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ACG 4341 Management Accounting Exam 1 Guide Multiple Choices 153pts 45 pts 0 What are the differences between financial and managerial accounting 0 Financial Accounting Often characterized as the primary focus of accounting I Concentrated on the preparation and provision of financial statements the balance sheet income statement cash ow statement and statement of changes in Stockholders equity I Typically historical quantitative monetary and verifiable I The objective of Financial Accounting is to provide useful information to external parties including investors and creditors Financial accounting requires compliance With GAAP I Primary users External I Primary Organizational Focus Whole aggregated I Information Characteristics Must be Historical Quantitative Monetary and Verifiable I Overriding Criteria GAAP I Consistency Verifiability I Recordkeeping Formal o Managerial Accounting Second dialect of accounting 0 Concerned With providing information to parties inside an organization so that they can plan control operations make decisions and evaluate performance 0 Used to gather the financial and nonfinancial information needed by internal users In a production environment managers are concerned With fulfilling organizational goals communicating and implementing strategy and coordinating product design manufacturing and marketing While simultaneously operating distinct business segments I Management accounting information commonly addresses individual or divisional concerns rather than those of the organization as a whole Financial Accounting 0 Primary users Internal 0 Primary Organizational Focus Parts Segmented 0 Information Characteristics May be Current or forecasted Quantitative or Qualitative Monetary or Nonmonetary Timely and at a minimum reasonably estimated 0 Overriding Criteria Situational Relevance usefulness 0 Benefits in excess of costs Flexibility 0 Recordkeeping Combination of formal and informal What is a cost object o A cost object is anything for which management wants to collect or accumulate costs I Cost objects 1 Product cost What do people need 2 Service Law firm or Acct firm their product is the service 3 Department How much do they spend to run a plant or cost control mechanism I Production operations and service lines are common cost objects 0 Le Toyota s Princeton Indiana plant makes Highlander and Sequoia SUVs and Sienna Minivans 0 Le Company managers could define the plant as the cost object and request information about production costs for a specific period 0 1e 2 Managers could define the Highlander SUV as the cost object and request information about production costs during the same period 0 Cost Classifications I Association With cost 0 Direct Conveniently and Economically traceable 0 Indirect Nontraceable must be allocated treated as overhead 0 Le Property tax supervisors salary Depreciation 0 Reaction to changes in activity 0 Variable Fluctuates in total 0 Fixed Remains constant in total 0 Mixed Its part variable part fixed 0 Step Increases at certain activity levels 0 Classification on the financial statements 0 Unexpired Balance Sheet 0 Expired Income Statement Inventoriable First appear as inventory on the balance sheet Transferred to income statement When product is sold I Prime DM DL I Conversion OH DL 39 Expensed I Ie Selling amp Administrative Cost Advertising Distribution Employee Compensation I Appear on Income Statement When incurred I Expensed When incurred o What assumptions do accountants make about cost behavior 0 A cost s behavior pattern is described according to the way its total cost rather than its unit cost reacts to changes in a related activity measure over the relevant range Common activity measures include production volume service and sales volumes hours of machine time used pounds of material moved and number of purchase orders processed Relevant Range The assumed range of activity that re ects the company s normal operating range The range of activity for which estimates and predictions are likely to be accurate is the Relevant Range Regarding Fixed Costs within relevant range which of the following are correct a Fixed Costs per unit increase as fewer units are produced b Fixed Costs per unit decrease as more units are produced c Fixed Costs are generally the same in total dollars regardless of production 0 What are cost behaviors for fixed variable mixed and step cost 0 Accountants assume that there are three cost behavior patterns Variable fixed and mixed A Variable Cost is a cost that varies in total in direct proportion to changes in activity but is constant on a unit basis Accountants View them as linear Economists View them as curvilinear A Fixed Cost is a cost that remains constant in total within the relevant range of activity but varies inversely with changes in the level of activity on a per unit basis A Mixed Cost has both a variable and a fixed component I Mixed costs must be separated into their variable and fixed components in order to make valid estimates of total costs at various activity levels Which of the following components are included in a mixed cost a A product cost and a period cost b c A step cost and a