ACC 202 Exam 1 Powerpoint Notes
ACC 202 Exam 1 Powerpoint Notes ACC 202
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This 14 page Study Guide was uploaded by Sharon Liang on Monday February 1, 2016. The Study Guide belongs to ACC 202 at University of Kentucky taught by Dr. Stephen Weissmueller in Spring 2016. Since its upload, it has received 58 views. For similar materials see Managerial Accounting in Accounting at University of Kentucky.
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Date Created: 02/01/16
ACC 202 Exam 1 Powerpoint Notes Chapter 1 Meaning of Managerial Accounting Providing accounting information for a company’s internal users Managerial accounting is not bound by generally accepted accounting principles (GAAP) Managerial accounting has 3 broad objectives 1) Planning - Detailed formulation of action to achieve a particular end 2) Controlling - Managerial activity of monitoring a plan’s implementation and taking corrective action as needed 3) Decision Making - Process of choosing between among competing alternatives Financial vs Managerial Accounting Financial (External Accounting) Provides information for external users - Investors, creditors, customers, suppliers, government agencies, and labor unions Historical - Investment decisions, stewardship evaluation, monitoring activity, and regulatory measures Financial statements must follow rules defined by - Securities and Exchange Commissions (SEC) - Financial Accounting Standards Board (FASB) - International Accounting Standards Board (IASB) Managerial (Internal Accounting) Provides information for internal users such as managers, executives, and workers Identifies, collects, measures, classifies, and reports financial and nonfinancial information to internal users in planning, controlling, and decision making Financial Managerial Externally focused Internally focused Must follow externally imposed No mandatory rules rules Objective financial information Financial and information; subjective information possible nonfinancial Historical orientation Emphasis on the future Information about the firm as a Internal evaluation and decisions based on very detailed whole information More self-contained Broad, multidisciplinary Current Focus of Managerial Accounting The business environment in which companies operate has changed Effective managerial accounting systems provide information that helps improve companies’ planning, controlling, and decision making activities Important Uses of Managerial Accounting 1) New methods of estimating product and service cost and profitability 2) Understanding customer orientation 3) Evaluating the business from a cross-functional perspective 4) Providing information useful in improving total quality New Methods of Costing Products and Services Today’s companies need focused, accurate information on the cost of products and services produced Activity based costing (ABC) is a more detailed approach to determine the cost of goods and services - ABC improves costing accuracy by emphasizing the cost of many activities or tasks that must be done to produce a product or service Process-value analysis focuses on the way in which companies create value for customers Find ways to perform necessary activities more efficiently and eliminate those that don’t create customer value Value Chain Pursuit of cost leadership and strategies Set of activities required to design, develop, produce, market, and deliver products and services, and provide support services to customers Role of Managerial Accountant Assist those who are responsible for carrying out an organization’s basic objectives Positions that have direct responsibility for the basic objectives of an organization are line positions Positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives are staff positions The controller supervises all accounting functions and reports directly to the general manager and chief operating officer In larger companies, the controller is separate from the treasury department. The treasurer is responsible for the finance function Managerial Accounting and Ethical Conduct The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means Ethical behavior involves choosing actions that are right, proper, and just Behavior can be right or wrong; proper or improper; and the decisions we make can be fair or unfair Companies in the business for the long term find that it pays to treat all with honesty and loyalty Certification 3 major forms of certification for managerial accountants: 1) Public Accounting 2) Management Accounting 3) Internal Auditing Each certification offers particular advantages to a managerial accountant All 3 certifications offer proof of achievement at a minimum level of professional competence Chapter 2 Meaning and Uses of Cost Determine the cost of products, services, customers, and other items to managers Cost is the amount of cash of cash equivalent sacrificed for goods and/or services that bring a current or future benefit to the organization As costs are used up in the production of revenues do expire Expired costs are expenses The revenue per unit is price Cost Objects Managerial accounting systems are structured to measure and assign costs A cost object is any item such as a product, customer, department, project, geographic region, plant, etc. for which costs are measured and assigned Direct and Indirect Costs Direct costs are costs that can be easily and accurately traced to a cost object. When a cost is easy to trace, we mean that the relationship between the cost and object can be physically observed, is easy to tract, and results in more accurate cost assignments Indirect costs are costs that can’t be easily and accurately traced to a cost object. Some businesses refer to this as overhead or support costs Other Categories of Cost Costs that