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Managerial Accounting Week 1

by: Anna Notetaker

Managerial Accounting Week 1 ACCT

Marketplace > Middle Tennessee State University > ACCT > Managerial Accounting Week 1
Anna Notetaker
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Chapter 1 and 2
Managerial Accounting
Monica Davis
Class Notes




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This 6 page Class Notes was uploaded by Anna Notetaker on Thursday August 25, 2016. The Class Notes belongs to ACCT at Middle Tennessee State University taught by Monica Davis in Fall 2016. Since its upload, it has received 17 views.


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Date Created: 08/25/16
Managerial Accounting Week 1 Chapter 1:  Financial accounting – the summarizing and recording of the financial transactions of a company o results in the creation of the Financial Statements o the f/s are used by Both External and Internal Decision Makers o the focus is on the Past  Managerial accounting – the summarizing of various types of data for Managers to use o results in various Internal reports o these reports are used by Internal Decision Makers Only o the focus is on the Future  Management Accountants - strategic Business Partners who understand the Financial and Operational sides of the business o They report and analyze both Financial and Nonfinancial measures:  Profit  People  Processes  Planet o Managers perform 3 vital activities: Planning, Controlling, and Decision- Making. o Therefore, these are also the 3 Pillars of managerial accounting. o Planning – establishing Goals and specifying how to achieve them o Controlling - gathering Feedback to ensure that the plan is being properly executed or Modified as circumstances change o Decision-Making - selecting a course of Action from competing alternatives  A lot of these decisions involve Risk management.  Enterprise Risk Management – process used by a company to Identifies risks and develop Responses to them that enable the company to more likely meet its Goals  Managerial accounting provides the Data needed.  Corporate Social Responsibility (CSR) – the concept that organizations should consider the needs of all Stakeholders when making decisions, not just the needs of stockholders o Other stakeholders: o Customers o Employees o Suppliers o Community o Environmental and Human Rights Advocates o Extends the responsibility of an organization beyond Legal compliance to include Voluntary actions, because a company’s Social performance can impact itsFinancial performance  Value Chain – the major Functions/steps that add value to a company’s products or Services (example pg. 16) Chapter 2:  Cost data is used constantly in managerial accounting. o Each different type of managerial decision demands that a cost be Classified in a particular way. Manufacturing v. Non-Manufacturing Cost Classification  Manufacturing Costs – all of the Inventory costs of producing a Finishes product; 3 kinds: 1) Direct Materials - cost of materials that become an Intergral part of the finished product  example: small table : metal legs, laminate, and wood 2) Direct Labor – labor costs that can be easily and Physically Traced to units of the finished product  example: Table: Table Assemblers 3) Factory (Manufacturing) Overhead – all of the Indirect costs of producing the company’s finished products  indirect Materials - costs of materials used in Processing the product or that become part of the finished product but aren’t Significant enough to count as direct materials  examples: Table : Glue, nuts and bolts  indirect Labor- costs for labor that are necessary for making the product but can’t be Traced to particular products  examples: plant managers, custodians, security, supervisors  other indirect costs – costs for factory insurance, property taxes, depreciation, factory maintenance, repairs, utilities, etc. o Only costs associated with Operating the Factory are considered Manufacturing costs. Practice! Identify what kind of manufacturing cost is each of these costs for a furniture manufacturer: DM wood used in production of fine furniture OH water used to rinse dust from metal legs before paint is applied DL wages paid to individuals who assemble headboards and footboards OH wages paid to packaging department employees OH depreciation on the lathes, sanders and saws OH salary of the sanding department supervisor  Non-manufacturing costs – a company also incurs costs for advertising, utilities, property taxes, insurance, depreciation, etc., with its selling and administrative functions  Product Costs v. period Costs – for GAAP, another way to say Manufacturing v. Non-manufacturing costs because GAAP requires all manufacturing costs to be assigned to the product. o However, later we’ll look at 2 other costing methods that doesn’t assign all the manufacturing costs as product costs. Prime v. Conversion Cost Classification  Prime cost – the direct materials plus the direct labor costs  Conversion cost – the direct labor costs plus the manufacturing overhead costs Cost Behavior Classification  Cost Behavior - how costs respond in total to changes in the volume of a given Activity-Based. (In this text, assume the activity base is the company’s total number of goods or services sold) o Variable costs – Cost that change in total, proportionately and directly, with changes in the volume of an activity base. Example would be direct materials.  VC per unit – Remains constant regardless of changes in the volume of the activity base.  Example on page 34 o Fixed costs – costs that remain constant in total regardless of changes in the volume of an activity base. Example would be rent expense.  must define a time period for fixed costs  FC per unit- varies proportionately and indirectly with changes in the volume of the activity base.  Example on page 35  Committed fixed costs – multi-year costs that can’t be reduced in the short term, such as factories, equipment, property taxes, high-salary contracts  Discretionary fixed costs – fixed costs that result from annual decisions by management, such as advertising, research, temporary employees  Relevant range – the range of activity where the total fixed costs remain constant and the variable cost per unit remains constant o So if a business operates within its relevant range as most businesses do, the variable costs act like variable costs and the fixed costs act like fixed costs. o Examples on page 36  Mixed costs – cost that have both fixed and variable components. Example would be utility bills. o In order to separate the fixed component from the variable component within a mixed cost, we will use the High-Low method: 1) Variable cost per unit = cost at highest activity level – cost at lowest activity level highest activity level – lowest activity level 2) Total Fixed cost = total cost @ highest activity – (vari. cost per unit x highest activity) o Practice: E2-5 Answers should be $1.56 per occupancy, $1,395 (rounded) total fixed costs, and y=1395+1.56x  Traditional Format Income Statement v. Contribution Format Income Statement o Traditional format income statement – divides expenses into 2 classifications: Cost of Goods Sold and Operating expenses  Example on page 44  Good format for External reporting purposes o Contribution format income statement – divides expenses into these two classifications: Variable expenses and Fixed expenses  Example on page 44  Good format for internal Planning and Decision-Making purposes  Contribution margin – sales minus variable expenses; the amount that “contributes” to covering fixed expenses and then provides a profit (NI) for the period o Practice: E2-6 Answers should be: CGS as 160,000 and N. O. I. should be $250,000 More Cost Classifications for Decision-making  Because decisions involve choosing between 2 or more alternatives, we use classifications to describe the different costs being compared and considered. o Differential cost – the difference in costs between any two Alternative; also referred to as an Incremental cost o Opportunity cost – the potential Benefit that is given up when one alternative is selected over another o Sunk cost – a cost that has already been Incurred and cannot be changed by any decision made now or in the future; therefore, it shouldn’t be considered in the current decision between alternatives.


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