Mid-Term Study Guide
Mid-Term Study Guide ACCT 116
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This 9 page Study Guide was uploaded by Shubham Agarwal on Monday April 25, 2016. The Study Guide belongs to ACCT 116 at Drexel University taught by Stacey Kline in Fall 2015. Since its upload, it has received 109 views. For similar materials see Managerial Accounting in Accounting at Drexel University.
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Date Created: 04/25/16
Managerial Accounting 116 Study Guide (Ch. 2, 3, 5, 6, 7) Chapter 2 Managerial Accounting and Cost Concepts This chapters explains that in managerial accounting the term cost is used in many different ways. The reasons is that these costs are classified differently according to immediate needs of management. 2-1 The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead. 2-2 a. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. c. Direct labor consists of labor costs that can be easily traced to particular products. Direct labor can also be called “touch labor.” d. Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product. e. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs. 2-3 A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. 2-4 a. Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume. b. Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume. c. Mixed cost: A mixed cost contains both variable and fixed cost elements. 2-5 a. Unit fixed costs decrease as volume increases. b. Unit variable costs remain constant as volume increases. c. Total fixed costs remain constant as volume increases. d. Total variable costs increase as volume increases. 2-6 a. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed. b. Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid. 2-7 An activity base is a measure of whatever causes the incurrence of a variable cost. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc. 2-8 The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range. 2-9 A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a company’s investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are “locked in” for many years. Chapter 3 Job-Order Costing 1. Job-order costing systems are used when: Many different products are produced each period Products are manufactured to order The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job 2. Bill of Material – a document that lists the type and quantity of each type of direct material needed to complete a unit of product. 3. Materials requisition form – a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. 4. Job cost sheet – records the materials, labor, and manufacturing overhead costs charged to that job. 5. Time ticket – an hour by hour summary of the employee’s activities through-out the day. 6. Allocation base – a measure such as direct labor-hours or machine hours that is used to assign overhead costs to products and services. 7. Predetermined overhead rate – is computed by dividing the total estimated manufacturing overhead costs for the period by the estimated total amount of the allocation base. Four Step Process: i. Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. ii. Estimate the total fixed manufacturing overhead costs for the coming period and the variable manufacturing overhead cost per unit of the allocation base. iii. Use the cost formula (Y=a +bX) to estimate the total manufacturing overhead cost (the numerator) for the coming period. iv. Compute the predetermined overhead rate. 8. Overhead application = (Predetermined overhead rate) * (Amount of the allocation base incurred by the job) 9. Normal Cost System – applied overhead to jobs by multiplying a predetermined overheard rate by the actual amount of the allocation base incurred by the jobs. 10. Cost Driver – factor, such as machine-hours, beds occupied, computer time etc. that cause overhead costs. 11. Raw materials – includes any materials that go into the final product. 12. Work in process – consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. 13. Finished goods – consist of completed units of product that have not yet been sold to customers. 14. Costs of goods manufactured – includes manufacturing costs associated with the goods that were finished during the period. 15. Manufacturing costs other than direct materials and direct labor are classified as manufacturing overhead costs. 16. Non-Manufacturing costs should not go into the manufacturing overhead account. 17. Schedule of cost of goods manufactured – contains three elements of product costs – direct materials, direct labor, and manufacturing overhead – and it summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods. 18. Schedule of cost of good sold – contains three elements – direct material, direct labor and manufacturing overhead. It summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods sold. 19. Raw Materials= Beginning raw materials inventory + Purchases of raw material - Ending raw materials inventory 20. Total Manufacturing costs= Direct materials + Direct labor + Manufacturing overhead applied to work in process 21. Cost of goods manufactured = Total manufacturing costs + Beginning work in process inventory – Ending work in process inventory 22. Unadjusted cost of goods sold = Beginning finished goods inventory + Cost of goods manufactured - Ending finished goods inventory 23. Underapplied/Overapplied – the difference between the overhead costs applied to Work in Process and the actual overhead costs of a period. The cause of under applied or Overapplied overhead basically uses the method of applying overhead to jobs using a predetermined overhead rate assuming that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period. 24. Plantwide overhead rate – single predetermined overhead rate for an entire factory 25. Multiple predetermined overhead rare – system in which each production department may have its own predetermined overhead rate Chapter 5 Cost-Volume-Profit Relationships 5-1 The contribution margin ratio is the ratio of the total contribution margin to total sales revenue. It is used in target profit and break-even analysis and can be used to estimate the effect on profits of a change in sales revenue. 5-2 Incremental analysis focuses on the changes in revenues and costs that will change from a particular action. 5-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase. 5-4 Operating leverage measures the impact on net operating income of a given percentage change in sales. The degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of sales by the net operating income at that level of sales. 5-5 The break-even point is the level of sales at which profits are zero. 5-6 (a) If the selling price decreased, then the total revenue line would rise less steeply, and the break-even point would occur at a higher unit volume. (b) If the fixed cost increased, then both the fixed cost line and the total cost line would shift upward and the break-even point would occur at a higher unit volume. (c) If the variable cost increased, then the total cost line would rise more steeply and the break-even point would occur at a higher unit volume. 