MGT223 Course Review: All Notes from Chapter 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12

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Minlei Ye

MGT223 Chapter01: Introduction to Managerial Accounting Financial Accounting Managerial Accounting Users External who make Managers who plan for financial decisions and control the organization Time focus Historical perspective Future oriented Emphasis Objectivity and Relevance for planning verifiability and control Importance Precision of info Timeliness of info Subject focus Summarized data for the Detailed segment reports whole organization of an organization GAAP Must follow GAAP Need not follow GAAP Requirement Mandatory for external Not mandatory reports Work of management: planning, directing and motivating, controlling Planning and control cycle: 1. Formulated long-and short-term plans (planning) 2. Implementing plans (directing and motivating) 3. Measuring performance (controlling) 4. Comparing actual to planned performance (controlling) Strategy: a “game plan” that enables a company to attract customers by distinguishing itself from competitors Customer Value Propositions: 1. Customer Intimacy Strategy: understand and respond to individual customer needs 2. Operational Excellence Strategy: deliver products and services faster, more conveniently, and at lower prices 3. Product Leadership Strategy: Offer higher quality products CFO(Chief Financial Officer): a member of the top management team responsible for (1) providing timely and relevant data to support planning and control activities and (2) preparing financial statements for external users 3 types of professional accountants in Canada: CGA, CA, CMA Ethical Standards: 1. Competence - Recognize and communicate professional limitations that preclude responsible judgment - Follow applicable laws, regulations and standards - Provide accurate, clear, concise, and timely decision support information - Maintain professional competence 2. Confidentiality - Do not disclose confidential information unless legally obligated to do so - Ensure that subordinates do not disclose confidential information - Do not use confidential information for unethical or illegal advantage 3. Integrity (honest) - Reduce conflicts of interest and advise others of potential conflicts - Abstain from activities that might discredit the profession - Refrain from conduct that would not carry out duties ethically 4. Credibility - Communicate information fairly and objectively - Disclose delays or deficiencies in information timeliness, processing, or internal controls - Disclose all relevant information that could influence a user’s understanding of reports and recommendations Why have ethical standards? - Essential for a smooth functioning advanced market economy - Without it, the economy and whoever depends on it would suffer - Abandoning it will lead to lower quality of life with less desirable goods and services at higher prices To resolve an ethical conflict, - Follow established policies - Discuss the conflict with supervisor - Except where legally prescribed, maintain confidentiality - Consult a lawyer for legal obligations - Last, resign MGT223 Chapter02: Costs Terms, Classification, Cost Flow Manufacturing Costs: 1. Direct Material(DM): materials that became an integral part of a product and can be easily traced 2. Direct Labour(DL): factory labour costs that can be traced easily to a product 3. Manufacturing Overhead(MOH): all costs associated with manufacturing except direct materials and direct labour - Indirect materials: those raw materials that became integral part of an product and cannot be easily or conveniently traced, ex. janitorial supplies, oil for machines - Indirect labour: the portion of labour cost that cannot be easily traced to a product, ex. salaries of factory supervisor, wages of a janitor - Other MOH: ex. depreciation of factory equipment, machine maintenance cost, factory utilities, rent in the factory Conversion Cost = MOH + DL Prime Cost = DL + DM Non-Manufacturing Costs: all other costs involved in the operation of a company besides the manufacturing costs - Administrative costs: include all executives, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing, marketing, or selling - Marketing or selling costs: all costs necessary to secure customer orders to get the finished product or service to the customer, ex. commissions, delivery expense, advertising costs General Financial Predicting cost Assigning Decision classification reporting behaviour costs to cost making obejcts Manufacturing cost Product cost Variable cost Direct cost Differential cost Non-Manufacturing Period cost Fixed cost Indirect cost Opportunity cost cost Sunk cost Financial Reporting: 1. Product Cost: costs that are involved in the purchase or manufacture of goods, ex. DM, DL, MOH 2. Period Cost: are expensed in the same period as they occurred, ex. administrative cost, salary cost Predicting Cost Behaviour: how cost change depending on activity 1. Variable Cost: varies in total depend on activity level 2. Fixed Cost: does not change while activity level change Decision Making: 1. Differential Cost: relevant, different costs between options, ex. daily parking ticket = $13 x 4 weeks x 12 weeks = $624 sessional parking permit = $268.71 differential cost = $624 – $268.71 = $35.29 2. Opportunity Cost: relevant, options 3. Sunk Cost: already occurred, can’t be changed by any alternative Inventory Flow: Beginning + Additions = Available Available – Withdrawals = Ending Balance Inventory Accounts: - Raw Material - Work-In-Process(WIP) - Finished Goods(FG) Direct Materia Direct Labour  Work-in-Process Inventor Finished  Cost of Goods Goods Sold Inventory Manufacturing  Overhead Work-in-Process (WIP) Beginning Balance DM used Cost of Goods DL Manufactured MOH Ending Balance Finished Goods (FG) Beginning Balance Cost of Goods Sold COGM Ending Balance The Income Statement: Gross Margin = Sales – COGS Operating Income = Gross Margin – Selling and Administrative Expense MGT223 Chapter03: Job-Order Costing Job-Order