question

Managerial Accounting

answer

provides financial and nonfinancial information to managers and other internal decision makers

question

Purpose of managerial accounting

answer

provide useful information to decision makers

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Differences between financial accounting and managerial accounting

answer

1. managerial accounting also reports non-financial information. 2. financial accounting information is generally used by external users, whereas managerial accounting information is used by internal decision makers. 3. managerial accounting is not constrained by GAAP. 4. managerial accounting information is provided quickly, whereas financial accounting usually needs an audit.

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Planning

answer

the process of setting goals and making plans to achieve them

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Control

answer

the process of monitoring planning decisions and evaluating an organization's activities and employees

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Characteristics of fraud:

answer

1. provides direct or indirect benefit to the employee. 2. violates the employee's obligations to his employer. 3. costs the employer money or loss of other assets. 4. is hidden from the employer.

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Characteristics of an internal control system:

answer

1. urge adherence to company policies. 2. promote efficient operations. 3. ensure reliable accounting. 4. protect assets.

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Ethics

answer

beliefs that distinguish from right and wrong.

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The Institute of Management Accountants (IMA)

answer

the professional association for management accountants. Issued a code of ethics to help accountants involved in solving ethical dilemmas.

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IMA's Statement of Ethical Professional Practice requirements

answer

Management accountants must be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner.

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Fixed Costs

answer

do not change with changes in volume of activity. Ex) straight-line depreciation

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Variable Costs

answer

change in proportion to changes in the volume of activity. Ex) sales commissions

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Mixed Costs

answer

both fixed and variable. Ex) standard wages for employees (fixed) plus any overtime worked (variable)

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Cost Object

answer

a product, process, department or customer to which costs are assigned.

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Direct Costs

answer

traceable to a single cost object. Ex) salaries of maintenance dept employees, equipment purchased by maintenance dept, materials purchased by maintenance dept, maintenance dept equipment depreciation

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Indirect Costs

answer

cannot be easily traced to a single cost object. Ex) factory accounting, factory administration, factory rent, factory manager's salary, factory light and heat, insurance on factory

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Controllability of costs

answer

depends on the employee's responsibilities. Ex) a senior manager controls costs of investments in land, buildings and equipment, whereas a supervisor controls daily expenses such as supplies, maintenance and overtime.

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Sunk Costs

answer

costs that have already been incurred and cannot be avoided or changed (irrelevant to future decisions). Ex) the cost of already-purchased office equipment.

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Out-of-pocket Costs

answer

require a future outlay of cash (relevant for decision making). Ex) future purchases of equipment.

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Opportunity Costs

answer

the potential benefit lost by choosing a specific action from two or more alternatives. Ex) a student giving up wages from a job to attend evening classes

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Product Costs

answer

costs capitalized as inventory; expenditures that are necessary and integral to finished products. Includes direct materials, direct labor, and indirect manufacturing costs (overhead). These costs pertain to activities carried out to manufacture the product.

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Period Costs

answer

costs expensed; expenditures identified more with a time period than with finished products. Includes general administrative expenses, selling expenses. These costs pertain to activities that are not part of the manufacturing process.

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Difference between product costs and period costs

answer

Product costs: assigned to inventory on the balance sheet (until that inventory is sold). Period costs: expensed on the income statement (flow directly).

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Service industries always have _____ costs.

answer

Period costs; services are not inventoried. Instead, costs incurred are expensed in the reporting period when incurred.

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Examples of service industry costs:

answer

1. Beverages and snacks 2. Cleaning fees 3. Pilot and copilot salaries 4. Attendant salaries 5. Fuel/oil costs 6. Travel agent fees 7. Ground crew salaries

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3 types of industries:

answer

1. Manufacturing 2. Merchandising 3. Service

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Main difference between manufacturing and merchandising industries:

answer

Merchandisers buy goods that are ready for sale, whereas manufactures produce goods from materials and labor.

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Three inventories of a manufacturer:

answer

1. Raw materials 2. Goods in process 3. Finished goods

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Raw materials inventory

answer

the goods a company acquires to use in making products. Used directly and indirectly.

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Direct materials

answer

Raw materials that are used directly in a product.

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Indirect materials

answer

Raw materials that are used to support production processes, but are not as clearly identified with specific units or batches of a product. Often appear on balance sheet as factory supplies.

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Goods in Process inventory

answer

aka Work in Process inventory. Consists of products in the process of being manufactured, but are not yet complete.

