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Chapters 1-4 Study Guide

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by: Dalia Szkolnik

Chapters 1-4 Study Guide ACC 212

Marketplace > University of Miami > ACC 212 > Chapters 1 4 Study Guide
Dalia Szkolnik
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These are all of the notes and extra examples for the exam on Wednesday.
Managerial Accounting 212
Study Guide
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Juan Rios

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This 15 page Study Guide was uploaded by Dalia Szkolnik on Thursday February 4, 2016. The Study Guide belongs to ACC 212 at University of Miami taught by Quintana in Spring 2016. Since its upload, it has received 94 views.

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Date Created: 02/04/16
STUDY GUIDE EXAM 1 : CHAPTERS 1-4 EXAM WEDNESDAY FEBRUARY 10 Financial vs. Managerial Accounting Financial accounting: reporting financial information to external parties (ex: stockholders, creditors, and regulators) Managerial accounting: providing information to managers for use within the organization Financial Accounting Managerial Accounting • Reports to those outside the • Reports to managers inside the organization: owners, creditors, tax organization for: planning, authorities, regulators controlling, decision making • Focuses on financial consequences • Focuses on decisions affecting the of past activities future • Objectivity and verifiability • Relevance • Precision • Timeliness • Emphasizes companywide reports • Emphasizes segment reports • Has to follow GAAP/IFRS • Does not have to follow • Mandatory for external reports GAAP/IFRS • Not mandatory What is the work of management? Planning • Establish goals  specify how the goals will be achieved  develop budgets Example: You are in charge of recruitment for a company. These are some of the questions that you would ask yourself in the planning stage. o What ages are we going to focus on for recruitment? o When will the interviews be conducted? o How much money can we spend on recruitment efforts? o What salary and benefits will we provide to our new hires? • There are many questions that must be answered in the planning process and all plans are focused on a budget o Budget: detailed plan for the future that is usually express in formal quantitative items Controlling • Gathering, evaluating, and responding to feedback in order to ensure that the processes meet expectations Example: Once you plan how you will recruit new members for the company, you move to the control process. This helps search for new ways to fun more effective recruitment processes and campaigns for following years. o Did we succeed in hiring the right number of members? o Did all of our employees in the recruitment process perform how they should have? o Did the interviews run smoothly? o Did we stay within our budged in the process? • The control process includes preparing performance reports o Performance report: compares budget data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performance Decision Making • This process includes three main questions: What should we be selling? Who should we be serving? How should we execute? Business Management Perspectives IMA (Institute of Management Accountant’s) provides a Statement of Ethical Professional Practice, which includes guidelines for ethical behavior Ethics Perspective Competence Confidentiality Integrity Credibility • Recognize and • Don’t disclose • Resolve • Communicate communicate confidential conflicts of information fairly professional information interest and and objectively limitations unless legally advise of • Disclose • Follow laws, obligated potential deficiencies in conflicts regulations, and • Don’t use information standards confidential • Avoid conduct timeliness, • Provide accurate, information for that would processing, and clear, concise, and unethical or prejudice internal controls timely information illegal advantage performing • Disclose all duties ethically relevant • Avoid activities information and that could could influence discredit user profession Customer Value Propositions • Customer intimacy strategy  understand and respond to individual customer needs • Operation excellence strategy  deliver products and services faster, more conveniently, and at lower prices • Product leadership strategy  offer higher quality products Corporate Social Responsibility Perspective (CSR) • It is the responsibility of the managers of a company to consider the needs of all stockholders when making decisions Cost Classifications • Objects o Direct costs: easily traced o Indirect costs: cannot be easily traced • Manufacturing o Direct materials, direct labor, manufacturing overhead • Non-manufacturing o Selling and administrative costs • Financial statements o Product costs: inventoriable o Period costs: expensed • Cost behavior due to changes in activity o Variable costs: proportional to activity o Fixed costs: constant in total o Mixed costs: variable and fixed elements Cost Objects • Direct costs o Easily traced and conveniently traced to a specific cost object  Example: materials used to produce an automobile • Indirect costs o Cost that cannot be easily traced and conveniently traced to a specified cost object  Example: the cost of the electricity used to power the machines used in automobile production  Example: salaries of factory managers  it is a cost incurred due to running the factory but it is not incurred to produce any type of product • Factory manager’s salary is considered a common cost, which is a type of indirect cost o Common cost: cost incurred to support a number of cost objects but cannot be traced to them individually Manufacturing Costs Manufacturing companies separate their costs into direct materials and direct labor 1. Materials • Raw materials: Materials that go into the final product. A finished product of one company can become the raw material of another. In other words, a company can use the