Management Accounting – the design and use of accounting information systems inside the company to achieve the company’s operational objectives.
Internal accounting systems to aid the company (1. helps decide who has authority over assets, 2. supports planning & decision-making, 3. means of
monitoring, evaluating and rewarding performance – everyone in a firm has decision making authority.
Value Chain – all the activities & resources used to produce (create and deliver) a good or service. Benchmark studies – how one company compares
against others (past, present, and future information).
Manufacturing Costs (Product Costs)– costs of materials, wages earned by production workers, and a variety of other costs relating to the operation of
a production facility (overlap between managerial and financial). Conversion Costs – the cost of converting raw materials into finished good, specifically
the direct labour and overhead costs. Prime Costs – the direct materials and labour consumed in production. Direct Materials – the raw materials and
component parts used in production who’s costs are directly traceable to the products manufactured. Direct Labour – wages and other payroll costs of
employees who’s efforts are directly traceable to the products they manufacture. Manufacturing Overhead – a catchall classification, which includes all
manufacturing costs other than the costs of direct materials and labour (utilities, supervisor salaries, repairs, depreciation). Product Costs- incurred to
manufacture inventory, represent inventory (the related goods sold), and when sold, they become the COGS. Period Costs – associated with time
periods, charged directly to expense accounts, shown separately from the COGS (b/c you compute Margin from COGS). Matching Principle – product
costs are only put as expenses when they can be matched against revenue.
Materials Inventory – raw materials on hand and available for use in the manufacturing process. Work in Process Inventory – partially completed
goods on which production activities have been started but not yet completed. Finished Goods Inventory – unsold finished products available for sale to
customers. Process: Direct Materials are purchased (Materials Inventory), Direct Labour is used and Manufacturing Overhead is used – all go into the
work in process inventory. The cost of all those finished goods is then transferred to the finished goods inventory then once sold, transferred to the cost of
goods sold. Indirect Materials – can not be traced directly back to the good, classified as manufacturing overhead.
Direct Labour – 1) paying the workers (debit direct labour and credit cash) 2) applying the direct labour to the goods produced (debit work in process and
credit direct labour). Indirect Labour – same as indirect materials. Manufacturing Overhead – 1) record all costs classified as overhead and 2) assign
these costs to products being manufactured. Selling and administrative expenses do not relate to the manufacturing process and are not included in
manufacturing overhead (this account is debited to record any cost classified as overhead) (at year end, balance should be zero). This is a indirect
manufacturing cost. Work in Process – 1) record accum. Of manufacturing costs associated with the units orf products worked on in period 2) to
allocate these costs between partially finished and finished goods (costs debited to WIP Inv. Are direct and indirect manu. Costs.) (Each product line can
get a separate schedule). Financial Statements – 1) Costs associated with units sold during the period appear in the income statement as the cost of
goods sold. 2) Manufacturing costs associated with goods still on hand are classified as inventory and appear on the balance sheet. Direct = Traceable.
Value Chain – Research & Design – Period Cost. Suppliers & Production – Product Cost. Distribution & Marketing/Customer Service- Period Cost. .).
Value-Added Activities – add desirability in the eyes of the consumer (try to eliminate non-value added).
Activity Based Costing (Management) – 1) identify the activity 2) create an associated activity cost pool. 3) identify an activity measure. 4) Create the
cost per unit of activity. Management – using ABCs to help reduce and eliminate non value added activities – one way managers compare the costs and
benefits of activities is by contrasting the internal costs of the activity to the purchased external cost for that activity. ABC info needed before management
of activity can occur. Target Costing – process aimed at the earliest stages of a new product and service development – driven by customer and focused
on design. Customer desires about functionality, quality, and price drive the analysis; knowing customer requirements also means understanding
competitor offerings. Aimed at early product design- create process that will PROFIT. Target Cost = Target Selling Price – Target Profit. Target Price
= Target Price – Profit Margin. Target Costing Process – 1) entire value chain is involved in cutting costs and meeting customers needs 2) connection
between key aspects of the process and their costs is critical for value engineering 3) requires emphasis on the product’s functional qualities with r/t the
customer 4) reduce development time 5) using ABC information to find which changes will reduce costs to the target cost. Life-cycle costing – is the
consideration of all potential resources consumed by the product over its entire life. Just-In-Time- Manufacturing System- acquiring materials and
manufacturing goods only as needed to fill customer orders; demand pull – production is driven by consumer demand, supply push- suppliers produce as
much as possible. Goal is to reduce costs associated with storing inventory (nonvalue). Cycle Time – 1) processing time (where value is added to a
product) 2) storage & waiting time 3) movement time 4) inspection time (2,3,4- should be reduced as much as possible). Measure of JITÉ Manufacturing
Efficiency Ratio – time spent in value added activities as a percentage of a total cycle time MER = Value-Added Time / Cycle Time (optimal = 100%).