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Finished Goods inventory

answer

consists of completed products ready for sale.

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Difference between COGS for a manufacturer versus a merchandiser

answer

Manufacturer: beginning finished goods inventory + cost of goods manufactured (COGM) - ending finished goods inventory Merchandiser: beginning merchandise inventory + cost of goods purchased - ending merchandise inventory

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Cost of goods manufactured (COGM)

answer

= beginning goods in process inventory + production costs - ending goods in process inventory

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Production costs

answer

direct labor, direct materials, overhead

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Direct material costs

answer

the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods.

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Direct labor costs

answer

the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods.

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Factory overhead costs

answer

consists of all manufacturing costs that are not direct materials or labor. Cannot be separately or readily traced to finished goods. Includes: overtime, maintenance of factory, supervision of employees, equipment repairs, utilities, production manager's salary, factory rent, depreciation, insurance, property taxes, and accounting/legal services. Does NOT include: selling and administrative expenses (these are period costs).

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Prime costs

answer

direct materials costs and direct labor costs. Expenditures directly associated with the manufacture of finished goods.

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Conversion costs

answer

direct labor costs and overhead costs. Expenditures incurred in the process of converting raw materials to finished goods. Direct labor is considered both a prime cost and conversion cost.

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Operating expenses

answer

do not include manufacturing costs such as factory workers' wages and depreciation of production equipment and factory buildings. Includes sales salaries, office salaries, depreciation of delivery and office equipment.

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Materials activity

answer

the flow of raw materials.

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Production activity

answer

beginning goods in process inventory, direct materials, direct labor, and overhead. Unfinished products are considered ending goods in process inventory.

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Sales activity

answer

the cost of finished products sold is reported on the income statement as COGS. the cost of products not sold is reported on the current period's balance sheet as ending finished goods inventory.

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The Manufacturing Statement

answer

summarizes the types and amounts of costs incurred in a company's manufacturing process. Divided into 4 parts: direct materials, direct labor, overhead, and computation of COGM.

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Computing direct materials used:

answer

beginning raw materials + raw material purchases - ending raw materials

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Trends in managerial accounting

answer

1. Customer orientation 2. Global economy 3. E-commerce 4. Service economy 5. Lean practices 6. Value chain

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Customer orientation

answer

an increased emphasis on customers being the most important constituent of business. Employees understand the changing needs and wants of their customers and align their management and operating practices accordingly.

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Global economy

answer

expands competitive boundaries and provides customers more choices.

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E-commerce

answer

consumers expect to be able to buy items electronically, whenever and wherever they want.

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Service economy

answer

service businesses typically account for over 60-70% of total economic activity.

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Lean business model

answer

goal is to eliminate waste while satisfying the customer and providing a positive return to the company.

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Continuous improvement

answer

rejects the notions of "good enough" or "acceptable" and challenges employees/managers to continuously experiment with new and improved business practices.

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Total quality management (TQM)

answer

focuses on quality improvement and applies this standard to all aspects of business activities.

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Just-in-time manufacturing (JIT)

answer

a system that acquires inventory and produces only when needed. A demand-pull system.

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Value chain

answer

a series of activities that add value to a company's products or services.

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Cycle time

answer

process time + inspection time + move time + wait time

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Cycle efficiency

answer

process time / cycle time

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Cost Accounting System

answer

accumulates costs and assigns them to products and services Uses a perpetual inventory system (continuously updates).

question

Two types of Cost Accounting Systems

answer

1. Job order cost accounting 2. Process cost accounting

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Job order production

answer

Manufactured products that are individually designed to meet the needs of a specific customer.

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Job

answer

the production activities for a customized product

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Job lot

answer

a job that involves producing more than one unit of a custom product

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Heterogeneity of job order production

answer

the diversity of the products that are produced.

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Events in Job Order Costing

answer

1. Predict the cost to complete the job. 2. Negotiate price and decide whether to pursue the job. 3. Schedule production of the job.