can be direct or indirect and are analyzed by behavior patterns or the way in which cost changes when the level of output changes - Variable cost: one that increases in total as output increases and decreases in total as output decreases - Fixed cost: cost that doesn’t increase in total as output increases and doesn’t decrease in total as output decreases - Opportunity cost: benefit given up when one alternative is chosen over another Product Costs Output is one of the most important cost objects There are 2 types of output: products and services Products are good produced by converting raw materials through the use of labor and indirect manufacturing resources, such as the manufacturing plant, land, and machinery - TVs, hamburgers, automobiles, computers, clothes, and furniture are examples of products Services are tasks or activities performed for a customer or an activity performed using an organization’s products or facilities - Insurance coverage, medical care, dental care, funeral care, and accounting are examples of service activities - Car rental, video rental, and skiing are examples of services where the customer uses an organization’s products or facilities Determining Product Cost Product (manufacturing) costs are 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 - Only costs in the production section of the value chain are included in the product costs Direct Materials Direct materials are materials that are a part of the final product and can directly be traced to the goods being produced The materials cost can be directly charged to products because physical observation can be used to measure the quantity used by each product Materials that become part of the product are usually classified as direct materials Direct Labor Direct labor is the labor that can be directly traced to the goods being produced. - Physical observation can be used to measure the amount of labor used to produce a product - Those employees who converted direct materials into a product are classified as a direct labor A company can also have indirect labor costs - Indirect labor is included in the overhead and, therefore, is an indirect rather than a direct cost Manufacturing Overhead All product costs other than direct materials and direct labor are manufacturing overhead - Aka factory burden or indirect manufacturing costs Costs are included as manufacturing overhead if they can’t be traced to the cost object of interest Manufacturing overhead cost category includes a variety of items - Examples include depreciation on plant, buildings, and equipment, janitorial and maintenance labor, plant supervision, materials handling, power for plant utilities, and plant property taxes Prime and Conversion Costs Product costs of direct materials, direct labor, and manufacturing overhead can be grouped into prime and conversion costs - Prime cost = direct materials + direct labor - Conversion cost = direct labor + manufacturing overhead Period Costs Costs of production and assets that are carried in inventories until goods are sold Other costs such as period costs are not carried in inventory - Period costs are all costs that aren’t product costs - Examples of period costs: office supplies, research and development activities, CEO’s salary, and advertising - The level of period costs can be significant and controlling them may bring greater cost savings than the same effort exercised in controlling production costs Selling Costs Those costs are necessary to market, distribute, and service a product or service - Order-filling examples include warehousing, shipping, and customer service - Order-getting examples include sales personnel, salaries & commissions, and advertising Administrative Costs Administrative costs include research, development, and general administration of the organization and can’t be assigned to selling nor production General administration ensures that the various activities of the organization are integrated so that the overall mission of the firm is realized - Examples of general administration costs include: executive salaries, legal fees, printing the annual report, and general accounting - Research and development costs include: designing and developing new products must be expensed in the period incurred Preparing Income Statements: Cost of Goods Manufactured The cost of goods manufactured represents the total product cost of goods completed during the current period and transferred to finished goods inventory The cost of direct materials used in production can be derived using the following formula: beginning inventory of materials + purchases – direct materials used in production = ending inventory of materials The direct materials used is then used to calculate the costs of goods manufactured as follows: direct materials + direct labor + manufacturing overhead costs + beginning WIP inventory – ending WIP inventory = cost of goods manufactured Cost of Goods Sold To meet external reporting requirements, costs must be categorized into 3 groups: 1) Production 2) Selling 3) Administration Cost of goods sold represents the cost of goods that were sold during the period and then transferred from finished goods inventory on the balance sheet to cost of goods sold on the income statement. Beginning finished goods inventory + cost of goods manufactured – ending finished goods inventory = cost of goods sold Income Statement: Manufacturing Firms All sales revenue and expenses attached to a time period are on the income statement The heading of the financial statement tells us what type of statement it is --- Income Statement; for what firm --- the name of the company; and for what period Price x units sold = sales revenue Gross margin = sales revenue – cost of goods sold - It shows how much the firm is making over and above the cost of units sold - Gross margin does NOT equal operating income or profit as it’s computed without subtracting selling and administrative expenses - If gross margin is positive, the firm is charging prices that cover the product cost Operating Income Gross margin – selling and administrative expenses = operating income Operating income is the key figure from the income statement. In other words, it shows how much the owners are actually earning (profit) from the company Chapter 3 Basics of Cost Behavior Cost behavior is the foundation upon which managerial accounting is built Describes whether a cost changes when the level of output changes Costs can be variable, fixed, or mixed A cost doesn’t change in total as output changes is a fixed cost A variable cost increases in total with an increase in output and decreases in output with a decrease in output Knowing how costs change as output changes is essential to planning, controlling, and decision making Measures of Output and Relevant Range Fixed and variable costs have meaning only when related to an output measure A cost driver measures the output of the activity that leads or causes costs to change Identifying and managing drivers helps managers predict and control costs For example, weather is a significant driver in the airline industry Relevant Range and Cost Relationships Relevant range is the range of output over which assumed cost relationship is valid for the normal operations of the firm Limits the cost relationship to the range of operations that the firm normally expects to occur The following graph shows the relevant range which allows managers to assume a linear cost relationship Fixed Costs The number of computers produced is called the output measure or driver Though fixed costs, may change they’re NOT considered variable. Instead, they’re fixed at a new rate A graph of Colley’s supervision costs is shown below Discretionary and Committed Fixed Costs Discretionary fixed costs can be changed or avoided easily at management discretion. An example would be advertising because it depends on management decision Committed fixed costs can’t be changed. An example would be a lease cost because it involves a long-term contract Variable Costs Variable Costs are costs that vary in direct proportion to changes in output within the relevant range Variable costs can be represented by a linear equation Total variable costs depend on output level. Total variable cost = variable rate x amount of output This relationship can be described by the following graphs The Reasonableness of Straight Line Cost Relationships Caution when applying cost behavior assumptions to output levels that fall outside of the company’s relevant range of operations Straight line cost relationships that are assumed within the relevant range may actually semi-variable costs Example: At extremely low levels of output, workers often use more materials per unit or require more time per unit than they do at higher levels of output As the level of output increases, workers learn how to use materials and time more efficiently so that the variable cost per unit decreases as more output is produced Mixed Costs Mixed costs are costs that have both a fixed and variable component Example: Overhead for a company may consist of a fixed supervisor salary plus the cost of supplies that vary with the quantity of output produced Total cost = total fixed cost + total variable cost The graph depiction for a fixed cost is shown below Step Costs: Narrow Steps Some cost functions may be discontinuous Known as step costs (semi-fixed) - Displays a constant level of cost for a range of output then jumps to a higher level of cost at some point, where it remains for a similar range of output If a step cost has narrow steps, it means that the cost changes in response to small changes in output we can approximate it as a variable cost (red line) Step Costs: Wide Steps Step costs with wide steps are more characteristic of fixed costs Example: A company may have to lease a production to machinery - If the machine can only produce 1,000 units and the company grows, they’ll have to lease additional machines for each 1,000 units of production needed - Resulting in the wide steps is shown in the graph below Methods for Separating Mixed Costs into Fixed and Variable Components 3 methods for separating mixed costs into fixed and variable components 1) High low method 2) Scattergraph method 3) Method of least squares Each method requires the simplifying assumption of a linear cost relationship Expression of cost as an equation for a straight line is total cost = fixed cost + (variable rate x output) The dependent variable is a variable whose value depends on the value of another variable In the previous equation, total cost is the dependent variable; it’s the cost we’re trying to predict The independent variable measures output and explains changes in the cost or other dependent variable - A good independent variable is one that causes or is closely associated with the dependent variable - Many managers refer to an independent variable as a cost driver The intercept corresponds to a fixed cost The slope of the cost line corresponds to the variable rate APPENDIX 3A: Using the Regression Programs Computing the regression formula manually is tedious, even with only a few data points As the number of data points increases, manual computation becomes impractical Fortunately, spreadsheet packages like Microsoft Excel have regression routines that perform these computations Input the data and the spreadsheet regression program supplies more than the estimates of the coefficients Also provides information that can be used to see how reliable the cost equation is---a feature that’s not available for the scattergraph and high-low methods.
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