ACCT 285 Study Guide
ACCT 285 Study Guide Acct 285
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This 8 page Study Guide was uploaded by Sin Yong Tan on Tuesday March 22, 2016. The Study Guide belongs to Acct 285 at Iowa State University taught by Prof. Jim Cannon in Spring 2016. Since its upload, it has received 388 views. For similar materials see Managerial Accounting in Business at Iowa State University.
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Date Created: 03/22/16
Chapter 6 - ABC 3 differences between traditional costing & ABC: 1. Traditional costing allocates ALL MOHto products. ABC costing only assigns MOH costs consumed by products. 2. Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base.ABC costing also uses non-volume related allocation bases 3. Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes non-MOH costs caused by products in the activity cost pools that are assigned to products. - Trad. Costing OVERCOST (report lower margin) the expensive product, UNDERCOST (report higher margin)the cheaper product Whatare the advantages & disadvantages of ABC costing? Limitations: - Too expensive to maintain - X conform to GAAP - Managers unfamiliar with the numbers and report - Easily misinterpreted - Desire to fully allocate cost to product Reason for not using ABC: - External report are less detailed that internal report (too detailed) - Hard to chg company’s accounting system - ABC does not conform to GAAP - Auditor, subjective, on cost allocation based on employee interviews When do we use ABC costing? 5 levels of cost: 1. Unit-level: providing power to run processing equipment 2. Batch-level: setting up equipment and shipping orders 3. Product-level: designing or advertising a product 4. Customer-level: sales calls and catalog mailings 5. Organization-sustaining: heating a factory and cleaning executive offices(NOT assigned) Steps to assign overhead: 1) Assign expenses to the cost pools based on %. 2) Find the each activity rate 3) Allocate the costs to specific products or customers Traditional costing: Sales – (DM + DL +MOH (find POHR first) + S&A) = NI ABC costing: Sales – activities cost = Product margin Prod. Mar. – unassigned cost = Net income (loss) Chapter 7 - Differential Analysis and Decision-making ABC can help identify potentially relevant cost for decision-making purpose Identifying the relevant costs to making a decision. - Avoidable cost = relevant - Unavoidable = irrelevant DON’T include sunk cost and future cost that does not differ between alternatives is never relevant in a decision. Total (include everything) & differential (include only the changes) approach Add/Drop product line/segment General factory overhead & admin expremains if drop - CM Approach Contribution Margin Solution Contribution margin lost if digital watchesare dropped $ (300,000) Lessfixed coststhat can be avoided Salary of the line manager $ 90,000 Advertising - direct 100,000 Rent - factory space 70,000 260,000 Net disadvantage $ (40,000) - Including the unavoidable common fix cost makes product line seems unprofitable Make vs Buy Decisions Depreciation & fixed factory overhead remains even if buy Evaluating special orders Utilize constrained resource focus on more profitable item first. (item with higher CM/unit) Sell or Process Further: Joint product: Products with common input Split-off point: the point in where the product is view as separate product JOINT COST is IRRELEVANT! Don’t include in decision making, its already a sunk cost! Trad vs ABC Segmented IS: Chapter 8 – Capital Budgeting - Use capital budgeting analysis when involves an outlay now in order to obtain some future return - Money today is worth more than money in the future (prefer faster return projects) Screening decision: meet min. standard Preference decision: choose among passed proposal / decisions NPV Method: Calculating net present value (NPV) – Screening decision - Find discounted cash flow (both in and out) - Find the difference between in and out - NPV must be zero or ‘+’ve to be acceptable (equal or greater than required r.o.r) NOTE: Working capital is both in and outflow(release of capital)!! Outflow at begin & inflow in the end Differentiate present value tables (one is yearly another is one-time) NPV Assumptions: 1.All cash flows other than the initial investment occur at the end of periods. 2.All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate. Cost of capital: average r.o.r the company must pay to its long-term creditors and stockholders for the use of their funds What does net present value tell us? Worth investing? Example: (Pay attention to working capital and working capital release. One have a factor of 0.621) Cash 10% Present Years Flows Factor Value Investment in equipment Now $ (160,000) 1.000 $ (160,000) Working capital needed Now (100,000) 1.000 (100,000) Annual net cash inflows 1-5 80,000 3.791 303,280 Relining of equipment 3 (30,000) 0.751 (22,530) Salvage value of equip. 