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Target cost

answer

Expected selling price - desired profit = target cost

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Job Cost Sheet

answer

a separate record maintained for each job. Identifies: 1. the customer 2. the job number 3. the product 4. key dates 5. costs incurred (direct materials, labor and overhead)

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Materials ledger cards

answer

perpetual records that are updated each time units are purchased and each time units are issued for use in production.

question

Cost of direct materials flows from the materials ledger card to the ______.

answer

job cost sheet

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The cost of indirect materials flows from the materials ledger card to the:

answer

Indirect Materials account in the factory overhead ledger (a subsidiary ledger controlled by the Factory Overhead account in the general ledger).

question

Posting to subsidiary records includes a _____ to a job cost sheet and a ______ to a materials ledger card.

answer

debit, credit

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The flow of costs begin with ____.

answer

clock cards

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Clock cards

answer

used by employees to record the number of hours worked, and they serve as source documents for entries to record labor costs.

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Time tickets

answer

used by employees to report how much time they spent on each job.

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Overhead allocation base

answer

the factor to which overhead costs are linked

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Predetermined overhead rate

answer

allows managers to estimate overhead in advance. estimated overhead costs / estimated activity base = predetermined OH rate

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Underapplied overhead

answer

when less overhead is applied than is actually incurred (a debit left in the account).

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Overapplied overhead

answer

when more overhead is applied than is actually incurred (a credit left in the account).

question

Treat over/underapplied overhead by debiting or crediting the _____ account.

answer

Cost of Goods Sold

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Process operations

answer

the mass production of products in a continuous flow of steps. Ex) petroleum refining

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Important characteristic of process operations

answer

a high level of standardization is necessary if the system is to produce large volumes of products.

question

Job order operations versus Process operations

answer

Job order: 1. custom orders 2. heterogeneous products/services 3. low production volume 4. high product flexibility 5. low to medium standardization Process operations: 1. repetitive procedures 2. homogeneous products/services 3. high production volume 4. low product flexibility 5. high standardization

question

The ______ (input/output) of each production department becomes the ______ (input/output) of the next production department.

answer

output; input

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Process cost accounting system

answer

assigns direct materials, labor and overhead to specific processes. The total costs of each process are then divided by the number of units passing through that process to determine the cost per equivalent unit for that process.

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Materials consumption report

answer

summarizes the materials used by a department during a reporting period. Replaces materials requisitions. Used when materials are moving continuously from the raw materials inventory through the manufacturing process.

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If a process has no beginning and no ending goods in process inventory, the unit cost of goods transferred out of a process is computed as:

answer

total cost assigned to the process / total # of units started and finished in the period

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Equivalent Units of Production (EUP)

answer

the number of units that could have been started AND completed given the cost incurred during a period. Ex) 100 units are in the goods-in-process inventory at the end of the period, and management decides they are 60% completed. Therefore, equivalent units of production for that period total 60 (100 units x 60%). This means that with the resources used to put 100 units 60% of the way through the process, the company could have started and completed 60 entire units.

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Physical flow reconciliation

answer

a report that reconciles the physical units started in a period and the physical units completed in that period.

question

Weighted-average method

answer

a method used to assign inventory cost to sales. (cost of available-for-sale units / number of units available) x number of units sold = cost of sale

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Three methods of assigning overhead costs:

answer

1. Plantwide rate 2. Departmental rate 3. Activity-based costing

question

Plantwide overhead rate method

answer

the cost object is the unit of product. Plantwide OH rate = total budgeted OH cost / total budgeted direct labor or machine hours Overhead allocated to each product = Plantwide OH rate x DLH per unit

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Departmental overhead rate method

answer

uses a different OH rate for each production department. Departmental OH rate = total departmental OH cost / total units in departmental allocation base

question

True or False: The departmental OH rate method is more accurate than the plantwide OH rate method.

answer

True

question

3 Key Advantages to the Plantwide and Departmental OH Rate Methods

answer

1. they are based on readily available information 2. they are easy to implement 3. they are consistent with GAAP and can be used for external reporting needs.

question

Disadvantage of Plantwide/Deparmental OH Rate Methods

answer

OH costs are frequently too complex to be explained by one factor such as DLH or machine hours.

