Man Accounting part 1

Differential cost
In making business decisions, managers often have to choose between alternatives. You could buy something for 100 or 80, the diff cost is 20
Marginal Cost
The cost of producing hte last unit of the current production volume. Out of 100 units, the last unit is the marginal cost, if it is 99 units for 1000 dollars, the marginal cost is 0
Cost Definition
There are many ways of defining costs. Cost is usually the price paid to acquire a product or receive a service.
Diff between Period and Product cost
Product: Go into making the object material thing (Material, Labor, Overhead) stuff that can be loaded into inventory =Inventorial
Period: Like a furniture store, (Salary, rent, utilities) Stuff that is incurred per period
cost driver
The thing that drives your cost, coffee shop: the number of coffee you sell drives your cost
3 main costs
Fixed, Variable, and Sem-Variable
Fixed Costs
Remain constant, up to a relevant range, regardless of the level of activity. As more units are produced, there are no more costs, it just stays the same
Variable costs
the more the product is produced the more the costs go up or down. VICE VERSA
Semi Variable Costs
ok so if you sell 10 items, costs are 10 dollars, 20 items the costs are 20 dollars. In semi variable it would be more like 10 items, 3 dollars, the costs does change but not proportionally
closing stock
stuff that is unsold
Prime cost
The total of direct materials cost + direct labor cost is called prime cost
Conversion Cost
Direct labor cost +manufacturing overhead cost

These costs are incurred to convert direct materials into finished products

Carrying cost
Storage costs, interest on borrowing. Costs of maintenance to keep something held in a compartment. Evaporation costs.
ordering costs
costs of ordering a product
job costs
the costs of completing a job (like building a dam)
Process Costs
costs of processing something, the costs of making oil into diesel ect
Joint Costs
The cost before the split off point, like the cost of extracting the oil before it is refined
Set-up costs
Costs of setting up a production product. A cookie has costs of material labor utilities ect
Stock out costs
The cost of running out of any of the inputs of production. materials, labor or an overhead item, and the resulting loss due to production shut down
Discretionary costs
costs that can be postponed usually by managers such as short term contracts ect
non discretionary costs
costs to which the organization is committed to such an extent that there is no way out in the short run. Longer term non cancelable contracts.
Direct Costs
Those that can be easily traced toa product or service that was produced as a result of incurring the cost. examples are direct material direct labor ect.
Indirect costs
costs that do not specifically have anything to do with making the product
Opportunity Cost
The money you could have made if you had not made the decision that you did. So if you decided to take the day off work and if you had gone you wouldv made 100 dollars. then the opportunity cost is 100 dollars
Sunk Cost
The cost that has been incurred in the past. Past cost that cannot be recovered by any means . Paying saint marys price but dropping out, but still having to pay it
How costs behave? fc, vc, smc. Know these and you can plan the volume that delivers the desired profit.
total cost
the variable cost line where the fixed cost starts
Fixed Cost + Unit Variable cost “Times” (quantity of units)
Total revenue
how much margin you have over your variable cost
you buy muffins for 2 dollars and sell them at 3, so it should be for ever unit 1 above the variable cost
Break even point
where total cost and total revenue lines meet
where you start actually making money
Unit variable cost
Unit selling price
Break Even Point (dollars)
Total Fixed Cost / Contribution Margin Ratio (Contribution Margin/Sales)
Contribution Margin
The difference selling price and variable cost
Break Even Point (Units)
Total Fixed Cost / Contribution Margin
TOI (Before Tax)
TOI (After Tax) / 1 – (Tax Rate) “25% is .25”
Required Volume (Unit)
Total Fixed Costs (TFC) + TOI / Unit CM (UCM)
Required Volumes (Sales)
Total Fixed Costs (TFC) + TOI / CMR (Cont. margin ratio)
Contribution Margin Ratio (CMR)
Contr. Margin / Sales
BEP (B) Bundles
TFC / Bundle Contr Margin
After you get the BEP for bundles you
multiple the BEP Bundle number times the (ratio) amount of units, for example 1;3;2
Margin of safety
Sales – BEP (sales)
Margin of Safety (ratio)
Margin of safety / Sales
Degree of Operating Leverage (DOL)
DOL shows how a change in sales will cause a change in operating profit
Point of Indifference (units)
If you choose variable or FC either way they are the same (FC 1 – FC 2 / UCM 1 – UCM 2)
Point of Indifference (Amounts)
(FC 1 – FC 2 / CMR 1 – CMR 2)