5 5,000 0.621 3,105 Working capital released 5 100,000 0.621 62,100 Net present value $ 85,955 IRR Method: Internal Rate of Return (IRR): r.o.r when NPV = 0 trial & error to find the IRR if cash flow diff every yr. What does IRR tell us? min. r.o.r required for projects In IRR method, cost of capital = hurdle rate (must be more than hurdle rate to be accepted) After finding the factor, find the rate% from annuity table IRR Assumptions: - cash inflows are reinvested at the internal rate of return (more realistic to reinvest in discount rate) NOTE: NPV reinvest at discount rate & IRR reinvest at internal r.o.r Expanded NPV method: 1. Total-cost (normal NPV method, apply to all alternative, find the higher NPV) 2. Incremental-cost approach: a. Choose 1 alternative to be +ve, another to be –ve b. Find the difference and plug in to table, and apply the factor/discount rate c. NPV +ve or –ve will tell in favor of which alternative Good example: Chap 8 slide 47, 48 Least Cost Decision 1. Apply NPV 2. Choose the alternative with smaller –ve NPV value Uncertain cash flow Net present value to be offset $1,040,000 Present value factor = 0.104 = $ 10,000,000 If the value is 10mil, the NPV will be zero or +ve (become acceptable)(Slide 57 & 58) When having DIFFERENT amount of investment, use Project Profitability Index (PPI) to rank projects PPI is similar to CM/unit in constrained resources. Payback Method (time needed to get back capital/initial cost) Assume same net cash flow each year NOTE: DEDUCT Depreciation from NI for the net cash inflow (Quiz 8 Q5!!) Criticism: 1. Ignore time value of $$ 2. Ignore cash flow after payback period Strength: 1. Screening tool 2. Identify investments that will recoup cash investments quickly. 3. Identify products that will recoup their initial investment quickly For uneven cash flow, need to track year by year to find the Payback period. Simple r.o.r Disadvantage: 1. Ignore time value of money 2. Project with fluctuating incremental rev & exp may appear desirable or undesirable in different year. Postaudit of investment project: to see if project was completed with expected results (use actual data) Choose projects based on: 1. NPV cannot be compared to another project UNLESS investment is EQUAL (choose +ve for screening) 2. IRR Higher = better 3. Profitability Index Higher = better 4. Payback Period Shorter = better NOTE: these calculations is based on cash flows not income!!!! 5. Simple r.o.r Higher = better NOTE: among those methods, ONLY Simple r.o.r focus on Net Income Be able to calculate the simple rate of return o Remember to review notes on special circumstances for the simple rate of return o Keep in mind that depreciation expense is a non-cash item so it is NOT used for NPV, IRR, etc., but MUST be considered when calculating the simple rate of return Depreciation (Straight-line method) (initial investment – salvage value)/useful life = annual depreciation expense Chapter 9 – Profit planning Advantage of a budgeting: 1. Define goal & objective 2. Think and plan for future 3. Allocate resources effectively 4. Uncover potential bottleneck 5. Coordinate activities 6. Communicate plans Responsibility accounting: - Managers are ONLY responsible for the items that they can have controlover. Operating budgets: - Cover a one-year period corresponding to a company’s fiscal year (usually divided into four quarters) Continuous / perpetual budget: - 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. This approach keeps managers focusedon the future at least one year ahead. Self-imposed budget: - Prepared with the full cooperation and participation of managersat all levels. It is a particularly useful approach if the budget will be used to evaluate managerial performance. - Review by higher level to prevent “budgetary slack” set lower expectation? Advantage of self-imposing budget: 1. All level of organization view as member of the team (value employees) 2. Front line more accurate budget estimate 3. Motivation! (Get to set their own goal) 4. Eliminate the excuse of saying that the goal is “unrealistic” For budget to be successful: 1. Top mgmt. enthusiastic & committed 2. don’t blame lower level for not achieving goal 3. Highly achievable budget are usually preferred when managers are rewarded Budget committee responsible for: - Overall policy relating to the budget program - Coordinating the preparation of the budget - Resolving disputes related to the budget - Approving final budget Master Budget (Process/Sequence): Sales (+Cash collection) Production DL+DM+MOH (+ Cash disbursement) S & A Cash Budgeted IS & BS Production plans: (DL + DM + MOH) Required Material + Desired Ending Inventory – Beginning Inventory (Ending inventory in month 1 is beginning inventory in month 2) NOTE: Check if Guaranteed Labor Hour / Minimum Labor Hour exist. Min. pay is according to the min. labor hour or more. Cash collections/disbursements: Account Receivable (from credit sales) & Account payable (from material purchased& MOH) Cash Disbursement for MOH: Remember deduct Depreciation(non-cash) from fixed MOH Know the difference between revenues/expenses on the income statement and the actual flow of cash in and out of the company represented in the cash budget Difference between OH or S&A EXPENSE and the CASH DISUBURSEMENT: - Depreciation was deducted from the expenses and OH (non-cash expenses) Depreciation is a non-cash expense Not included in Cash Budget, but included in Income statement Cash budget : o 1) Beginning Balance o 2) + Cash Inflows o 3) - Cash Disbursements o 4) +/- Financing o =Ending Cash Balance Cash Budget format: Indicate repayment, interest & deficiency with brackets Royal Company Budgeted Income Statement For the Three MonthsEnded June 30 Sales (100,000 units @ $10) $ 1,000,000 Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income $ 239,000 Sales: Sales Budget COGS: Ending finished goods inv. S&A: S&A expenses budget Interest expenses: Cash budget Royal Company Budgeted Balance Sheet June 30 Assets: Cash $ 43,000 Accounts receivable 75,000 Raw materialsinventory 4,600 Finished goodsinventory 24,950 Land Equipment Total assets Liabilitiesand Stockholders' Equity Accountspayable $ 28,400 Common stock Retained earnings Total liabilitiesand stockholders' equity Equipment: Prior balance + Purchases - depreciation from MOH and S&A ERE = BRE + NI - DIV
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