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Activity-based Costing (ABC)

answer

an activity is what causes costs to be incurred.

question

Activity Cost Pool

answer

a collection of costs that are related to the same or similar activity.

question

Four steps in applying ABC:

answer

1. Identify activities and the costs they cause. Usually done through discussions with employees in production departments and reviews of production activities. 2. Trace OH costs to cost pools. 3. Determine activity rates. Determination depends on proper identification of the factor that drives the cost in each cost pool and proper measures of activities. Activity cost driver: the activity that causes costs to be incurred. 4. Assign OH costs to cost objects.

question

Cost pool activity rate =

answer

= OH costs assigned to pool / Number of activities

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OH from cost pool allocated to certain product =

answer

= Activities consumed x Activity rate

question

Advantages of ABC method

answer

it recognizes that OH costs are much more complex than seen in Plantwide and Departmental OH methods More accurate, more effective cost control, focuses on relevant factors, allows for better management of activities.

question

Disadvantages of ABC method

answer

Costs to implement and maintain ABC, uncertainty with decisions still remains

question

Types of activities

answer

1. unit level activities: performed on each product unit. Costs tend to change with volume. 2. batch level activities: performed only on each batch/group of units. Costs do not vary with number of units, but do vary with number of batches. 3. product level activities: performed on each product line. Costs do not vary with number of units or batches. 4. facility level activities: performed to sustain facility capacity as a whole. Costs do not vary with volume.

question

Cost-Volume-Profit (CVP) Analysis

answer

helps managers predict how changes in costs and sales levels affect income. Involves computing the break-even point.

question

Curvilinear Cost

answer

nonlinear cost. Increases at a nonconstant rate as volume increases.

question

3 methods used to analyze past costs:

answer

1. Scatter diagrams 2. High-low method 3. Least-squares regression

question

Variable cost per unit (scatter diagram)

answer

change in cost / change in units

question

High-low method

answer

(total cost at highest level of activity - total cost at lowest level of activity) / (number of units or hours at highest level of activity - number of units or hours at lowest level of activity)

question

Least-squares regression

answer

statistical; y = a + bx

question

Contribution margin per unit

answer

the amount by which a product's unit selling price exceeds its total unit variable cost. Sales price per unit - total variable cost per unit = contribution margin

question

Contribution margin ratio

answer

contribution margin per unit / sales price per unit

question

Break-even point in units

answer

fixed costs / contribution margin per unit

question

Break-even point in dollars

answer

fixed costs / contribution margin ratio

question

CVP Chart

answer

Horizontal axis = # of units produced and sold Vertical axis = dollars of sales and costs Lines = sales and costs at different output levels

question

Pretax income

answer

= after-tax income / (1 - tax rate)

question

Computing sales (dollars) for a target after-tax income

answer

dollar sales at target after-tax income = (fixed costs + target pretax income) / contribution margin ratio

question

Computing sales (units) for a target after-tax income

answer

unit sales at target after-tax income = (fixed costs + target pretax income) / contribution margin per unit

question

Margin of safety

answer

the excess of expected sales over the break-even sales level. This is the amount that sales can drop before the company incurs a loss.

question

Calculating margin of safety

answer

% = (expected sales - break-even sales) / expected sales

question

Sales mix

answer

the ratio (proportion) of the sales volumes for the various products

question

Composite unit

answer

consists of a specific number of units of each product in proportion to their expected sales mix.

question

Break-even point in composite units

answer

fixed costs / contribution margin per composite unit

question

Degree of operating leverage (DOL)

answer

= total contribution margin (in dollars) / pretax income

question

Budget

answer

a formal statement of a company's future plans, usually expressed in monetary terms.

question

Benchmarking budgets

answer

management is required to evaluate (benchmark) business operations against some norm. Evaluation involves comparing actual results against either past performance or expected performance.

question

3 important guidelines of the budgeting process:

answer

1. employees affected by a budget should be consulted when it is prepared 2. goals reflected in a budget should be attainable 3. evaluations should be made carefully with opportunities to explain any failures

question

Most budgets should be developed using a _____ process.

answer

bottom-up

question

Master budget

answer

a formal, comprehensive plan for a company's future. It contains several individual budgets that are linked with each other to form a coordinated plan.

question

Basic components of a master budget

answer

1. Operating budgets (sales, selling expenses, general and admin expense budgets) 2. Capital expenditures budget 3. Financial budgets (cash, budgeted income statement, budgeted balance sheet)

question

Master budget sequence

answer

1. Prepare sales budget 2. Develop production budget 3. Prepare manufacturing, selling, and general and admin expense budgets. 4. Prepare capital expenditures budget 5. Consolidate operating and capital expenditures budgets into financial budgets: cash, budgeted income statement, budgeted balance sheet

question

Sales budget

answer

shows the planned sales units and the expected dollars from these sales. The starting point in the budgeting process.