Costing: charge direct material and direct labour costs to each job as work is performed, manufactured overhead are allocated to all jobs rather than directly traced to each job Predetermined Overhead Rate(POHR): used to apply overhead to jobs is determined before the period Estimated total manufacturing overhead cost for the coming period POHR = Estimated total units in the allocation base for the coming period (cost driver that causes overhead) Cost driver for DM is number of units made, for MOH is machine hours, labour hours Overhead applied = POHR x Actual Activity , estimated before the period, the actual amount of the allocation is based upon the actual level of activity Why not use actual MOH? - It is impossible to trace overhead costs to particular jobs - Managers need timely information for decision making - Many types of manufacturing overhead costs are fixed - Simplify record keeping MOH Actual Applied Indirect DM Overhead Applied to WIP Indirect DL Other OH Under-applied Over-applied Under-Applied MOH: Disposition (Debit Balance) Cost of goods sold (the amount under-applied) Manufacturing Overhead (the amount under-applied) Over-Applied MOH: Disposition (Credit Balance) Manufacturing Overhead (the amount over-applied) Cost of Goods Sold (the amount over-applied) Overhead Application Summary: 1. Determine overhead (OH) costs for an appropriate operating period 2. Select the cost driver(s) for charging the OH costs and estimate the total amount 3. Estimate the predetermined OH rate 4. Calculate the applied OH cost 5. Adjust at year end if under- or over–applied MGT223 Chapter04: Process Costing Job-Order Costing Process Costing - different products/jobs - single product - accumulate costs by jobs - accumulated by process - job cost sheet - department production report - unit cost calculated by job - unit cost calculated by department Assume there are 2 departments – Department A and Department B: 1. Costs (DL,DM,MOH) are assigned to both Department A and Department B under Work In Process 2. Transfer Department A’s Work In Process to Department B’s Work In Process 3. All together, Work In Process under Department B are converted to cost of goods manufactured 4. Cost of goods manufactured transfer to Finished Goods 5. Under Finished Goods, COGM converted to cost of goods sold 6. COGS transfer to account Cost Of Goods Sold Quantity of Production: process costing assigns costs to both fully and partially completed units by converting partially completed units to equivalent whole units or to equivalent units of production (EUP) Equivalent Units of Production (EUP): the number of partially completed units and the percentage completion of those units ex. 10,000 units with 70% completion are equivalent to 7,000 complete units Weighted Average Method: Costs for producing the equivalent units of production Cost per Equivalent Unit = Equivalent units of production - makes no distinction between work done in prior or current periods - blends together units and costs from prior and current periods Conversion = Direct labour + Manufacturing overhead Weighted-Average steps: 1. Identify units completed and transferred out of the department 2. Identify the equivalent units of production in ending work in process with respect to materials and conversion 3. Equivalent units of production = Units completed and transferred + Equivalent units remaining in work in process Cost of beginning work in process inventory + Cost added during the period Cost per Equivalent Unit = Equivalent units of production Reconciling Costs Costs to be accounted for: Cost accounted for: Cost of beginning work in process inventory Cost of ending work in process inventory Costs added to production during the period Cost of units transferred out Total cost to be accounted for Total cost accounted for MGT223 Chapter05: Activity-Based Costing In activity-based costing, 1. Non-manufacturing as well as manufacturing costs may be assigned to products, but on a cause-and-effect basis 2. Some manufacturing costs may be excluded from product costs 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity. 4. Overhead rates, or activity rates, may be based on the level of activity at capacity rather than on the budgeted level of activity Activity-Based Costing: method based on activities that is designed to provide managers with cost info for strategic and other decisions that potentially affect capacity and thus fixed and variable costs 1. ABC assigns some manufacturing and some nonmanufacturing costs while traditional product costing assigns all manufacturing costs to products 2. ABC uses cost pools while traditional cost system rely on volume measures such as DL hours or machine hours 3. ABC charges products based on level of activity on capacity, unused capacity costs are treated as period expenses while traditional costing is based on budgeted activity Activity: an event that causes the consumption of overhead resources Activity Cost Pool: a “cost bucket” in which costs related to a particular activity measure are accumulated How costs are treated under ABC: 1. Unit-level activities: each time a unit is produced 2. Batch-level activities: each time a batch is handled 3. Product-level activities: specific products 4. Customer-level activities: specific customers 5. Organization-sustaining activities: regardless of above four activities Steps for implementing ABC: 1. Identify and define activities, activity cost pools and activity measures 2. Assign overhead costs to activity cost pools 3. Calculate activity rates 4. Assign overhead costs to cost objects using the activity rate and activity measures 5. Prepare management reports *Traditional cost system overcosts the high volume product and reports a lower product margin *Traditional costs system undercosts the low volume product and reports a higher product margin Cost of additional units: - prime cost - shipping cost - overhead Benefits Limitations - more accurate product cost - resistance to unfamiliar numbers and reports - pricing
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