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A202 Exam 1 Study Guide

by: Lauren Detweiler

A202 Exam 1 Study Guide BUS-A202

Marketplace > Indiana University > Business > BUS-A202 > A202 Exam 1 Study Guide
Lauren Detweiler
GPA 3.98
Managerial Accounting
Diane Biagioni

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About this Document

This study guide covers all A202 content from the first 5 weeks of the semester (chapters 1-5).
Managerial Accounting
Diane Biagioni
Study Guide
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This 11 page Study Guide was uploaded by Lauren Detweiler on Thursday February 12, 2015. The Study Guide belongs to BUS-A202 at Indiana University taught by Diane Biagioni in Spring2015. Since its upload, it has received 215 views. For similar materials see Managerial Accounting in Business at Indiana University.


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Date Created: 02/12/15
A202 Exam 1 Study Guide Prof Diane Biagioni Chapters 15 0 90 At a bare minimum your topics of review should include 1 Chapter 1 a Understand the difference between nancial accounting and managerial accounting b Understand the Decision Making Framework c Understand the Planning and Control Cycle 11 Chapter 2 a Identify costbenefits to measure relevantcontrollable b Understand cost classi cations used to estimate costs traceability and variability c Describe cost hierarchy 111 Chapter 3 a Describe the GAAP income statement format and expense categories product vs period b Describe the ow of costs in various types of organizations service merchandising manufacturing c Understand all inventory formulae and how they are used d Understand the purpose and methodology of allocations IV Chapter 4 a Describe the Contribution Margin income statement format and expense categories variable vs f1xed b Understand how to create a Contribution Margin statement using acct classification hilo and regression analysis methods c Define and calculate UVC CM UCM GM and VCA202 Exam 1 Study Guide V Chapter 5 a CostVolumeProflt analysis i Define and calculate break even units and pro t ii Define and calculate target profit iii Understand the impact to CM and PET for pricing changes iv Understand the impact to CM and PET for expense changes v Understand the impact of multiple products on CVP analysis b Measure operating risk margin of safety and operating leverage Indepth chapter notes Chapter 1 I The Decision Framework a Step I Specify the decision problem including the decision maker s goals i We all have different goalsobjectives decision should help achieve that objective b Step 2 Identify options i Business decisions frequently have numerous options ii One of the most important tasks of management c Step 3 Measure costs disadvantages and bene ts advantages to determine the value bene ts reaped less costs incurred of each option i Value of an option measures how much the option contributes to the decision maker s goals 1 Businesses typically measure value in terms of money pro t ii Opportunity cost value to the decision maker of the next best option 1 Effective decision makers ensure that the value of any given choice exceeds its opportunity cost d Step 4 Make the decision choosing the option with the highest value i The option with the highest value is the only one whose value exceeds its opportunity cost II Organization a A group of individuals engaged in a collectively bene cial mission b Different types ie nonpro t forpro t etc i Ex Forpro t family business maximize pro t for the family ii Ex Forpro t public company maximize shareholder value max returns c How do companies align individual ie of the employees and organizational goals i Policies and procedures to de ne acceptable behavior ii Monitoring to enforce policies and procedures iii Incentive schemes and performance evaluation to motivate employees to consider organizational goals III The Planning and Control Cycle a Planning decisions choices about acquiring and using resources to deliver goodsservices i Ex Which products to offer their prices resources needed b Control decisions relate to motivating monitoring and evaluating performance i Ex Your GPA is lower than what your goal was so you decide to spend more time on class work c 4 stages of the cycle PIER i Plan Implement Evaluate Revise IV Accounting amp The Decision Framework a The primary role of accounting is to help measure the costsbene ts of decision options step 3 b Financial accounting aims to satisfy information needs of decision makers outside the rm i ie shareholders creditors taxing authorities c Managerial accounting aims to satisfy information needs of decision makers inside the rm i ie management employees ii Supports planning and control decisions V Role of Ethics a Should be an integral part of all 4 steps in the Decision Framework b What stops an individual from engaging in