semivariable cost 1 A sunk cost and an opportunity cost o For financial reporting purposes how are the cost categorized and presented 0 Classification on the Financial Statements 0 The balance sheet is a statement of unexpired costs assets and liabilities and owners capital Whereas the income statement is a statement of revenues and expired costs expenses and losses 0 The matching concept provides a basis for deciding When an unexpired cost becomes an expired cost and is moved from an asset category to an expense or loss category 0 When the product is specified as the cost object all costs can be classified as either product or period costs 0 also called are related to making or acquiring the products or providing the services that directly generate the revenues of an entity 0 Direct material is any material that can be easily and economically traced to a product 0 Direct labor refers to the time spent by individuals Who work specifically on manufacturing a product or performing a service 0 Overhead is any factory or production cost that is indirect ie not direct material or direct labor to the product or service 0 The sum of direct labor and overhead costs is referred to as as those are the costs incurred to convert materials into products 0 The sum of direct material and direct labor cost is referred to as as those are the primary costs in making most products are related to business functions other than production such as 0 Period costs are generally more closely associated With a particular time period than With making or acquiring a product or performing a service 0 Period costs that have future benefit are classified as assets whereas those having no future benefit are expenses For example prepaid insurance asset becomes insurance expense 0 Distribution costs are period costs incurred to warehouse transport or deliver a product or service I Why I 1 To determine full absorption cost GAAP I 2 To motivate the manager in charge of the cost object to manage it efficiently I 3 To compare alternative courses of action for management planning controlling and decisionmaking o Allocation process should be rational and systematic 0 Which of the following is not a reason that companies allocate costs a To discourage managers from using external suppliers b To calculate the full cost of products for financial reporting purposes c To provide information needed by managers to make appropriate decisions d To reduce the frivolous use of company resources 0 What causes under or overapplied overhead 0 Two factors cause under applied or over applied overhead 0 A difference between actual and budgeted overhead costs numerator differences and o A difference between actual and budget activity levels denominator differences 0 Under applied overhead is the debit balance in the overhead control account that remains at the end of the period when the applied overhead is less than the actual overhead 0 Over applied overhead is the credit balance in the overhead control account that remains at the end of the period when the applied overhead is greater than the actual overhead 0 How is it treated at the end of a period 0 If OH is underapplied the adjusting entry is 0 Increase COGS o Decrease Net Income 0 If OH is overapplied the adjusting entry is o Decrease COGS 0 Increase Net Income O 3 Disposing of OH differences Immaterial COGS Material Prorate to WIP Finished Goods COGS O O gt If the amount of underapplied overhead is large in amount it is o Apportioned among WIP Finished Goods amp COGS gt What is the impact of disposing any overapplied overhead between the appropriate accounts doing an adjusting entry for overapplied overhead if the amount is material 0 Reduce COGS increase Income reduce inventory How do absorption and variable costing differ also known is a cost accumulation and reporting method that Absorption costing presents expenses on an income statement according to their functional classifications A functional classification is a group of costs that were all incurred for the same principle purpose Examples include cost of goods sold selling expenses and administrative expenses Thus as shown on the right side of text Exhibit 39 the absorption costing income statement format is as follows Revenue Cost of Goods Sold Selling amp Administrative Expenses Income before Tax Nonmanufacturing costs selling and administrative are considered to be period costs and are expensed in the also known as re ortin method that includes is a cost accumulation and Fixed Manufactured Overhead is a Period Cost Selling General amp Administrative Period Costs As shown on the right side of text Exhibit 310 the variable costing income statement presents expenses according to cost behavior variable and fixed Revenue Variable CGS Product CM Variable SampA Expenses Total CM Fixed Expenses OH and SampA Income before Tax Reports the Total Contribution Margin Cost of goods sold is more appropriately called variable cost of goods sold since it is composed of only the variable production costs DM DL VOH related to the units sold Product contribution margin is the difference between selling price and variable cost of goods sold and indicates how much revenue is available to cover all period