5-7 The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. It is the amount by which sales can drop before losses begin to be incurred. 5-8 The sales mix is the relative proportions in which a company’s products are sold. The usual assumption in cost-volume-profit analysis is that the sales mix will not change. 5-9 A higher break-even point and a lower net operating income could result if the sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus, net operating income would decline. With a lower contribution margin ratio, the break-even point would be higher because more sales would be required to cover the same amount of fixed costs. Chapter 6 Variable Costing and Segment Reporting: Tools for Management 6-1 Absorption and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period’s income statement. 6-2 Selling and administrative expenses are treated as period costs under both variable costing and absorption costing. 6-3 Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold. 6-4 Manufacturing overhead deferred in inventory = Fixed manufacturing overhead in ending inventories – Fixed manufacturing overhead in beginning inventories 6-5 Absorption costing advocates argue that absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that no distinction should be made between variable and fixed manufacturing costs for the purposes of matching costs and revenues. 6-6 Advocates of variable costing argue that fixed manufacturing costs are not really the cost of any particular unit of product. If a unit is made or not, the total fixed manufacturing costs will be exactly the same. Therefore, how can one say that these costs are part of the costs of the products? These costs are incurred to have the capacity to make products during a particular period and should be charged against that period as period costs according to the matching principle. 6-7 If production and sales are equal, net operating income should be the same under absorption and variable costing. When production equals sales, inventories do not increase or decrease and therefore under absorption costing fixed manufacturing overhead cost cannot be deferred in inventory or released from inventory. 6-8 If production exceeds sales, absorption costing will usually show higher net operating income than variable costing. When production exceeds sales, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to the next period. In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing. 6-9 If fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales. 6-10 Under absorption costing, net operating income can be increased by simply increasing the level of production without any increase in sales. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period’s fixed manufacturing overhead costs into the inventory account, reducing the current period’s reported 6-11 Dollar sales for a segment to break even = Segment traceable fixed expenses/Segment CM Ratio 6-12 Segment income statements provide information for evaluating the profitability and performance of divisions, product line, sales territories, and other segments of a company. Chapter 7 Activity-Based Costing: A Tool to Aid Decision Making ABC uses a four-level cost structure to determine how far down the production cycle costs should be pushed: Unit level (output level) Batch level Product sustaining level Customer level Organization sustaining level Activity – an event that causes the consumption of overhead resources Activity cost pool – a “cost bucket” in which costs related to a single activity measure are accumulated Activity measure – the term cost driver is also used to refer to an activity measure. T2o types of activity measures: Transaction driver – simple count of the number of times an activity occurs Duration driver – a measure of the amount of time needed for an activity ABC – 5 steps: 1. Identify activities 2. Assign costs to cost pools 3. Compute activity rates for cost pools 4. Assign costs to product 5. Compute product margin Determine if PH is over or under costed when comparing traditional costing to ABC costing. Compare total product cost under each method. The results of overcosting one product and undercosting another: The overcosted product absorbs too much cost, making it seem less profitable than it reall is The undercosted product is left with too little cost, making it seem more profitable than it really is 3 main differences between traditional costing and ABC: 1. ABC assigns manufacturing and nonmanufacturing costs 2. ABC does not assign all manufacturing costs 3. ABC uses more cost pools, whereas traditional generally uses one Activity rate = total cost/total activity 1) What activity measure would be best for a cost pool consisting of equipment depreciation and power to run machines? >>Machine hours 2) Activity-based costing treats organization-sustaining costs as periodcosts. Which of the following has its own unique measure of activity? Cost pool 3) Match each color-coded cost with its description. >>Red costs:Are the most difficult to adjust to changes in activity and require management action >>Yellow costs:Require management action in order to make adjustments to changes in activity >>Green costs:Automatically adjust to changes in activities 4) A cost pool consisting of the costs of design work on new products would be considered what level of activity? Product-level 5) Match the ease of adjustment code with the correct cost. >>Red cost:Building lease >>Yellow cost:Selling expense >>Green cost:Shipping cost 6) Place the steps for implementing ABC in order. o Define activities, activity cost pools, and activity measures. o Assign overhead costs to activity cost pools. o Calculate activity rates. o Assign overhead costs to cost objects. o Prepare management reports. 7) A(n) actionanalysis report shows which costs are assigned to cost objects and how difficult it would be to adjust the cost if there were a change in activity. In activity-based costing, first-stageallocation is the process of assigning overhead costs to activity cost pools. 8) Which stage in activity-based costing uses activity rates to apply overhead costs to products? >>Second-stage allocation. 9) Activity based costing only charges products for the cost of the capacity used because (select all that apply): >>products are only assigned the costs of resources they actually use >>it results in a more stable unit product cost 10) Only costs that can be tracedare relevant when deciding to eliminate a product line. Which of the following are organization-sustaining activities? (Check all that apply.) >>Preparing annual reports > >Heating a factory >>Setting up a computer network
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