finished product to produce their own product. o Direct materials: those that become an integral part of the finished product and the costs can be easily traced to the finished product  Example: electronic components that Microsoft uses for it computers o Indirect materials: insignificant materials to finished products that are not worth tracing their costs, so they are included as part of manufacturing overhead  Example: the glue used to make a chair in a company 2. Labor • Direct Labor: labor costs that can be easily traced to individual units of product o Labor workers typically touch the product while it is being made  Example: assembly-line workers in the Microsoft factory • Indirect labor: labor costs that cannot be physically traced to a product or those that can be traced but at a high and inconvenient cost o It is included as part of the manufacturing overhead  Example: costs of janitors, supervisors, guards 3. Manufacturing Overhead • All manufacturing costs except direct materials and direct labor • ONLY costs associated with operating the factory o Depreciation of machinery, insurance on facilities, property taxes, electricity, maintenance and repairs 4. Nonmanufacturing Costs • Selling costs: costs incurred to secure customer orders and get finished products to the customer (order-filling or order-getting) o Advertising, shipping, sales commissions, sales salaries • Administrative costs: costs associated with the general management of an organization rather than manufacturing or selling o Public relations, executive compensation, secretarial Preparing Financial Statements For income statements, costs need to me classified as either product or period. The matching principle states that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized • Product costs: costs involved in acquiring or making a product o These costs are essentially attached to the product as the goods are purchased or manufactured and remain attached as they pass into the inventory section  Also known as inventoriable costs since they are initially assigned to inventories o Recorded as expenses in the period in which the product is sold • Period costs: costs that are not product costs (selling and administrative expenses) o Sales commissions, advertising, executive salaries, rental costs of administrative offices • Prime Cost and Conversion Cost o Prime cost: sum of direct materials and direct labor o Conversion cost: sum of direct labor cost and manufacturing overhead cost Product cost = direct materials + direct labor + manufacturing overhead Period cost = selling expenses + administrative expenses Conversion cost = direct labor + manufacturing overhead Prime cost = direct materials + direct labor Predicting Cost Behavior Cost behavior: how a cost reacts to changes in the level of activity (activity level rises or falls  cost may rise or fall or remain constant) Cost structure: relative proportion of each type of cost in an organization • Variable cost: varies in total and in direct proportion to changes in level of activity o Cost of goods sold, direct materials, direct labor, variable elements of manufacturing overhead, variable elements of selling and administrative expenses o A variable cost must be variable with respect to something  The activity base is the “something”  it is the measure of whatever causes the incurrence of a variable cost  Activity base is a cost driver • Examples: direct labor hours, machine hours, units produced, units sold • Examples: miles driven by a person, number of pounds cleaned by a hotel, number of calls handled by technical support • Fixed cost: cost that remains constant in total regardless of changes in level of activity o Straight-line depreciation, insurance, property taxes, rent, administrative salaries, advertising o NOT affected by changes in activity  Committed fixed costs: represent organizational investments with a multiyear planning horizon that cannot be significantly reduced even for short periods of time without making changes • Investments in equipment, real estate taxes, salaries of top management  Discretionary fixed costs: arise from annual decisions made by management to spend on certain fixed cost items • Advertising, research, public relations, internships for students **Example: the cost of ice cream and the cost of napkins for customers are variable with respect to the number of cones sold. Linearity assumption and relevant range • Relevant range: range of activity within which the assumption of cost behavior (strictly linear, reasonably valid) Mixed costs • Contains both variable and fixed cost elements o For example, some licensing fees include a fixed cost as well as a variable cost that changes Y= a + bX • Y= total mixed cost • a = total fixed cost • b = variable cost per unit of activity • X = level of activity Analysis of mixed costs • Account analysis: each account is classified as either variable or fixed • Engineering approach: classifies costs based upon evaluation of production methods, and material, labor, and overhead requirements • Cost is a dependent variable because the amount of it incurred during a period depends on the level of activity • Activity is an independent variable because it causes variations in the cost • High-low method o Identify period of lowest level of activity and period of higher level of activity o Variable cost = change in cost / change in activity  Change in cost is the cost at high activity level minus cost at low activity level o Total fixed cost = total cost – total variable cost  For example, get the higher level of cost minus the variable cost times the number of hours • Least-squares regression method o Analyzes mixed costs if a scatter graph plot reveals a linear relationship between X and Y o Y = a + bX Income Statements Formats • Traditional format: external reporting purposes o Organizes costs into either cost of goods sold or selling and administrative expenses  Sales – cost of goods sold = gross margin  Gross margin – selling/administrative expenses = net operating