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Ch.1 #1-1 How does management accounting differ from financial accounting?

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Financial Accounting: focuses on reporting to external users, and the financial statements must be based on GAAP. Management Accounting: measures, analyzes, and reports financial and non financial information to help managers make decisions to fulfill organizational goals. Managerial accounting need not be GAAP compliant.

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Ch.1 #1-2 "Management accounting should not fit the straitjacket of financial accounting." Explain and give an example.

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Management does not have to follow GAAP when making decisions. Ex: Management accounting can use asset or liability measurement rules (such as present values or resale prices) not permitted under GAAP.

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Ch.1 #1-4 Describe the business functions in the value chain.

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1. Research and Development 2. Design 3. Production 4. Marketing 5. Distribution 6. Customer service - Management accountants play a role in every stage of the value chain.

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Ch.1 #1-8 Describe the five-step decision-making process.

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1. Identify the problem and uncertainties 2. Obtain information 3. Make predictions about the future 4. Make decisions by choosing among alternatives 5. Implement the decision, evaluate performance, and learn

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Ch.1 #1-10 What three guidelines help management accountants provide the most value to managers?

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1. Cost-benefit approach: benefits generally must exceed costs as a basic decision rule. 2. Behavioral and technical considerations: People (employees) and their emotions and lives have to be taken into consideration when making decisions, not just dollars and cents. 3. Different costs for different purposes: Managers use alternative ways to compute costs in different decision-making situations.

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Ch.1 Steps in determining an ethical decision:

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1. State the facts associated with the case 2. Define the ethical issues in a form of a question. Is it ethical to....? 3. Stakeholder analysis 4. List all possible courses of action 5. Analyze each course of action using ethical approaches 6. Come to a conclusion and justify the decision

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Ch.2 Quiz #1 Describe the graph the depicts the description: 1. Total variable costs 2. Average variable costs 3. Total fixed costs 4. Average fixed costs

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1. 45 degree diagonal line starting from 0 2. Horizontal line 3. Horizontal line 4. Gradual downward sloping line never touching axis lines.

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Ch.2 Quiz #2 Prime costs =

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Direct materials + Direct labor

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Ch.2 Quiz #2 Conversion costs =

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Direct labor + Manufacturing overhead

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Ch.2 Quiz #2 Period costs:

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All costs in the income statement other than cost of goods sold.

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Ch.2 Quiz #2 Cost object:

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Anything of interest for which a cost is desired. AKA, the item we are trying to determine the cost of.

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Ch.2 Quiz #2 Cost driver:

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A variable that causally affects costs over a given time span. AKA, level of activity. - A change in the cost driver results in a change in the level of total costs. - Ex: The number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line, b/c the more vehicles assembled, the more we will have to spend on steering wheels.

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Ch.2 Quiz #2 Inventoriable costs:

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All costs that are assigned to inventory, and are expensed to COGS only when the product is sold. = Direct materials, Direct labor, and Manufacturing overhead. - Therefore, both direct and indirect

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Ch.2 Direct costs:

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Can be conveniently identified and traced (tracked) to a cost object in an economically feasible way. - ex: tires, steel, labor hours

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Ch.2 Idle time and Overtime:

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Classified as overhead costs because they cannot be traced to a specific product.

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Ch.2 Cost of Goods Sold =

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Beg. Finished Goods Inventory + Cost of Goods Manufactured - End. Finished Goods Inventory

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Ch.2 Gross margin (profit) =

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Revenue - Cost of Goods Sold

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Ch.3 CMU =

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SPU - VCU

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Ch.3 CM% =

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CMU / SPU also = (sales dollars - variable costs) /sales dollars

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Ch.3 Breakeven units =

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TFC / CMU

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Ch.3 Breakeven dollars =

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TFC / CM%

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Ch.3 Target units =

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(TFC + Desired Op. Inc.) / CMU

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Ch.3 Target dollars =

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(TFC + Desired Op. Inc.) / CM%

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Ch.3 Quiz 2 #1 Cost-volume-profit analysis is used primarily as a:

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Planning tool

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Ch.3 Quiz 2 #2 Contribution margin income statement:

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Revenue - Variable costs = Contribution margin - Fixed costs = Operating Income

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Ch.3 Practice #22 CVP analysis assumptions:

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1. Changes in production/sales volume are the sole cause for cost and revenue changes. 2. Total costs consist of fixed costs and variable costs. 3. Revenue and costs behave and can be graphed as a linear function (a straight line). 4. Selling price, variable cost per unit, and fixed costs are constant. 5. In many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are constant. 6. The time value of money (interest) is ignored.