(Contribution margin ratio)

expect profit
cm – FC
pg. 60 2 a1 2 a2 2 b2 pg 66 236 37 38 39 40 2. 43. 2 47 2 54 2 60 2 61 2 66 ch 3 3. 32. 34 36 40 41 44 50 52 54 55 56
Profit =
(Sales − Variable expenses) − Fixed expenses
Sales =
Variable expenses + Fixed expenses + Profit
Criteria of a sound regression model (pg 86-87)
1. plausibility
2. goodness of fit
Multi variable analysis/multi linear regression
TC=FC +B1 (Cost driver) + B2 (cost driver)
VC #1
E (error)
the difference between the guess and the actual answer
Goodness of fit
is the accuracy of your guess on what the Total Cost will be (How well the model fits the reality) R2 or Co-efficient of multiple determination
1 cost driver
which variate do you choose
the one with the highest R2
High Low method
1. Plot the data, :X axis is unites Y is cost
2. Draw a line between the highest activity point and the lowest activity point
3. Identifying variable cost or slope
4. fill out the formula
objective of plotting
identify the outliers the points that are outside of the main line
To find the slope/variable cost
Y = A + B (X)
TC= FC + VC (#units)
Starting with the highest!!!!
Highest cost – Lowest cost/
Highest activity (corresponding) – lowest activity (corresponding) (the units)
Finding the fixed cost for the slope with a graph
TC = the highest row cost = FC (which is not found yet) + the variable cost times (the number of units in the same row)
High Low method Strengths
1. easy to compute and simple to understand
2. gives a reasonable approximation of cost behavior
High Low method strengths
1. It is based on only 2 date points – the highest and the lowest
2. Ignores all other data points
3. It is no truly representative of the information
4. Does not work in all activity levels
B= N (collumbs) * (Exy) – (x * E y)/
(Ex2) – (Ex)2
A= Ey – B Ex/
R2 is
he explanatory power of the function
(it shows how much variations in Y (or costs) is explained by variations in x (activity level)
Activity based management (ABM)
Using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control of an organization
Value-added cost
the cost of an activity that a company cannot eliminate without affecting a product’s value to the customer
Cost management system
A collection of tools and techniques of managing costs
2 categories (traceable) and (non traceable)
1. Cost estimation
2. Cost accumulation
3. cost assignment
4. cost control
Traceable Costs
Direct materials are one. You know which items go into what product so it is easy to trace
Non-Traceable Costs
If you had an oven, its hard to trace what products were made in the oven.
Something that can be used with more than one subject or product for example a computer.
Non-Value added costs
Costs that company can eliminate without affecting a product’s value to the customer
The continuous process of comparing products, services, and activities to the best industry standards
this means that no matter what everyone pays the same thing like the tuition at saint marys
ABC Activity based costs
Bridges between resources and products
Allocating stages
1. Allocating resource costs to the activities
2. From activities you assign those to the products
does not help with products such as all other costs that are not specific
Degree of Operating Leverage
%Change in operating income/ % change in sales
operating income/
contribution margin
why is the Sarbanes Oxley report 2002 controversial?
THe costs of applying the Oxley act are greater than the benefits. This is true with the auditing of companies internal control systems.
What two major considerations affect the design of all accounting systems?
1. Cost Benefit balance:How well accounting will help reach the management’s goals in relation to the cost system.
2. Behavioral effects: This says that an accounting system should be judged by how it will affect the behavior or decisions of the managers.
a quantitative expression of a plan of action
Performance Report
This compares actual results with the budget
This measures the differences between the budget costs and actual costs.
Why are accountants concerned about product life cycles?
Information that is relevant for decisions about a product depends on the product’s life-cycle stage. Therefore, to prepare and interpret information, accountants should be aware of the current stage of a product’s life cycle.
“Accountants in every company should measure and eport on every function in the company’s value chain.” do you agree? explain
