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Managerial Accounting (COMM 112) Midterm Exam Review

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Queen's University
COMM 112
George Boland

Accounting Midterm Exam Review Shannon Bailey Chapter 1 Managerial accounting – the provision of accounting information for a company’s internal users. It is the firm’s internal accounting system and is designed to support the information needs of managers Information for planning – the detailed formation of action to achieve a particular end Information for controlling – monitoring a plan’s implementation and taking corrective action as needed Information for decision making – the process of choosing among alternatives Value chain – the set of business functions that add value to an organization’s products or services Value Chain Primary Activities  Inbound logistics  Operations  Outbound logistics  Marketing and sales  Service Value Chain Support Activities  Procurement  Technology Development  Human Resources Management  Developing Infrastructure Continuous improvement – the continual search for ways to increase the overall efficiency and productivity of activities by reducing waste, increasing quality, and managing costs Total Quality Management (TQM) – manufacturers strive to create an environment that will enable workers to manufacture perfect (zero-defect) products Lean accounting – organizes costs according to the value chain and collects both financial and nonfinancial information Line positions – positions that have direct responsibility for the basic objectives of an organization Staff positions - positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives Ethical Behaviour – involves choosing actions that are right, proper and just. 10 core values: 1. Honesty 2. Integrity 3. Promise-keeping 4. Fidelity 5. Fairness 6. Caring for others 7. Respect for others 8. Responsible citizenship 9. Pursuit of excellence 10. Accountability Chapter 2 Cost – the amount of cash or cash equivalent sacrificed for goods/services that are expected to bring a current or future benefit to the organization Expenses – expired costs Price – revenue per unit Accumulating costs – the way that costs are easured and recorded Assigning costs – the way that a cost is linked to some cost object Cost object – any item such as a product, customer, department, project, geographic region, plant etc for which costs are measured and assigned Direct costs – those costs that can be easily and accurately traced to a cost object Indirect costs – costs that cannot easily and accurately be traced to a cost object Allocation – means that an indirect cost is assigned to a cost object by using a reasonable and convenient method Variable costs – costs that increase as total output increase and decrease as total output decreases i.e. denim used in making jeans Fixed costs – costs that do not increase in total as output increases and do not decrease in total as output decreases i.e. the cost of property taxes on the factory building Opportunity cost – the benefit given up or sacrificed when one alternative is chosen over another Products – goods produced by converting raw materials through the use of labour and indirect manufacturing resources Services – tasks or activities performed for a customer or an activity performed by a customer using an organization’s products or facilities i.e. car rental, dental care Manufacturing organizations produce products while service organizations provide services Product (manufacturing) costs – those costs, both direct and indirect, of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale Direct materials – those materials that are a part of the final product and can be traced to the goods being produced Direct labour – the labour that can be directly traced to the goods being produced Manufacturing overhead – all product costs other than direct materials and direct labour (costs that cannot be traced to the cost object of interest) i.e. maintenance/janitorial labour Prime cost – the sum of direct materials cost and direct labour cost Conversion cost – the sum of direct labour cost and manufacturing overhead. Can be interpreted as the cost of converting raw materials into a final product Prime cost = Direct Materials + Direct Labour Conversion cost = Direct Labour + Manufacturing Overhead Total Product Cost = DM + DL + MO Period costs – all costs that are not product costs i.e. cost of office supplies, CEOs salary Selling costs – the costs necessary to market, distribute, and service a product or service i.e. advertising, warehousing, shipping, customer service Administrative costs – all costs associated with research, development, and general administration of the organization that cannot be reasonably assigned to either selling or production Materials inventory – consists of the costs of the direct and indirect materials hat have not entered the manufacturing process Work in process (WIP) inventory – consists of the direct materials, direct labour, and factory overhead costs for products that have entered the manufacturing