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Ch.3 Practice #24 Operating income =

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Net Income / (1 - Tax rate)

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Ch.3 Practice #25 When performing a sensitivity analysis, if the selling price per unit is increased, then the:

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Total cost for sales of commissions and other nonmanufacturing variable costs will increase.

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Ch.3 Sales mix % (units) =

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# Units / Total Units

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Ch.3 Sales mix % (dollars) =

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Revenue / Total revenue

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Ch.3 Sales mix: BE units =

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TFC / WACMU

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Ch.3 Sales mix: BE dollars =

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TFC / WACM%

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Ch.3 WACMU =

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CMU X Sales mix % (units) - do this for each product and add together

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Ch.3 WACM%

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CM% X Sales mix % (dollars) - do this for each product and add together

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Ch.3 Book # 3-24 Margin of safety (dollars) =

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Actual (budgeted) sales - BE sales

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Ch.3 Book # 3-24 Margin of safety (units) =

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Actual (budgeted) units - BE units

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Ch.10 Quiz 1 #1 Define y=a+bx:

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y = Dependent variable; Total mixed cost; cost that is being predicted a = Total fixed cost b = The slope of the line; variable cost per unit x = Independent variable; cost driver

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Ch.10 Quiz 1 #3 Three criteria to use in identifying cost drivers that can be included in a regression model are:

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1. Economic plausibility 2. Goodness of fit 3. Significance of independent variable

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Ch.10 Quiz 2 #1 R-squared:

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The coefficient in determination relating to Goodness of fit: indicates the strength of the relationship between the cost driver and costs. - R-squared measures the percentage of variation in Y explained by X.

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Ch.10 Quiz 2 #3 Correlation between independent and dependent activities

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A high correlation between activities does not necessarily mean there is a cause and effect relationship. - It must be economically feasible as well.

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Ch.10 Quiz 2 #4 Multicollinearity:

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- A major concern that arises with multiple regression - It exists when two or more independent variables are highly correlated with each other - Generally, a coefficient of correlation between independent variables greater than 0.70 indicates multicollinearity.

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Ch. 10 Book # 10-16 High-low method:

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Used to estimate the cost function. - Simplest method of quantitative analysis - Uses only the highest and lowest observed values - Calculates variable cost per unit of activity - First select the highest and lowest values of the cost driver (x)

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Ch.10 Practice #5 When t-value is greater than 2, what does this imply?

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There is a significant relationship between Y and X.

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Ch.11 Relevant information has two characteristics:

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1) Future information 2) Information should differ among alternatives

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Ch. 11 Practice #8 Opportunity costs:

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- "How much profit did the firm 'lose out on' by not selecting this alternative?" - Opportunity costs are always relevant.

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Ch.11 Book # 11-29 Opportunity cost approach:

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The incremental cost of the alternative plus the opportunity cost of the profit foregone from choosing that alternative.

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Ch.11 Differential cost

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The difference in total cost between the two alternatives.

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Ch.11 Practice #18 Incremental cost:

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The additional total cost incurred for an activity.

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Ch.11 Practice #18 When there is excess capacity, it makes sense to accept a one-time-only special order for less than the selling price when:

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Incremental revenues exceed incremental costs.

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Ch.11 Handout #5 Product-mix decisions:

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- The decisions made by a company about which products to sell and in what quantities. - Choose the product that produces the highest contribution margin per unit of the constraining resource.

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Ch.12 Practice #13 Short-run pricing decisions:

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- Have a time horizon of less than one year. Includes decisions such as: - Pricing a one-time-only special order with no long-run implications.

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Ch.12 Practice #13 Long-run pricing decisions:

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- Have a time horizon of one year or longer. - Costs that are often irrelevant for short-run policy decisions, such as fixed costs, are generally relevant in the long run because costs can be altered in the long run. - Profit margins in long-run pricing decisions are often set to earn a reasonable return on investment. Includes decisions such as: - Pricing a product in a major market where there is some leeway in setting price.

