. o Total quality management is a philosophy where manufacturers strive to create an environment that will enable workers to manufacture perfect (zero-defect) products. o Value Chain is the set of business functions that add value to an organization’s products or services (e.g. R&D, product design, production, marketing, distribution and customer service) * The Role of the Managerial Accounting o They are responsible for identifying, collecting, measuring, analyzing, preparing, interpreting, and communicating information. o They must be sensitive to the information needs of managers o They serve as staff members of the organization and are part of the management team. o Line positions are positions that have direct responsibility for the basic objectives of an organization. o Staff positions are positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives. 2 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Controller or the chief accounting officer supervises all accounting functions and reports directly to the general manager or chief operating officer (COO). o Treasurers are responsible for the finance functions; they help raised capital and manage cash and investments. * Managerial Accounting, Ethical Conduct & Social Responsibility o A strong ethical sense is needed to resist efforts to change economic information that may present an untrue picture of firm performance. o Many firms have a written code of ethics or code of conduct. o The CMA has a code of ethics for managerial accountants. o Sarbanes-Oxley Act is a legislation passed in 2002 in the US that establishes stronger government control and regulation of public companies in response to the securities fraud and accounting misconduct seen in some public companies. * Accounting Designations and Career Opportunities o Certified Management Accountant (CMA) o Chartered Accountant (CA) o Certified General Accountant (CGA) Chapter 2: Basic Managerial Accounting Concepts * The Meaning and Uses of Cost o Cost is the cash or cash-equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization o Managers use cost information to determine the cost of objects such as products, projects, plants and customers. o Direct costs are traced to cost objects based on cause-and-effect relationships o Indirect costs (i.e. overhead) are allocated to cost objects based on assumed relationships and convenience o Expenses are expired costs 3 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Price is the revenue per unit o Accumulating costs is the way that costs are measured and recorded. o Assigning costs is the way that a cost is linked to some cost object o Cost objects are any items for which cost is measured and assigned (e.g. product, customer, department, project, geographic region, plant) o Allocation is assigning indirect costs to a cost object by using reasonable and convenient method. o Variable cost is a cost that increases in total as output increases and vice versa o Fixed cost is a cost that stays the same as output increase or decreases. o Opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another. * Product and Service Costs o Product are goods that either are purchased or produced by converting raw materials through the use of labor and indirect manufacturing resources such as plants, o Services are tasks performed for a customer or activities performed by a customer using an organizations products or facilities. o Product (manufacturing) costs are those costs, both direct and indirect, of acquiring a product in a merchandising business and preparing it for sale or of producing a product in a manufacturing business, Product costs are classified as inventory on the balance sheet then expensed as cost of goods sold on the income statement when the inventory is sold o Selling costs are the cost of marketing and distributing goods and services o Administrative expenses are the costs of organizing and running a company. o Both selling and administrative costs are period costs. o Direct materials are those materials that are a part of the final product and can be directly traced to the goods being purchased. o Direct labor is the labor that can be directly traced to the good being produced 4 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Manufacturing overhead is all product costs other than direct materials and direct labor. They cannot be easily traced to the cost object of interest o Period costs are all costs that are not product costs; all areas of the value chain except for production. Examples would be R&D and CEO salaries. * Preparing Financial Statements for Manufacturing Operations o Cost of goods manufactured (COGM) represents the total product cost of goods completed during the period and transferred to finish goods inventory. o Cost of goods sold (COGS) represents the cost6 of goods that were sold during the period and therefore, transferred from finished goods inventory to cost of goods sold o For a retailer, there is no COGM, and COGS equals the beginning inventory plus net purchases minus ending inventory. o For manufacturing and merchandising firms, cost of goods sold is subtracted from sales revenue to arrive at gross margin. In addition, for manufacturing firms, cost of good manufactured must first be calculated before calculating cost of goods sold. o Service firms do not calculate gross margin because they do not purchase or produce inventory for sale and, as a result, do not have a cost of goods sold (i.e. inventory expense) o All firms next subtract selling and administrative expenses to arrive at net income. * Summary of Important Equations o Total product cost= direct materials + direct labor + manufacturing overhead o Unit product cost= total product cost ÷ number of units o Prime cost = direct materials + direct labor o Conversion cost = direct labor + manufacturing overhead 5 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Direct materials used in product=obeginning inventory of materials + purchases – ending inventory o Cost of goods manufactured = direct materials used in production + direct labor used in production + manufacturing overhead costs used in production beginning WIP inventory – ending WIP inventory o Cost of goods sold= beginning finished goods inventory + cost of goods manufactured – ending finished goods inventory o NOTE* remember the formula for calculated COGM,COGS & Raw Material inventory by B.P.U.S.(Black People Understand E-40 or Beginning + Purchases – Used = Ending Inventory) Chapter 3: Cost Behavior * Basics of Cost Behavior o Cost behavior is the way of a cost change in relation to changes in activity output o Time horizon is important because costs can change from fixed to variable depending on whether the decisions takes place over the short run or the long run o Variable costs change in total as the driver, or output measure, changes. Usually, we assume that variable cost increase in direct proportion to increases in activity output. o Fixed costs do not change in total as activity output changes. o Cost driver is a causal measurement that causes cost to change. o Relevant range is the range of output over which the assumed cost relationship is valid for the normal operations of a firm. It limits the cost relationship to the range of operations that the firm normally expects to occur. 6 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o Discretionary fixed costs are fixed costs that can be changed or avoided relatively easy at management discretion e.g. advertising o Committed fixed costs are fixed costs that cannot be easily changed. They often involve long-term contracts e.g. leasing warehouse space o Fixed Cost vs. Variable Cost Total Cost Unit Cost Variable Cost Varies in direct proportion Is fixed throughout the to changes in activity relevant range Fixed Cost Remains fixed throughout the Varies inversely with activity relevant range throughout the relevant range (activity ˄fixed˅) * Mixed Costs and Step Costs o Mixed costs have both a variable and fixed component o Step costs remain at a constant level of cost for a range of output and then jump to a higher level of cost at some point, where it remains for a similar range of output i.e. school fees o Cost objects than display step cost behavior must be purchased in chunks. o The width of the step defines the range of output for which a particular amount of the resource applies o Dependent variables are variables whose value depends on the value of another variable o Independent variables are variables that measure output; explaining changes in the cost or a dependent variable. * Methods for Preparing Mixed Costs into Fixed and Variable Components o In the high-low method, only two data points are used – the high point and the low point with respect to activity level. These two points then are used to compute the intercept and the slope of the line on which they lie. NOTE* the same as finding the gradient (y2 – y1 ÷ x2 – x1) 7 Kelsey Pearman - 500437146 ACC 406: INTRODUCTION TO MANAGERIAL ACCOUNTING CHAPTER NOTES o The high-low method is objective and easy, but a non-representative high or low point will lead to an incorrectly estimated cost relationship o The scatter graph method involves inspecting a graph showing total mixed cost at various output levels and selecting two points that seem to represent the relationship between cost and output, and drawing a straight line. o The intercept gives an estimate of the fixed cost component and the slope an
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