process but are not yet completed, regardless of the level of completion Finished goods inventory – consists of completed (or finished) products that have no yet been sold Cost of goods manufactured – the total cost of making products that are available for sale during the period To prepare a statement of cost of goods manufactured: 1. Determine the cost of direct materials used Materials inventory, Jan 1, 2012 $65 000 Plus materials purchased 100 000 Cost of materials available for use 165 000 Less materials inventory, Dec 31, 2012 (45 000) Cost of direct materials used 120 000 2. Determine the total manufacturing costs incurred Cost of direct materials used (step 1) $120 000 All direct labour 210 000 All factory overhead 70 000 Total manufacturing costs incurred 400 000 3. Determine the cost of goods manufactured Total manufacturing costs incurred (step 2) $400 000 WIP inventory, Jan 1, 2012 50 000 Total manufacturing costs 450 000 Less WIP inventory, Dec 31, 2012 (80 000) Cost of goods manufactured 380 000 Statement of Costs of Goods Manufactured For the year ended Dec 31, 2012 Materials inventory, Jan 1, 2012 $65 000 Plus materials purchased 100 000 Cost of materials available for use 165 000 Less materials inventory, Dec 31, 2012 (45 000) Cost of direct materials used 120 000 Plus direct labour 210 000 Plus factory overhead 70 000 Total manufacturing costs incurred 400 000 Total manufacturing costs incurred (step 2) $400 000 Plus WIP inventory, Jan 1, 2012 50 000 Total manufacturing costs 450 000 Less WIP inventory, Dec 31, 2012 (80 000) Cost of goods manufactured 380 000 Beginning Inventory of materials + Purchases – Direct materials used in production = ending inventory of materials Gross margin – the difference between sales revenue and COGS Chapter 3 Cost behaviour – the general term for describing whether a cost changes when the level of output changes – variable or fixed Cost driver – a causal measurement that causes costs to change Relevant range – the range of output over which the assumed cost relationship is valid for the normal operations of a firm. i.e. supervision cost will not vary with output within a certain range, but say if a firm doubled or tripled its production, it would likely increase Discretionary fixed costs – fixed costs that can be changed or avoided relatively easily at management discretion i.e. advertising Committed fixed costs – fixed costs that cannot be easily changed. They often involve a long term contract (i.e. leasing of machinery/warehouse space) or the purchase of property, plant, and equipment Total variable costs = variable rate x amount of output Total Cost Unit Cost Variable Varies in direct proportion to Is fixed through the relevant range Cost changes in activity Fixed Cost Remains fixed throughout Varies inversely with changes in activity the relevant range throughout the relevant range Variable cost – relevant range: Mixed costs – costs that have both a fixed and variable component Total cost = total fixed cost + total variable cost Step cost – displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point, where it remains for a similar range of output. If steps are narrow enough, we can approximate step cost as a strictly variable cost Total cost = Fixed cost + (Variable rate x Output) Dependent variable – a variable whose value depends on the value of another variable. In the previous equation, total cost is the dependent variable Independent variable – a variable that measures output and that explains changes in the cost or other dependent variable. -the intercept corresponds to fixed cost (the point where the total cost line intercepts the cost (vertical) axis -the slope corresponds to the variable rate (the variable cost per unit of output Month Materials Handling Cost($) Number of Moves January 2000 100 February 3090 125 March 2780 175 April 1990 200 May 7500 500 June 5300 300 July 3800 250 August 6300 400 September 5600 475 High-low method – is a method of separating mixed costs into fixed and variable components by using just the high and low data points Step 1: Find the high point and the low point for a given data set. The high point is defined as the point with the highest activity level or output level, and the low point is defined as the point with the lowest activity or lowest output level. Don’t use the highest and lowest costs!!! Step 2: Using the high and low points, calculate the variable rate. To perform this calculation, we recognize that the variable rate (slope) is the change in total cost divided by the change in output Variable Rate = High Point Cost – Low Point Cost High Point Output – Low Point Output Step 3: Calculate the fixed cost using the variable rate (from step 2) using either the high or low point Fixed cost = total cost at high point – (variable rate x output at high point) OR Fixed cost = total cost at low point – (variable rate x output at low point) Step 4: Form the cost formula for materials handling based on the high low method For our example Variable rate = 7500 – 2000 = $13.75 500 – 100 Fixed cost = 7500 – (13.75 x 500) = $625 Total cost = 