income • Contribution format: distinction between fixed and variable costs (aids in planning, controlling, and decision making) o Separates costs into fixed and variable Differential cost and Revenue • Differential cost: difference in costs between any two alternatives (also known as incremental cost) • Differential revenue: difference in revenues between any two alternatives Opportunity cost and sunk cost • Opportunity cost: potential benefit that is given up when one alternative is selected over another • Sunk cost: cost that has already been incurred and that cannot be changed by any decision made (NOT DIFFERENTIAL COSTS) EXAMPLES 1) A company started December with 500 unites in beginning finished goods. During the month 4,000 unites were produced and 3,700 units were sold. Costs added in December were direct materials $2,000 direct labor $400 production overhead $1,400. Sales salaries were a total of $1,200 and administrative costs $800. Inventory balances were the following Beginning work in process $250 Beginning finished goods $450 Ending work in process $600 Ending finished goods $690 a. Cost of goods manufactured? b. Cost of goods sold? 2) Product costs used for external financial reporting include which of the following? a. Customer service costs b. Marketing costs c. Production costs d. Research and development costs e. All of the above 3) What is the assignment of indirect costs to cost objects called? 4) When are product costs expensed? 5) Within the relevant range what happens? 1) a. $3,450 beginning work in process + added manufacturing costs – ending work in process $250 + ($2000 + $400 + $1400) – $600 = $3,450 b. $3,210 Beginning finished goods + cost of goods manufactured – ending finished goods $450 + $3450 - $690 = $,3210 2) Production costs 3) Allocation 4) When the product is sold 5) Fixed cost per unit increases as production decreases What is job-order costing? • It is used when many different products, each with individual and unique features, are produced each period • Since there is variation in the product manufactured, the job order costing system creates a job cost order for each item, job or special order o For example, in large-scale construction projects each project is unique and different from every other o This type of costing is used primarily in service industries  hospitals, law firms, accounting firms, repair shops Categories to classify costs • Direct materials o Bill of materials: document that lists the type and quantity of each type of direct material needed for a unit of product o Once the quantity, price, and shipment of the product is established with the customer, a production order is used • Job Cost Sheet o Records materials, labor and manufacturing overhead costs charged to a job • Direct Labor o Only those that can be easily traced o NOT tasks such as maintenance, supervision, cleaning • Predetermined Overhead Rates o Allocation is used to assign overhead costs to products since it is difficult to trace manufacturing overhead costs since they are indirect costs  Allocation base: measure such as, direct labor hours or machine hours, that is used to assign overhead costs to products and services o Computed BEFORE the period begins Predetermined overhead rate = estimated total manufacturing overhead cost / estimated total amount of the allocation base Overhead applied to a particular job = predetermined overhead rate X amount of the allocation base incurred by the job o EXAMPLE: If the predetermined rate is $8 per direct labor hour, then $8 of overhead cost is applied to a job for EACH hour incurred on the job o EXAMPLE: A company estimates that 40,000 direct labor hours will be required for the job. It estimated a total of $220,000 fixed manufacturing overhead cost and $2.50 variable manufacturing overhead cost per labor- hour. Estimate the total manufacturing cost for the year:  Y = a + bX = $220,000 + ($2.50 x 40,000) = $320,000  Predetermined overhead rate = $320,000 / 40,000 = $8 per direct labor hour  If 27 hours were charged to the job then, the overhead applied to job = $8 per hour x 27 = $216 of overhead applied to the job • Cost driver: factor that causes overhead costs (machine-hours, computer time, flight hours) What is the flow of the costs? • Raw materials: those that go into the final product o Costs are transferred to work in process inventory as direct materials • Work in process: unites of product that are partially complete and require work to be ready to sale to the customer o Direct labor costs are added directly to work in process  NOT part of raw materials o When the product is complete, it is transferred from work in process to finished goods  known as cost of goods manufactured • Finished goods: completed units that have not been sold o When finished goods are sold, they are transferred to cost of goods sold Raw Materials Manufacturing Costs Work In Process Finished Goods Beginning raw materials Direct Materials Beginning work Beginning finished inventory + Raw materials purchases + Direct labor goods inventory + Total manufacturing = Raw materials available + Manufacturing costs + Cost of goods for use in production overhead applied manufactured = Total work in - Ending raw materials = Total manufacturing process for period = Cost of goods csots available for sale = Raw materials used in - Ending work production inventory - Ending finished goods inveotry = Cost of goods = Cost of Goods Sold manufactured ** THE RAW MATERIALS USED IN PRODUCTIOIN BECOME THE DIRECT MATEIRLS IN MANUFACTURING COSTS EXAMPLE Schedules of Cost of Goods Manufactured vs. Cost of Goods Sold • BOTH contain three elements of product costs  direct materials, direct labor, manufacturing overhead • Schedule of cost of goods manufactured: o Summarizes the portions of those costs that remain in ending work in process inventory and are transferred out of work in process to finished goods • Schedule of cost of goods sold: o Summarizes the portion of those costs that remain in ending finished goods inventory and are