Production quality- defects per million units produced. If a company does not have access to highly reliable sources of supply, it should maintain
reasonable inventories of materials. ISO 9000- standards of quality, done by a thirdparty. Total Quality Management – assigning responsibility for
managing quality, providing quality measures for decision making, evaluating and rewarding quality performance. Components – Prevention Costs –
employee training, prevent defects from occurring. Appraisal Costs – determine whether products adhere to quality standards. Internal Failure Costs –
correcting low quality output. External Failure Costs – lost sales, returns, warranty. If quality is low in one part of the value chain, quality costs can
increase for all components in that chain (all part of value chain must do TQM). Quality and productivity are ultimately linked, and managers prefer to
undertake activities that reduce the costs associated with low quality and increase productivity. SUMMARY OF TECHNIQUES TO ELIMINATE NON
VALUE: 1) ABManagement (figuring out cost) 2) Target Costing (controlling cost) 3) JIT 4) TQManagement. Increase in quality, increase in productivity.
Internal Failure Costs- incurred to correct defects discovered in the appraisal process (defective products, labour to rework shit). External Failure
Costs – incurred when poor quality products are not discovered in the inspection process.
CVP Analysis – is a means of learning how costs and profits behave in response to changes in the level of business activity. The importance of
determining which factors drive costs and how managers can use this info to improve their planning and control activities. CVP Analysis – find activities
that cause costs to vary. Fixed Costs – costs and expenses that do not changes significantly in response to changes in an activity base. Variable Cost –
is one whose total rises or falls in approximate proportion to changes in an activity base. Semivariable Costs – are sometimes called mixed costs
because they contain both a fixed and a variable component (Manufacturing overhead). Per Unit Costs – fixed costs per unit decrease when volume increases. Most business can reduce unity costs by using their facilities more intensively – these savings are called economies of sale; most apparent in
businesses with high fixed costs, such as airlines (some raise like stairs, some curve (increases with volume/cost, etc.). For a given business, the
probability that volume will vary outside of a fairly narrow range is usually remote. Relevant Range – the range over which output may be expected to
vary is called this. Revenue – Variable Costs – Fixed Costs = Operating Income. Cost volume profit analysis is often called break-even analysis
(revenue exactly equals cost). Break Even Point – level of activity at which operating income is equal to zero (profit in CVP is referring to operating
income, not net income. Contribution Margin – the amount by which revenue exceeds variable costs. Contribution Margin per Unit = Unit Selling
Price – Variable Cost Per Unit. Contribution Margin Ration = Contribution Margin per Unit / Unit Sales Price. Prior to breaking even, a cmargin
ration of 60% means that 60 cents of every sales dollar helps to cover fixed costs. Projected Sales Volume (in units) = fixed costs + target operating
income / contribution margin per Unit. Projected Sales Volume (dollars) = fixed costs + target operating income / contribution margin ratio.
Margin fo Safety – how much sales volume exceeds the break even point sales volume = fixed costs / cont. margin ratio. Operating Income = Margin
of Safety x Contribution Margin Ratio. Change in Operating Income = Change in Sales Volume x Contribution Margin Ratio. Sales Mix – the relative
percentages of total sales provided by different products. Average C.Margin – weighting the contribution margin ratios of each line by the percentage of
total sales which that product represents.
High Low Method – use to determine semivariable cost elements. Find variable portion of administrative costs, we relate the change in cost to the
change in the activity base between the highest and lowest months of production activity (find highest & lowest months, find change between the two).
Find the fixed portion, we take the total monthly cost at either the high point or the low point, and deduct the variable administrative cost from that amount
(fixed cost = total cost – variable cost).
Assumptions underlying CVP – 1) sales price per unit is assumed to remain constant 2) if more than one product is sold, the proportion of the various
products sold (mix) is assumed to remain constant 3) fixed costs (expenses) are assumed to remain constant as a percentage of sales revenue 4)
variable costs (expenses) are assumed to remain constant as a percentage of sales revenue. 5) For manufacturing companies, the number of units
produced is assumed to equal the number of units sold each period. Fixed costs per unit decline as activity increases. Total variable costs increase as
activity increases. Fixed costs remain constant in total. Look at highlow UNITS not highlow DOLLARS. Sales – Var. Costs = Contr. Margin. – Traceable
Fixed Costs = Responsibility Margin – Common Fixed Costs = Operating Income
Organizations must evaluate and reward decision outcomes. Responsibility Centers – to describe a subunit within a business organization. A
designated manager is responsible for directing the activities of each such center (need for this info) 1) Planning and allocating resources (success of one
product line over the other) 2) Controlling Operations 3) Evaluating the performance of center manager. Cost Center – is a business section that incurs
costs (or expenses) but does not directly generate revenue). Evaluated primarily 1) their ability to control costs and 2) the quantity and the quality of the
services that they provide. Managers evaluated on inputs. Profit Center – part of a business that generates both revenue and costs. Managers evaluated
on inputs & outputs. Investment Center – a profit center for which management has been given decision making responsibility for making significant
capital investments related to the center`s business activities. While profit centers that share common facilities can be evaluated with respect to their
profitability, they usually are not evaluated in terms of their return on investment. Revenue Center – sales volume, outputs. Responsibility Accounting