625 + (13.75 x number of moves) Scattergraph method – a way to see the cost relationship by plotting the data points on a graph. To calculate the variable rate, you find the line of best fit for the scatter of all cost points and then calculate the slope Scattergraph variable rate = high point cost – low point cost High point number of moves – low point number of moves -the scattergraph methods suffers from the lack of any objective criterion Method of least squares (regression) – a statistical way to find the best fitting line through a set of data points. Is the most accurate method Chapter 4 – Cost Volume Profit Analysis Break-even point – the point where total revenue equals total costs Contribution margin income statement – the income statement format that is based on the separation of costs into fixed and variable components Contribution margin – the excess of sales over variable costs CM = sales – variable costs CM unit price – variable cosunit Contribution margin ratio – indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations Contribution margin ratio = contribution margin sales = sales – variable costs sales Change in income from operations = change in sales dollars x CM ratio OR Change in income from operations = change in sales units x CM unit i.e. is a company with a 60% CM ratio adds $100 000 in sales ratios, its income from operations will increase by $60 000 2 i.e. if a company’s unit selling price is $20, variable cost is $8 (unit CM thereform is $12), how much will the income be increase if sales were to increase by 15 000 units? = $12 x 15 000 = $180 000 Break even units = total fixed cost = total fixed cost Price – variable cost per unit CM unit Variable cost ratio - the proportion of each sales dollar that must be used to cover variable cost Variable cost ratio = 1 – contribution margin ratio Variable cost ratio = variable cost per unit price -if fixed costs = CM, operating income = 0 (breakeven) -if fixed costs < CM, positive operating income -if fixed costs > CM, operating loss Break even sales = total fixed expenses CM ratio Number of units to earn target income (BEP + PROFIT) = fixed cost + target income Price – variable cost per unit = fixed cost + target income CM unit Sales dollars to earn target income (BEP sales + PROFIT) = fixed cost + target income CM ratio BEP unitith target income (before taxes) and a tax rate of T = (fixed cost + target income) (1 – T) CM unit Profit volume graph – visually portrays the relationship between profits (operating income) and units sold. It is the graph of the operating income equation (operating income = (price x units) – (unit variable cost x units) – total fixed costs) Cost volume profit graph – depicts the relationship among cost, volume, and profits (operating income) by plotting the total revenue line and the total cost line on a grpah Revenue = price x units Total cost = (unit variable cost x units) + fixed costs Direct fixed expenses – those fixed costs that can be traced to each segment and would be avoided in the segment did not exist Common fixed expenses – the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated -when you have more than one product, for a break-even analysis look at the sales mix and form a ‘package’, then find the break even point for the package i.e. A company sells two products, A is priced at $400 and B is priced at $800. The variable costs per unit are A at $325 and B at $600. Total fixed expense is $96250. The expected sales mix is 3A:2B CM package = 3 (400-325) BEP = 96 250 = 154 packages 2 (800 – 600) 625 = $625 one package is 3A and 2B, so 3(154) = 462 A and 2(154) = 308 B Margin of Safety (MS) – the excess of budgeted or actual sales over break even sales. It indicated the possible decrease in sales that may occur before an operating loss results MS unitsactual sales in units - Bunits MS =$$ales – BEP $$ MS = MS or MS % units sales Actual unit sales actual dollar sales MS unitsprice = MS$$ If an MS ratio is 20%, then sales can decline by 20% before an operating loss occurs Operating leverage – the use of fixed costs to extract higher percentage changes in profits as sales activity changes Degree of operating leverage = Contribution margin Operating income -the greater the DOL, the more changes in sales will affect income Cost structure – a company’s mix of fixed costs relative to variable costs % change in operating income = DOL x % change in sales Indifference point – the quantity at which two systems produce the same operating income Sensitivity analysis – a what if technique that examines the impact of changes in underlying assumptions on an answer Chapter 5 plus Appendix 5A – Job Order Costing Job order costing – where costs are assigned and accumulated by job  Wide variety of distinct products  Costs accumulated by job  Unit cost computed by dividing total job costs by units produced on that job Process costing – where firms accumulate production costs by process or by dept. for a given period of time  Homogenous products  Costs accumulated by process or department  Unit cost computed by dividing process costs of