unethical decision making i Examples 1 Foreign Corrupt Practices Act of 1977 2 SarbanesOxley Act of 2002 3 Individual company policies 4 Code of Ethics established by the Institute of Management Accountants c Organizations professional bodies and the government de ne ethical standards d Responsibility to uphold ethical standards rests with all individuals Chapter 2 I Knowing What to Measure a Relevance relevant costsbene ts differ across decision options b Future revenues and costs do not focus on sunk costs past expenditure because we cannot change the past II Time and Decision Making a Controllability by picking an option the decision maker chooses to receive some bene ts and incur some costs relative to doing nothing i A cost or a bene t is controllable if the decision maker can avoid it by not picking that option ii Benefitscosts that are not controllable cannot be relevant however not all controllable bene tscosts are relevant b Categorizing decisions based on time i Controllability can vary depending on if it is long or shortterm ii How to distinguish long from shortterm 1 Longterm the ability to change the levels of capacity resources related to plants equipment and salaried staff 2 Shortterm capacities of these resources are xed iii Can also classify decisions as relating to long vs shortterm based on the time over which you experience the costs bene ts iv There is no unique rule that allows us to classify all decisions as long or shortterm without any ambiguity III How to Estimate Costs and Bene ts a Steps in estimating costs i Cost behavior build a model of the relation between cost and activity ii Cost estimation use historical data to estimate the model iii Cost prediction predict cost associated w a decision option b Variability the relation between a costbene t and an activity i Variable cost proportional to the volume of activity ii Fixed cost no change as the volume changes iii Mixed cost combination of variable and xed iv Step cost stays at the same level for a certain activity range but jumps to a higher amount if the volume increases past that range c Traceability the degree to which we can directly relate a costrevenue to a decision option i Direct costrevenue we can uniquely relate trace to a decision option ii Indirect only a portion of the costrevenue pertains to a speci c decision option IV Hierarchical Cost Structure Unitlevel increasedecrease in direct proportion to of units produced Batchlevel depends on the number of batches produced of setups Productlevel change only as the company changes the of products Facility level costs that do not vary at the unit batch or product levels ie xed costs of operating a factory 999 Chapter 3 I Product and Period Costs a Product cost costs associated with getting products and services ready for sale i Appear above the line for gross margin revenues less product costs b Period cost all costs that are not product cost i Do not directly relate to readying products and services for sale II Cost Flows in Service Organizations a The products service rms offer are not tangible or storable i ie consulting rm hotel airline ii Don t have an inventory of products b Income statements i Product costs ie instructor salaries rent equipment depreciation utilities maintenance supplies ii Period costs ie accounting of ce rent advertising sales staff III Cost Flows in Merchandising Organizations a Merchandising rms buy goods from suppliers and resell substantially the same products to customers i ie retailers like Macy s Sears grocery stores like Kroger of ce products stores like Of ce Depot and Staples b Inventory of goods that they buy and sell c Inventory equation lost of beginning inventory lost of goods purchased during lhc period Cost of cnding inventory 205 of goods sold COGS during the period d Flow of costs i Cost incurred goods purchased 9 inventory account balance sheet 9 product costs 9 COGS income statement ii Costs incurred ie accounting sales staff advertising of ce rent 9 period costs 9 selling and admin costs income statement IV Cost Flows in Manufacturing Organizations a Manufacturing rms use labor and equipment to transform inputs such as raw materials and components into outputs b Inventories of raw materials and components partly nished items and nished goods c Summary of most important cost terms i Direct materials materials used direct cost ii Direct labor labor used direct cost iii Manufacturing overhead total of indirect manufacturing outputs l Divided into variable overhead and xed overhead iv V vi vii viii Inventoriable costs costs that rms attach to inventories of work inprocess and nished goods Selling and administration costs period costs Prime costs sum of costs of labor and materials Capacity costs sum of variable and xed overhead Conversion costs sum of labor and overhead e Typical production process 1 ii iii iv Raw materials