costs and to potentially provide net income Product contribution margin is commonly called manufacturing margin Total contribution margin is the difference between revenue and all variable costs regardless of the area of incurrence production or nonproduction Thus two differences exist between absorption and variable costing one relates to cost accumulation and the other relates to cost presentation The cost accumulation difference is that absorption costing treats fixed overhead as a product cost while variable costing treats it as a period cost 0 Absorption costing advocates contend that fixed overhead costs should be considered product costs since production could not take place without the incurrence of fixed overhead 0 Variable costing advocates contend that fixed overhead costs would be incurred whether or not any products are manufactured thus such costs are not caused by production and cannot be product costs The cost presentation difference is that absorption costing classifies expenses by function whereas variable costing categorizes expenses by behavior first and then by function Calculations about 20 pts 0 Calculate COGM and COGS 0 Cost of Goods Manufactured Beginning WIP Current Manufacturing Cost Ending WIP I Current Manufacturing Costs Direct Material Direct Labor Overhead Heat light amp power Rent for production facility Depreciation of equipment 0 Cost of Goods Sold Beginning Finished Goods COGM Ending Finished Goods 0 Estimating mixed cost using High low method o The highlow method is a technique for determining the fixed and variable portions of a mixed cost by using only the highest and lowest levels of activity and related costs within the relevant range 0 The method determines the variable cost per unit b as follows Cost at High Activity Level Cost at Low Activity Level b High Activity Level Low Activity Level Changes in Total Cost b Changes in Activity Level The fixed portion of a mixed cost a is found by subtracting total variable cost from total cost at either the high or low activity level a y bx where y total cost for either one of the observations used to determine b b variable cost per unit determined in the previous step x activity volume of the observation used to determine y Chapter 7 1 What is the Standard Cost a Standard costs are budgeted costs to 1 Manufacture a single unit of product or 2 perform a single service b To develop the standards identify material and labor types quantities and prices amp OH types and behaviors c To Calculate i ii iii iv V1 vii Material Standards 1 Materials Used Types Quality Quantity Price 2 From Product specifications observation inquiry and bill of materials a Standard Material cost Unit Purchase Price Quantity Labor Standards 1 Labor used Types Production setup cleanup and rework Quantity Cost Include wages payroll taxes and fringe benefits 2 From Industrial engineering studies including methods time measurement MTM time and motion studies historical data and Operations ow document a Standard Labor Cost Hours Wage Rate Overhead Standards 1 Variable and fixed manufacturing OH 2 Estimated level of activity 3 Estimated costs 4 Predetermined factory OH Application rates Standard Cost Card 1 For one unit of output a bike a Standard DM Components b Standard DL Components c Manufacturing OH i Variable OH ii Fixed OH A Standard is a benchmark or norm used for planning and control The difference between actual cost and standard cost is referred to as a variance Standards are developed for materials labor and overhead a An unfavorable DL efficiency variance could be caused by a n o Unfavorable material usage variance b Favorable variances i Credits ii Represent savings in production costs c Unfavorable Variances i Debits ii Represent excess production costs Inventories are recorded at standard cost during the period 0 Actual Price gt Standard Price Unfavorable 0 Actual Price lt Standard Price Favorable 0 Actual Quantity gt Standard Quantity Unfavorable 0 Actual Quantity lt Standard Quantity Favorable 3 How are variances accounts closed a When an amount is material Prorate Variances to MPV to 4 different accounts Raw Material COGS WIP amp FG Close to remaining accounts to the right b If its immaterial Adjust COGS close to COGS WIP amp FG Chapter 8 1 What are operating budget financial budget and masters budget a is a budget that is expressed in both units and dollars It includes Sales budget production budget purchases budget DL budget OH budget and Selling amp Admin Budget b a budget that aggregates monetary details from the operating budgets It includes Capital Expenditure budget cash budget pro forma balance sheet pro forma income statement pro forma statement of cash ows pro forma statement of RE c is a comprehensive set of budgets budgetary schedules and budgeted pro forma organizational financial statements i Includes both Operating amp Financial budgets ii Speci c level of predicting sale iii Static Wages 2 What are imposed budget participative budget and budget slack a Imposed Budget A budget developed by top management With little or no input from operating personnel operating personnel are then informed of the budget goals and constraints i Top bottom approach because CEO tells