transferred out of finished goods into cost of goods sold COST OF GOODS MANUFACTURED Raw materials used in production = beginning raw materials inventory + Purchases of raw materials – ending raw materials inventory Total manufacturing costs = direct materials + direct labor + manufacturing overhead applied to work in process Cost of goods manufactured = total manufacturing costs + beginning work in process inventory – ending work in process inventory COST OF GOODS SOLD Unadjusted cost of goods sold = beginning finished goods inventory + cost of goods manufactured – ending finished good inventory EXAMPLE If beginning raw materials was $32,000 and $276,000 of raw materials were purchased. At the end of the month, $28,000 of raw material was still present. What is the cost of direct material used? • $32,000 + $276,000 = $308,000 - $28,000 = $280,000 of raw materials were used What is underapplied and overapplied overhead? • It is the difference between overhead cost applied to work in process and the actual overhead costs of a period o If the actual overhead is more  then the overhead cost applied to work in process was underapplied o If the actual overhead is less  then the overhead cost applied to work in process was overapplied IF Manufacturing Overhead is: Underapplied Cost of goods sold increases Gross margin decreases (net operating income decreases as well) Overapplied Cost of goods sold Gross margin increase (net decreases operating income increases as well) • Overapplied or underapplied overhead can be allocated to work in process, finished goods, or costs of goods sold OR it can be directly allocated to just cost of goods sold EXAMPLE If the actual overhead is $650,000 and the total of direct labor hours are 170,000. How much total overhead was applied during the year, using a predetermined overhead rate of $4.00 per direct labor hour? • Applied overhead = predetermined overhead rate X actual direct labor hours o Applied overhead = $4.00 X 170,000 = $680,000 • Comparing the actual overahead of $650,000 to the applied overhead, the difference is $30,000 of overapplied. The applied overhead was more than what it had to be; it was overapplied. Process costing basics • Used by businesses such as glass container manufacturing, food processing, and oil and gasoline refining • Products that are similar and produced continuously Process Costing and Job-Order Costing • Both systems assign material, labor, and overhead costs to products • Both provide mechanism for computing unit product costs • Both use the same manufacturing accounts  manufacturing overhead, raw materials, work in process, finished goods • Job-Order Costing is used for products that are different and produced continuously but Process Costing is for those who are similar Materials • First you credit raw materials • Then you debit them in work in process Labor • Salaries and wages payable  direct labor is credited • Work in process  direct labor is debited Manufacturing overhead • Manufacturing overhead  actual overhead is debited and overhead applied to work in process is credited • Work in process  applied overhead is debited Equivalent units of production • Product of the number of partially completed units and the percentage completion of those units • Complicate the determination of a department’s output o Equivalent units = Number of partially completed units x Percentage completion EXAMPLE: For the current period, 15,0000 unites and completed are 10,000 units. This left 5,000 units in process 30 percent complete. How many equivalent units of production did the company have for the period? • 10,000 X 100% = 10,000 completed units + (5,000 X 30%) = 11,500 Calculating equivalent units • Weighted-average method o Blends together units and costs from current periods with units and cost from prior periods  Equivalent units of production = Units transferred to next department or finished goods + Equivalent units in ending work in process inventory  Cost per equivalent unit = (cost of beginning work in process inventory + cost added during the period) / equivalent units of production EXAMPLE: Using the weighted-average method, what are the equivalent units of production for conversion costs? Beginning work in process inventory (100% complete as to materials; 60% complete as to conversion) 120,000 units Started in process during the period 360,000 units Ending work in process inventory (100% complete as to materials; 50% complete as to conversion) 80,000 units • First, find the units that are in the processing department in order to find the units in ending inventory • Information given: o Beginning inventory (120,000) o Units Transferred in (360,000) o Units in ending inventory (80,000) • Next, do the calculations: o Units in beginning inventory + units transferred in = total units to be accounted for (120,000 + 360,000 = 480,000) o Units completed + units in ending inventory = total units to be accounted - So to find the number of units completed do 480,000 minus 80,000 = 400,000 - Units completed = 400,000 o To find the equivalent units, simply add the number of units transferred out/completed which is 400,000 and add the units in ending inventory - 400,000 + (80,000 x .6) = 448,000  equivalent units ** .6 comes from the 60% of units completed as to conversion EXAMPLE: The following information is given of a company for the month of August. Find the following Units Percent Complete Cost Beginning work in 11,200 70% $5,000 process inventory Ending work in process 14,300 40% inventory 75,200 units were completed. Manufacturing cost was $60,120 1. Number of equivalent units a. (75,200 + (14,300 x .40) = 80,920 2. Cost per equivalent unit a. (60,120 + 5,600) / 80,920 = $.81 3. Cost of the 14,300 units in ending inventory a. (14,300 x .40 ) x .81 = $4,633.2 4. Cost of the 75,200 units completed a. (75,200 x .81) = $60,912 5. If 50,000 units are sold for $1.40 each, what is the company’s gross profit? a. (50,000 x 1.40) – (50,000 x .81) = $29,500


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