the period by the units produced in the period Job – one distinct unit or set of units Actual costing – requires the firm to use the actual cost of all direct materials, direct labour, and overhead used in production to determine unit cost -the problem is overhead, many overhead costs are not incurred uniformly throughout the year and overhead does not have a direct relationship with production -even if a company adds all overhead costs and divides them by number of units, distorted costs may occur Normal costing – requires the firm to assign actual costs of direct materials and direct labour to units produced and to apply overhead to units based on a predetermined estimate -overhead can be estimated by approximating the year’s actual overhead at the beginning of the year and then using a predetermined rate throughout the year to obtain the needed unit cost information Steps to estimate overhead and apply to production: 1. Calculate the predetermined overhead rate Overhead rate = estimated annual overhead Estimated annual activity level 2. Apply Overhead to Production Applied overhead is found by multiplying the predetermined overhead rate by the actual use of the associated activity for the period 3. Reconcile applied overhead with actual overhead or allocate applied overhead to WIP and Finished goods ending inventories -if actual overhead is greater than applied overhead, then the variance is called underapplied overhead -if actual overhead is less than applied overhead, the variance is called overapplied overhead -if the overhead is underapplied, debit COGS, and if the overhead is overapplied, credit COGS by the variance amount Plantwide overhead rate – a single overhead rate calculate by using all estimated overhead for a factory divided by the estimated activity level across the entire factory Departmental overhead rate – simply estimated overhead for a department divided the by the estimated activity level for that department -with normal costing, the unit cost is the total cost of the job (Materials, labour, and applied overhead) divided by the number of units in the job Degrees of Conversion in Firms:  Low degree of conversion – limited to adding convenience in terms of where, when, and in what quantities (packages) i.e. gas stations, travel agencies, hair salons  Moderate degree of conversion – small degree of conversion, usually just before delivery, such as when installing, packaging, washing, and labeling I.e. oil change stores, florists, butcher shops, car washes  High degree of conversions – the input is transformed greatly i.e. construction companies, restaurants, manufacturing companies Job-order cost sheet – is prepared for every job; is subsidiary to the WIP account and is the primary document for accumulating all costs related to a particular job i.e. Johnson Leathergoods Job-Order Cost Sheet Job Name: Backpacks Date Started: Jan 3, 20XX Date Completed: Jan 29, 20XX Direct Materials $1000 Direct Labour 1080 Applied Overhead 240 Total Cost $2320  Number of units 20 , Unit Cost $116 Materials Requisition form – the cost of direct materials is assigned to a job by the use of this source document Time tickets – used only for direct labourers to help calculate the costs of direct labour Cost flow – describes the way costs are accounted for from the point at which they are incurred to the point at which they are recognized as an expense on the income statement Normal cost of goods sold – the COGS before an adjustment for overhead variance Adjusted cost of goods sold – the result after the adjustment for the period’s overhead variance Typical Cost Flow Journal Entries: Transactions 1. Purchased raw materials costing $2500 on account 2. Requisitioned materials costing $1500 for use in production 3. Recognized direct labour costing $1350 (that is, it was not paid in cash) 4. Applied overhead to production at the rate of $2 per direct labour hour. A total of 170 direct labour hours were worked 5. Incurred Actual Overhead costs of $415 6. Completed the backpack job and transferred it to finished gods 7. Sold the backpack job at cost plus 50% 8. Closed underapplied overhead to COGS 1. Dr. Raw materials $2500 Cr. Accounts Payable $2500 2. Dr. WIP $1500 Cr. Raw Materials $1500 3. Dr. WIP $1350 Cr. Wages Payable $1350 4. Dr. WIP $340 Cr. Overhead Control $340 5. Dr. Overhead Control $415 Cr. Lease Payable $200 Cr. Utilities Payable $50 Cr. Accumulated Dep. $100 Cr. Wages Payable $65 6. Dr. Finished Goods $3290 Cr. WIP $3290 7. Dr. COGS $3290 Cr. Finished Goods $3290 Dr. Accounts Receivable $4935 Cr. Sales Revenue $4935 8. Dr. COGS $75 Cr. Overhead $75 Note:  Direct materials and direct labour are charged to work in process  Applied overhead costs are charged to WIP, while actual overhead costs are charged to overhead control  When units are completed, their total cost is debited to finished goods and credited to work in process  When units are sold, their total cost is debited to COGS and credited to finished goods Chapter 6 – Process Costing Sequential processing – requires t
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