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Managerial Accounting Review.docx

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Wilfrid Laurier University
Greg Clark

Managerial Accounting Review Chapter 1: Introduction Decentralization – the delegation of decision-making authority throughout an organization Line Positions Staff Positions - directly involved in achieving the basic - indirectly involved in achieving the basic objectives of objectives of the organization the organization - support line positions but DON’T have direct authority over line positions - ex. productions supervisors - cost accountants Controller – part of top management team that is responsible for providing timely/relevant data to support planning and control activities - prepares financial statements for external users Corporate Governance – the system by which a company is directed and controlled Board of Directors  Top Management  Stockholders A strong corporate governance systems protects the interests of the company’s other stakeholders: - employees, customers, creditors, suppliers Process Management There are four approaches to improving business processes: 1) Lean Production Traditionally, in a “push” manufacturing company, work is pushed through the system in order to produce as much as possible and to keep everyone busy. In lean production, a “pull” manufacturing system is used which reduces inventories, decrease defects, reduces wasted effort, and shortens customer response times. - goods are delivered when needed and production begins as parts arrive 2) Six Sigma Six Sigma relies on customer feedback and fast-based data gathering and analysis techniques to drive process improvement. Typically Six Sigma is associated with the term “zero defects.” 3) Computer Technology E-commerce uses the Internet which has many advantages over conventional marketplaces. 4) Risk Management Enterprise risk management is a process used to proactively identify and manage risk by implementing specific controls (such as product testing, testing websites, inventory counts, using passwords etc.). Chapter 2: Cost Terms, Concepts and Classifications Manufacturing Costs fall in 3 categories: a) Direct Labour - wages to those who make the product b) Direct Materials - materials used to make the product c) Manufacturing Overhead - indirect labour/materials Non-Manufacturing Costs: a) Marketing and Selling - costs necessary to get the order/deliver the product (advertising) b) Administrative - office related costs – all executive, organizational, and clerical costs Product Costs – direct materials, direct labour and manufacturing overhead Period Costs – selling costs and administrative costs If the cost has to do with the manufacturing/factory, it is a product cost. ex. heating the factory, factory tools, wages to assembly workers If the cost has to do with anything outside the manufacturing it is a period cost. ex. office building property taxes, advertising, commissions to sales staff Direct Costs – costs that are directly traced to the particular cost object - ex. direct material, direct labour, material used to make the product Indirect Costs - costs that cannot easily be traced to the particular cost object - ex. manufacturing overhead, taxes on the factory used to make the product Fixed Costs – costs that remain constant regardless of changes in the level of activity Variable Costs – cost that varies in direct proportion to changes in the level of activity Differential Cost – a difference in cost between any two alternatives Differential Revenue – the difference in revenue between any two alternatives Ex. Your job now pays $1,500 per month. You get a job offer in a city that pays $2,000 per month. It costs $300/month to commute to the new city. Differential Revenue = $2,000 - $1,500 = $500 Differential Cost = $300 Opportunity Cost – potential benefit that is given up when one alternative is selected over another Incremental Cost – an increase in cost between two alternatives Sunk Costs – costs that have already been incurred and can no longer be changed now or in the future Sample Income Statement: Sales 750,000 Cost of Goods Sold Beginning Inventory 50,000 Cost of Goods Manufactured 400,000 Cost of Goods Available for Sale 450,000 Ending Inventory 37,000 413,000 Gross Margin 337,000 Operating Expenses: Administrative Expenses 125,000 Selling Expenses 77,000 202,000 Income (Loss) from Operations 135,000 Income Tax Expense (20%) 27,000 Net Income (Loss) 108,000 Chapter 3: Job-Order Costing Process Costing – products are indistinguishable from one another - ex. beverage and paper manufacturing Job-Order Costing – products are unique/manufactured to order - ex. aircraft manufacturing, greeting card design For job-order costing, the unique nature of each job-order requires tracing/allocating costs to each job, and maintaining cost records for each job. Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labour hours or machine hours, is used to assign manufacturing overhead to individual jobs. Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost for the Coming Period Estimated Total Units in the Allocation Base for the Coming Period - determined before the period begins and makes it possible to estimate total job costs sooner - actual overhead for the period is not known until the end of the period Overhead Applied = Predetermined Overhead Rate x Actual Activity Ex. If the Predetermined Overhead Rate was $4.00/DLH, for each direct labour hour worked on a particular job, $4.00 of factory overhead will be applied to the job. The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied Overhead – the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred Overapplied Overhead – the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred Example: ABC’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. How much total overhead was applied to ABC’s jobs during the year? Use ABC’s predetermined overhead rate of $4.00 per direct labour hour. Applied Overhead = POHR x Actual DLH = $4.00/DLH x 170,000 DLH = $680,000 Since the applied overhead is $30,000 greater than ABC’s actual overhead, ABC has overapplied overhead for the year by $30,000. This $30,000 may be allocated to Work in Process, Finished Goods or Cost of Goods Sold. Since $30,000 is a relatively small amount, they are likely to close it to Cost of Goods Sold. If they were to allocate the $30,000 they would do it as follows: The following table summarizes overapplied and underapplied manufacturing overhead: Chapter 4: Process Costing Equivalent Units – the product of the number of partially completed units and the percentage completion of those units We calculate equivalent units for process costing since a department usually has some partially
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