purchased added to materials inventory account Labor and overhead costs incurred go into temporary control accounts Production commences 9 materials labor and overhead costs added to WorkInProcess WIP accounts 1 At every step add costs of materials labor and overhead consumed to build the cost in the WIP account Production completed 9 physically transfer nished work from WIP to nished goods FG inventory 1 Also transfer cost of goods manufactured COGM from WIP inventory account to nished goods inventory account Sell nished goods 9 physically transfer goods to buyer 1 Remove associated cost from PC inventory account and move it to COGS account f Income statement i ii iii iv Beginning WIP raw materials labor and manufacturing overhead used during the year collectively called the total manufacturing costs charged to production 1 Apply inventory equation to WIP account to obtain cost of goods manufactured COGM Cost of goods sold COGS Beginning nished goods FG inventory Cost of goods manufactured COGM Cost of ending nished goods inventory Merchandise rm has one signi cant inventory account merchandise inventory Manufacturing rm has 3 inventory accounts raw materials work inprocess and nished goods 1 Final income statement looks the same for service merchandising and manufacturing rms V Cost Allocations a Cost Allocation A procedure that allocates or distributes a common cost b 4 elements in every cost allocation 1 ii iii Cost pool the total costs to allocate Cost objects the items or entities to which we allocate the costs in our cost pool Cost driver allocation basis attributes we can measure for each cost object iv Allocation volume denominator volume sum of the cost driver amounts across all cost objects c 2 steps of allocation procedure i Determine the allocation rate overhead rate 1 Allocation rate amount in cost pool denominator volume ii Allocate the cost 1 Multiply the number of cost driver units contained in each cost object by the allocation rate iii Note no matter what cost driver we use the sum of the allocations equals the cost pool 1 Proportion of cost allocated to a cost object equals proportion of driver units in that cost object d Beware of allocated costs when making decisions i Allocating overhead costs can make noncontrollable xed costs appear controllable and variable Chapter 4 1 Contribution Margin Statement a Contribution Margin the amount that remains after subtracting variable costs from revenue b The statement groups costs based on whether they are xed or variable and reports them as separate line items 11 Estimating Cost Structure a Cost Structure an estimate of the variable and xed portions of a company s costs b Most rms rely on historical data to estimate their cost structure 111 Method 1 Account Classi cation Method a Involves systematically categorizing a company s cost accounts as xed or variable b Estimate the change in variable costs i Sum the costs classi ed as variable to obtain total variable costs for the most recent period ii Divide the above amount by a measure of the volume of activity for the corresponding period to estimate the unit variable cost iii Multiply the estimated unit variable cost by the change in activity to estimate the total variable cost IV Method 2 HighLow Method a Uses two observations of aggregate cost data to estimate total xed cost and unit variable cost i This avoids classifying each cost as xed or variable individually making it much less timeconsuming than the account classi cation method b For any volume of activity total costs are Total Costs Fixed costs Unit Variable Costx Volume of Activity i We do not know this cost line so we must use observations of actual costs and actual activities to estimate the cost line c Managers use the two observations pertaining to the highest and lowest activity levels i Most likely to de ne the normal range of operations ii Apply the cost equation to these two points Total Costs HIGHACTIVITYLEVEL Fixed costs Unit Variable Cost x Activity Level HIGH Total Costs LOWACTIVITYLEVEL Fixed costs Unit Variable Cost x Activity Level LOW iii From these equations we can calculate unit variable cost as 39Ibml quotmix Ihm quotmlsl qu Hun l ll h39z39lix mm1 U INCH Illl Jul1 lzm39d lquotmllull 39mi wuiubr rm iv Then use the unit variable cost estimate with either the high or low total cost equation to estimate xed costs Fixed costs Total Costs HIGH Unit Variable Costx Activity Level HIGH Fixed costs Total Costs LOW Unit Variable Costx Activity Level LOW V Method 3 Regression Analysis a A statistical method for estimating xed and variable costs b Uses all available observations to come up with a line that best ts the data i Contrast to highlow method uses only two past observations to estimate xed and variable costs c Steps to t a regression line to data ie 12 months of membership and cost data for a gym i In Excel enter the months in