division manager What he wants to do b Participative budget A budget that has been developed through a process of joint decision making by top management and operating personnel i Bottom Top Approach CEO asks division manager What he wants to do c Budget slack an intentional underestimation of revenues andor overestimation of expenses in a budgeting process 3 What is the starting point of a master budget and Why LO 2 a b c The Starting point of a Master Budget is SALES because they must know how much they need to sell in order to be able to produce The master budget includes both the operating and financial budgets An operating budget is a budget that is expressed in both units and dollars i It includes components of the various pro forma financial statements 1 Sales budget Production budget purchases budget DL budget OH budget and S amp A budget A Financial budget is a budget that aggregates monetary details from the operating budgets i It includes 1 Capital Expenditure budget Cash budget Pro forma balance sheet pro forma income statement pro forma statement of cash ows and Pro forma statement of retained earnings The master budget is prepared for a specific time period and is static rather than exible in the sense that it is based on a single level of output demand The budget is typically prepared for a year and then subdivided into quarterly and monthly periods The budgetary process begins With sales The output level of sales or service quantities selected for use in the master budget preparation affects all other organizational components it is essential that all the components interrelate in a coordinated manner The treasurer combines the sales estimates With cash collection patterns and the production requirements information With cash payment patterns to develop a cash budget 4 What benefits are provided by a budget LO 6 a Chapter 9 Benefits of budgeting i Budgeting facilitates the coordination of activities ii Budgeting requires managers to plan ahead iii Budgeting provides specific benchmarks for evaluating performance 1 What is CostVolumeProfit CVP Analysis LO 3 b Because profits cannot be achieved until the breakevenpoint is reached the starting point of CVP analysis is the breakeven point Examining shifts in cost and volume and the resulting effects on profits is called CVP Analysis can be used to calculate the sales volume necessary to achieve a target profit stated as either a fixed or variable amount on a beforeorafter tax basis Relationship of Revenue Costs Volume Changes Taxes and Profits f It applies to manufacturers wholesalers retailers and service industries g Associated with Variable Costing i Separates costs into fixed and variable components ii Shows fixed costs in lumpsum amounts not on a perunit basis iii Does not allow for deferralrelease of fixed costs fromto inventory when production and sales volumes differ iv Because CVP analysis is concerned with relationships among the elements affecting continuing operations in contrast with nonrecurring activities and events profits as used in this chapter refer to operating profits before extraordinary and other nonoperating nonrecurring items v Managers can use CVP to determine how high variable cost can be while allowing the company to produce a desired amount of profit Variable cost can be affected by modifying product specifications or material quality as well as by being more efficient or effective in the production service andor distribution processes vi LO3 A calculation used in a CVP analysis determines the breakeven point Once the breakeven point has been reached operating income will increase by the 2 What are the underlying assumptions of CVP analysis a CVP Analysis is a shortrun model that focuses on relationships among selling price variable cost fixed cost volume and profit Assumptions c Total CM total revenue total variable cost is linear within the relevant range and increases proportionally with output d Total fixed cost is constant within the relevant range This assumption in part indicated that no capacity additions will be made during the period under consideration e Mixed costs can be accurately separated into xed and variable elements Although accuracy of separation can be questioned reliable estimates can be developed from the use of regression analysis or the high low method as discussed in Chapter 3 f Sales and production are equal thus there is no material uctuation in inventory levels This assumption is necessary because fixed cost can be allocated to inventory at a different rate each year Thus variable costing information must be available Because CVP and variable costing both focus on cost behavior they are distinctly compatible with one another g In a multiproduct firm the sales mix remains constant This assumption is necessary so that a weighted average contribution margin and CM can be computed h Labor productivity production technology and market conditions will not change If any of these changes were to occur cost would change correspondingly and selling prices might change Such changes would invalidate assumptions 13 Additional 0 No change in inventory or capacity variance 0 Quantitative and Qualitative Sales Mix should be constant 0 Labor