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Ch.12 Practice #17 Locked-in costs:

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Costs that have not yet been incurred but, based on decisions that have already been made, will be incurred in the future.

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Ch.12 Quiz #2 The best opportunity for cost reduction is:

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during the product design phase of the value chain.

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Ch.12 Quiz #3 The first step in implementing target pricing and target costing is:

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developing a product that satisfies needs of potential customers.

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Ch.12 Five steps in developing target prices and target costs:

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1. Develop a product that satisfies the needs of potential customers. 2. Choose a target price. 3. Derive a target cost per unit: - Target price per unit minus target operating income per unit 4. Perform cost analysis. 5. Perform value engineering to achieve target cost.

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Ch.12 Practice #6 Cost-base possibilities:

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- Full cost - Variable cost - Fixed cost - Manufacturing overhead

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Ch.12 The three "Cs" relating to pricing decisions:

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1. Customers 2. Competition 3. Costs

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Ch.12 Quiz #1 Cost-based pricing formula:

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(cost-base) + (markup% X cost-base) = (sales price)

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Ch.12 Practice #16 Market-based pricing formula:

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(target price) - (target op.inc.) = target cost

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Ch.12 Book #12-24 Operating income =

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markup % X cost based

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Ch.12 Book # 12-23 Markup =

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Invested capital X target return on investment

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Ch.6 Budget:

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A quantitative way for managers to show goals and objectives. - includes both financial and nonfinancial data.

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Ch.6 Budget as a planning tool:

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Used to make better decisions.

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Ch.6 Budget as a control tool:

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Used to evaluate, provide feedback, and apply correction. - Effective control tool if integrated into the accounting system.

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Ch.6 Budget as a motivational tool:

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Used to motivate employees to do a good job and stay within the budget. - Can sometimes be perceived as a restriction.

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Ch.6 Budget used as a communication tool:

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Used to provide firm goals to employees. - If departments have opposing views, a budget approved by top executives allows departments to all be on the same page.

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Ch.6 The ongoing budget process:

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1. Managers and accountants plan the performance of the company to prepare a master budget. 2. Senior managers distribute a set of goals approving the master budget. 3. Accountants help managers to investigate deviations from the budget. 4. Managers and accountants assess the feedback, instill corrective action, and plan for the next budgeting period.

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Ch.6 Components of Master Budgets:

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Operating budget and financial budget.

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Ch.6 Operating budget:

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Building blocks leading to the creation of the budgeted income statement - Revenue, COGS, Reduction, Direct materials, Direct labor, Inventory, Inc. Statement

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Ch.6 Financial budget:

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Building blocks based on the operating budget that lead to the creation of the budgeted balance sheet and the budgeted statement of cash flows. - Cash, Capital expenditure

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Ch.6 Kaizen budgeting:

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Incorporating continuous improvement factors in the budgeting process.

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Ch.6 Responsibility center:

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A part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. - Types: cost, revenue, profit, investment

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Ch.6 Responsibility accounting:

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A system that measures the plans, budgets, actions, and actual results of each responsibility center. - Assigns responsibilities to each manager by type of responsibility center. - Focuses on information sharing, not in laying blame on a particular manager.

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Ch.6 Budgeting and human behavior: Disadvantages of budgets

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- "The Office" episode: They want to spend the rest of the money so they get the same amount budgeted to them the next period. - Budget creators could over budget on purpose so the goals are more attainable.

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Ch.6 Authoritative budget:

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Created by senior-level managers. - Advantages: - Ensures total consistency across all functions. - Less complex and time-consuming to create. - Disadvantages: - Superiors may dominate the budget process or hold subordinates accountable for events they have no control over. - Less likely to foster a sense of commitment. - Top managers not involved in daily business activities.

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Ch.6 Participative budget:

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Created by lower-level managers. - Advantages: - Increased sense of ownership. - Acceptance and commitment to firm's goals. - Disadvantages: - "private" knowledge seen by day-to-day workers is not shared with upper management and can affect the budget. - Costly and time-consuming to create. - Build up of budgetary slack.

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Ch.6 Budgetary slack:

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The practice of underestimating budgeted revenues, or overestimating budgeted expenses, in an effort to make the resulting budgeted goals (profits) more easily attainable.

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