No. Some functions in the value chain may not be present in some organizations and not all of the functions are of equal importance to the success of all organizations. Measurement and reporting should focus on those functions that enable a company to gain and maintain a competitive edge.
What are management accountants starting to do more of.
Management accountants are the information specialists. In non-hierarchical companies, they are more directly involved with managers and are often parts of cross- functional teams.
To become a CMA, you must qualify with two parts.
1. Financial planning, performance, and control
2. Financial decision making
How are changes in economy effecting management accounting
Changes in technology are affecting how accountants operate. Increasing computing capabilities and decreasing computing costs have changed how accountants gather, store, manipulate, and report data. Today accountants must be able to account for transactions efficiently and safely, integrate their accounting systems into ERP systems, and use XBRL to communicate information electronically.
Briefly describe how a change in a plant’s layout can make its operation more efficient?
Moving tools and products that are in process from one location to another in a plant is an activity that does not add value to the product. So changing the plant layout to eliminate wasted movement and time improves production efficiency.
Controller Acitivities
Planning for control
Reporting and interpreting
Evaluating and consulting
Tax administration
Government reporting
Protection of assets
Economic appraisal
Provision of capital
Investor relations
Short-term financing
Banking and custody
Credit management and collections of cash
Risk management
Traits of Management Accounting
1. Field is less sharply defined
2. Provides internal consulting advice to managers
3. Is characterized by detailed reports
4. Has a future orientation
Traits of Financial Accounting
1. Has less flexibility
2. Is constrained by GAAP
3. Behavioral impact is secondary
What is GAAP (financial acctg only)
generally accepted accounting principles: a collection of rules and procedures and conventions that define accepted accounting practice
Which employees have line or staff responsibilities? Indicate if it does another function as well
1. President: Line, Support
2. District sales manager: Line, Marketing
3. Market research analyst: Staff, Marketing
4. Cost Accountant: Staff, Support
5. Head of legal department: Staff, Support
6. Production superintendent: Line, Production
Value Chain
The set of business functions or activities that add value to the products or services of an organizationin
Research and development
Design of products, services, processes
Customer Service
Line Managers
are directly involved with making and selling the organization’s products or services
Staff Managers
are advisory—they support the line managers, they give advice
CFO (chief financial manager)
A top executive who deals with all finance and accounting issues, oversees the accounting function in most organizations
concerned mainly with the company’s financial matters such as raising and managing cash
Concerned with operating matters such as aiding management decision making
List several costs and benefits of poor and ethical environments
poor ethical (costs):
1. Legal costs
2. costs due to absenteeism and high employee turnover
Ethical (benefits):
1. Improved morale
2. lower absenteeism and employee turnover
3. lower loss from theft
IMA (Statement of Ethical Professional Practice)
Management accountants should not condone the commission of acts by their organization that violate the standards of ethical conduct
Unit activity costs
Total activity cost
Managerial Accounting
Managerial Accounting is the part of accounting that aids the managerial decision making. It emphasizes on the use of accounting information to help people internally in making decisions concerning routine and non-routine decisions. Decisions such as how much inventory to carry, how much inventory to order at a time, whether a new product line should be launched or an existing product to be postponed. It also extends to cash management, budgeting, variance analysis, performance evaluation, cost control, and designing control systems within organizations. The management accounting can help in hard environments by first identifying inefficiencies in all segments of supply, production, and distribution chains. Second, identifying product differentiation opportunities. Also specializing in products and services where the US has a competitive avantage, such areas are software intellectual property, leisure ect.
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