productivity production technology and market conditions remain constant 3 What is the breakeven point and why is it important LO 1 A company s BEP Breakeven point is that level of activity in units or dollars at which total revenue equal total cost Therefore at BEP the company generates neither a profit nor a loss on operating activities BEP is calculated to establish a point of reference By knowing BEP managers are better able to set sales goals that should result in profits from operations rather than losses An important measure in breakeven analysis is contribution margin which can be defined on either a perunit or a total basis Unit Contribution margin is constant because revenue and variable cost have been defined as being constant per unit 4 How to interpret Margin of Safety and operating leverage The margin of safety is the excess of the budgeted or actual sales of a company over its breakeven sales it can be calculated in units or dollars or as a percentage it is equal to 1 degree of operating leverage The margin of safety is the amount that sales can fall before reaching the breakeven point and thus provides a certain amount of cushion from losses Operating leverage is the proportionate relationship between a company s variable and fixed costs Low operating leverage and a relatively low breakeven point are found in companies that are highly laborintensive experience high variable costs and have low fixed costs Companies with low operating leverage can experience wide swings in volume levels and still show a profit An exception is a sports team which is highly laborintensive but whose labor costs are fixed High operating leverage and a relatively high breakeven point are found in companies that have low variable costs and high fixed costs Companies will face this type of cost structure and become more dependent on volume to add profits as they become more automated A company s cost structure strongly in uences the degree to which its profits respond to changes in volume Companies With high operating leverage also have high contribution margin ratios The degree of operating leverage is a factor that indicates how a percentage change in sales from the existing or current level Will affect company profits it is calculated as contribution margin divided by net income it is equal to 1 margin of safety percentage The calculation providing the degree of operating leverage factor is Degree of operating leverage Contribution margin Profit before tax The calculation assumes that fixed costs do not increase When sales increase The degree of operating leverage decreases as sales move upward from the BEP When the margin of safety is small the degree of operating leverage is large MS 1 DOLandDOL1 MS Class Exercise Solutions Direct Material Variance 22 In November 2013 Daytime Publishing Company s cost and quantities of paper consumed in manufacturing its product were as follows Actual unit purchase price 013 per page Standard unit price 014 per page Standard quantity of good production 97900 pages Actual quantity purchased 115000 pages Actual quantity used 100000 pages J oumalize transactions a Total purchases AP gtlt AQp 013 gtlt 115000 14950 b Material price variance AP gtlt AQp SP gtlt AQp 14950 014 gtlt 115000 14950 16100 1150 F b Material quantity variance SP gtlt AQu SP gtlt SQ 014 gtlt 100000 014 X 97900 14000 13706 294 U Direct Labor Variance 27 Information on Hanley s direct labor costs for January is as follows Actual direct labor rate 75 Standard direct labor hours allowed 9000 Actual direct labor hours 10000 Labor rate variance 5500 F J oumalize transactions a Since the labor rate variance is favorable the actual cost of direct labor is less by 5 500 than the standard cost The standard cost is 80500 AP gtlt AQ SP gtlt AQ 750 x 10000 SF x 10000 75000 80500 5500 F Labor Rate Variance 80500 10000 actual direct labor hours equals a standard rate of 805 b Since the actual hours are 1000 less than the standard the ef ciency variance is 1000 hours gtlt 805 8050 U APXAQ SPXAQ SPXSQ 750 X 10000 805 X 10000 805 X 9000 75000 80500 72450 5500 F 8050 U Labor Rate Variance Labor Ef ciency Variance c Work in Process Inventory 72450 Labor Ef ciency Variance 8050 Labor Rate Variance 5500 Wages Payable 75000 OH Variance 36 The manager of the Texas Department of Transportation has determined that it typically takes 30 minutes to register a new car In Bexar county the predetermined fixed overhead rate was computed on an estimated 10000 direct labor hours per month and is 9 per direct labor hour whereas the predetermined variable overhead rate is 3 per direct labor hour During July 18800 cars were registered in Bexar County and 9500 direct labor hours were worked in registering those vehicles For the month variable overhead was 27799 and fixed overhead was 90800 J oumalize transactions 36 a Standard hours 18800 2 cars per hour 9400 Variable Overhead Actual Budget Applied 27700 3 X 9500 28500 3 X 9400 28200 800 F 300 U VOH Spending Variance VOH Ef ciency Variance 500 F Total VOH Variance Total budgeted FOH 9 X 10000 90000 Fixed Overhead Actual Budget Applied 90800 90000 9 X 9400 84600 800 U 5400 U FOH Spending Variance Volume Variance 6200 U Total FOH Variance