column A the volume of activity of members in column B and total costs in column C Use a headingtitle for each column ii From the Tools menu choose the Data Analysis option iii From the Options box choose Regression iv You will see a dialog box can be seen in Exhibit 410 of the textbook 1 Enter the yaxis cell range total costs and the xaxis cell range of members 2 Check the Labels option to include the title cells in the range 3 Choose the Line Fit Plots option if you would like to see a graph of the tted line 4 Click OK and you should see the results in a separate worksheet d Other statistics i RSquare the value of this indicates the goodness of t 1 Will always lie between 0 and l 2 The closer it is to l the better the t ii Pvalue indicates the con dence that the coef cient estimates reliably differ from zero 1 Usually we look for pvalues below 005 2 Lower values indicate a higher level of con dence in the estimates VI Choosing an Appropriate Method a Choice of a particular method depends on how best we can implement each of the techniques in a given setting b Reminder for all three techniques we assumed revenues and variable costs are proportional to activity volume i This is only valid in the relevant range normal range of operations Chapter 5 I The CostVolumePro t CVP Relation a Profit before taxes 2 Price unit variable costgtlt Sales volume in units Fixed costs b Price unit variable cost unit contribution margin c CVP relation is simply a convenient way to express the contribution margin statement 11 How Firms Use the CVP Relation a Frequently used by rms to estimate pro t at different sales volumes b Uses of the CVP Relation i Plan pro t ii Evaluate decision options 1 Change shortterm prices 2 Change mix of xed and variable costs 3 Change product mix III The CVP Relation and Pro t Flaming a Breakeven volume the sales volume at which pro t equals zero i Revenues equal total costs ii To have any chance of making a pro t a rm must have a positive unit contribution margin in other words price must exceed the unit variable cost 1 This alone does not guarantee pro t the rm must sell enough units so that the contribution margin at least covers xed costs Fixed Costs 111 Breakeven Volume 2 Unit Contribution Margin b Breakeven revenues the sales dollars needed to break even i Breakeven revenues Breakeven volume x Price ii OR Fixed Costs 111 Breakeven revenues Contribution Margin Ratio iv Reminder Contribution Margin Contribution margin ratio Revenues Revenues Variable Costs Revenues IV Target Pro t a Can come up with the same target pro t using either i Unit Contribution Margin Profit before taxes 2 Unit Contribution Margin x Sales volume in units Fixed costs ii Contribution Margin Ratio Profit before taxes 2 Contribution Margin Ratio x Revenues Fixed costs b CVP Analysis and Taxes i Profit after taxes 2 Profit before taxes x 1 tax rate V Using the CVP Relation to Make ShortTerm Decisions a Managers can analyze different options in terms of the CVP Relation and its effect on various elements that make up the firm s profit b Using the CVP Relation to evaluate price changes i CVP analysis allows firms to evaluate the tradeoff between price and quantity and their effect on profit ii Note keep in mind the shortterm focus of CVP analysis VI Using the CVP Relation to Evaluate Operating Risk a Two common measures of operating risk i Margin of safety 1 The amount by which current sales exceeds breakeven sales 2 Expressed in percentage terms Sales in units Breakeven volume Revenues Breakeven Revenues Sales in units Revenues 3 Generally the higher the margin of safety the lower the risk of a loss should actual sales fall short of expectations a No rule on what is an appropriate margin of safety b Varies by firmindustry situation etc 4 Margin of safety and profit sensitivity a To calculate the percent change in profit that results from any given percent change in sales Margin of Safety 1 o C 611196 in PTOfl efore axes C quot96 m a es 0 ume Margin of safety 1 Chan e in Revenues X g Margin of safety ii Operating Leverage l A measure of risk arising from having more fixed costs Fixed Costs Fixed Costs 2 Operating Leverage Fixed CostsVariable Cost Total Costs VII 3 In general we prefer the technology with a smaller operating leverage at lower sales volumes and technology with a larger operating leverage at higher sales volumes CVP Analysis A Critical Evaluation a Assumptions underlying CVP Analysis 1 ii iii iv v vi vii Revenues increase proportionally with sales volume Variable costs increase proportionally with sales volume Selling prices unit variable costs and xed costs are known with certainty Revenues and costs occur in a single period Product mix is constant and known Does not always provide the best solutions to shortterm decisions There is availability of capacity


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