The content was detailed, clear, and very well organized. Will definitely be coming back to Taryn for help in class!
Midterm Review Notes Managerial Chapters 15
∙ Know the differences between financial and managerial accounting. o Financial:
Uses information from the past
External for people outside the company who want to look at you financials
Overview of the whole company
Uses set guidelines
Projects the future
Internal for people within the company to look at
Departmentalized not an overview of whole company
Financial and nonfinancial
∙ Know about the ethical components of managerial accounting. o Code of conduct for a company
Many include integrity, compliance with the law, performance of ones duties and respect and responsibility to each other, partners, customers etc.
o Standards of ethical conduct for managerial accountants
American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) have ethical standards for accountants such as competence, confidentiality, integrity, and
∙ There is a “Statement of Ethical Professional Practice” set in
place by the IMA that managerial accountants are expected to
follow. We also discuss several other topics like Who is considered the wildest greek god?
∙ Some of the expectations include honesty, fairness, objectivity
If individuals do not comply there can be consequences
∙ Know about direct materials, direct labor, and manufacturing overhead o Direct materials:
Raw materials used in production
o Direct labor:
Physical/touch labor used in production
o Manufacturing overhead:
∙ Managers pay
∙ Janitorial costs
∙ Know period costs vs. products costs
o Period Costs (aka Selling & Administrative Costs):
Outside of the factory
∙ CEO Salary
∙ Delivery costs
o Product Costs:
Incurred by manufacturing or producing a good/service
∙ Direct materials
∙ Direct labor If you want to learn more check out How does “enzyme induction” differ from other mechanisms of enzyme regulation?
∙ Manufacturing overhead
∙ Know discretionary vs. committed fixed costs
o Discretionary Costs:
∙ Work parties
o Committed Costs:
Not easily changed
∙ Long term contracts
∙ Purchase of land, equipment, buildings…
∙ Know how to use Taccounts
o Method shown under ‘inventory cost flow’ below
∙ Know prime costs vs. conversion costs
o Prime Costs:
o Conversion Costs:
∙ Know how to calculate Cost of Goods Manufacturing, Cost of Goods Sold o Cost of Goods Manufacturing
Total product cost of goods completed during the current period and transferred to finished goods inventory. If you want to learn more check out How would researches conveniently organize large amounts of numerical data?
∙ DM+DL+MO+WIP BBWIP EB=COGM
o Cost of Goods Sold
3 categories: production, selling, administrative
Cost of goods that were sold during the period and transferred from finished goods inventory on the balance sheet to cost of goods sold on the income statement.
∙ COGM + FG BB FG EB = COGS
∙ Be able to do the inventory cost flow (asset account)
o Raw Materials Account
Beginning Balance +Purchase of RM–Ending Balance=Materials Used ∙ Materials used are transferred to Work in Process account as
o Work in Process Account
BB + (DM + DL + MO) – EB = Cost of Goods Manufactured
∙ Cost of Goods Manufactured are transferred to Finished Goods
o Finished Goods Account
BB + COGM – EB = Cost of Goods Sold
∙ COGS is then transferred from the balance sheet to the income
∙ Know the HighLow method (used to separate variable and fixed costs). Be able to use the formula to calculate variable cost, total cost, fixed cost, cost at a new level of activity, etc If you want to learn more check out What makes a design "baroque"?
o 5 Steps
1. Find the high and low points in a given data set
∙ High point is the point with the highest activity or output level
∙ Low point is the point with the lowest activity or output level
∙ Identified by looking at activity level NOT costs
2. Calculate variable rate (slope)
∙ Change in Total Cost / Change in Output
o (High Cost – Low Cost / High Output – Low Output)
3. Calculate fixed costs
∙ Total Cost at High Point – (Variable Rate x Output at High
∙ Or use the low points
4. Find the cost formula
∙ Total Cost = Fixed Cost + (Variable Rate x Activity Level)
∙ Y = a + b(x)
5. Total Cost
∙ Find ‘Y’ by using the above formula
Can then use the values/formula to plug in a new activity level as ‘x’ ∙ Understand fixed cost, variable costs, mixed costs and how they react o Fixed Costs:If you want to learn more check out Why do we need carbohydrates?
Constant whether output changes or not
o Variable Costs:
Constant per unit but change with the level of output
o Mixed Costs:
Both variable and fixed
∙ E.g. Earning a salary plus commission
Found by using the HighLow Method
∙ Know and understand contribution margin format Income Statement o The contribution margin income statement is the income statement format that is based on separating costs into fixed and variable.
o The contribution margin is the money left over after covering variable expenses that can be used towards fixed expenses.
Sales Variable Expenses = Contribution Margin
Contribution Margin Fixed Expenses = Operating income
∙ Know BreakEven analysis and how to calculate this in both units and sales dollars
o At the break even point operating income is zero.
o Break even in units
Shows exactly how many units need to be sold in order to cover all costs (anything above this will be profit).
∙ Total Fixed Cost / (PriceVariable cost per unit) If you want to learn more check out What are the characteristics unique to bacteria?
o Break even in sales dollars
Shows how close a company is to breaking even using only sales revenue data.
∙ Total Fixed Cost / Contribution Margin Ratio
∙ Contribution Margin Ratio = CM per unit / Price
∙ CM per unit = Price – Variable Cost per unit
NOTE: Variable cost ratio = 1 CM ratio
∙ Know how to figure out target profit
o Target profit in units
(Target Income + Total Fixed Cost) / (Price – Variable Cost per unit) o Target profit in sales dollars
(Target Income + Total Fixed Cost) / Contribution Margin Ratio ∙ Understand what happens if there are changes in fixed costs, variable costs, sales price, etc
o Changes in fixed costs
An increase in fixed costs means a higher break even point
o Changes in variable costs
An increase in unit variable cost means a lower CM and higher break even point
o Changes in sales price
An increase in price means a higher CM and a lower break even point Vice Versa
∙ Know the Normal Costing Method
o In a normal costing scenario actual DM and DL are used but MO is estimated and applied.
o 3 step method
∙ Know how to calculate predetermined overhead rate (Step 1) o This rate is calculated at the beginning of the year and it helps companies maintain a constant application of overhead during the whole year; it is an estimate.
o Estimated Annual Overhead / Estimated Annual Activity Level
∙ Know how to apply overhead in the normal costing method (Step 2) o Once the predetermined overhead rate is calculated the company can use that rate and apply it to production.
o Applied Overhead = Predetermined Overhead Rate x Actual Activity Level ∙ Know how to determine under or overapplied overhead
o At the end of the year a company is able to see their ACTUAL overhead. o This is then compared to the APPLIED overhead that was computed at the beginning of the year.
The difference (overhead variance) must be computed so that the actual value can be recorded on the COGS account.
o Overhead Variance = Actual Overhead – Applied Overhead
o If actual is greater than applied then the variance is UNDERAPPLIED overhead
o If actual is less than applied then the variance is OVERAPPLIED overhead ∙ Know how to adjust COGS
o Adjusted COGS = Unadjusted COGS + or – Overhead Variance Underapplied overhead is added to COGS
Overapplied overhead is subtracted from COGS