question

Merchandise purchases budget (if company is retail)

answer

usually expressed in both units and dollars. Inventory to be purchased = budgeted ending inventory + budgeted cost of sales for the period - budgeted beginning inventory

question

Selling expense budget

answer

lists the types and amounts of selling expenses expected during the budget period.

question

General and administrative expense budget

answer

plans the predicted operating expenses not included in the selling expenses budget.

question

Capital expenditures budget

answer

lists dollar amounts to be both received from plant asset disposals and spent to purchase additional plant assets to carry out the budgeted business activities.

question

Cash budget

answer

shows expected cash inflows and outflows during the budget period. beginning cash balance + budgeted cash receipts - budgeted cash disbursements = preliminary cash balance

question

Budgeted income statement

answer

shows predicted amounts of sales and expenses for the budget period.

question

Budgeted balance sheet

answer

the final step in preparing the master budget. Shows predicted amounts for the company's assets, liabilities and equity at the end of the budget period.

question

Activity-based Budgeting (ABB)

answer

a budget system based on expected activities.

question

Budgetary control process

answer

refers to management's use of budgets to monitor and control a company's operations. 1. Develop budget 2. Compare results to budget 3. Take action 4. Set new plans 5. Repeat

question

Fixed (static) budget

answer

based on a single predicted amount of sales or other measure of activity.

question

Favorable variance

answer

when compared to the budget, the actual cost or revenue contributes to a higher income. Actual revenue is higher than budgeted revenue, or actual cost is lower than budgeted cost.

question

Unfavorable variance

answer

when compared to the budget, the actual cost or revenue contributes to a lower income. Actual revenue is lower than budgeted revenue, or actual cost is higher than budgeted cost.

question

Flexible (variable) budget

answer

a report based on predicted amounts of revenues and expenses corresponding to the actual level of output. It is designed to reveal the effects of volume of activity on revenues and costs.

question

Flexible budget performance report

answer

lists differences between actual performance and budgeted performance based on actual sales volume or other activity level. This report helps direct management's attention to those costs or revenues that differ substantially from budgeted amounts.

question

Standard costs

answer

preset costs for delivering a product or service under normal conditions.

question

Management by exception

answer

managers focus attention on the most significant differences between actual costs and standard costs and give less attention to areas where performance is reasonably close to standard.

question

Cost variance (CV)

answer

Actual Cost (AC) - Standard Cost (SC) where: AC = Actual Quantity (AQ) x Actual Price (AP) SC = Standard Quantity (SQ) x Standard Price (SP)

question

Price variance (PV)

answer

(AP - SP) x AQ

question

Quantity variance (QV)

answer

(AQ - SQ) x SP

question

Overhead cost variance (OCV)

answer

Actual OH Incurred (AOI) - Standard OH Applied (SOA)

question

Controllable variance

answer

the difference between actual OH costs incurred and the budgeted OH costs based on a flexible budget

question

Volume variance

answer

occurs when there is a difference between the actual volume of production and the standard volume of production.

question

Steps of decision making

answer

1. Define task and goal 2. Identify alternative actions 3. Collected relevant information 4. Select course of action 5. Analyze and assess decision

question

Relevant costs

answer

sunk costs, out-of-pocket costs, opportunity costs

question

Relevant benefits

answer

the additional or incremental revenue generated by selecting a particular course of action over another.

question

Capital budgeting

answer

the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

question

Payback period

answer

the expected time period to recover the initial investment amount. Payback period of even cash flows = cost of investment / annual net cash flow

question

Accounting rate of return

answer

annual after-tax net income / annual average investment

question

Annual average investment

answer

(beginning book value + ending book value) / 2

question

Net present value (NPV)

answer

computed by discounting the future net cash flows from the investment at the project's required rate of return (RRR) and then subtracting the initial amount invested.

question

NPV decision rule

answer

If NPV is greater than or equal to 0, ACCEPT. If NPV is less than 0, REJECT.

question

Profitability index

answer

NPV of cash flows / investment

question

Internal rate of return (IRR)

answer

equals the rate that yields an NPV of zero for an investment. Compute the present value factor (amount invested / net cash flows) for the investment project, then identify the IRR yielding the present value factor.

question

IRR decision rule

answer

IRR - hurdle rate If greater than or equal to 0, ACCEPT. If less than 0, REJECT.

question

Two main goals of accounting for departments:

answer

1. set up a departmental accounting system to provide information for managers to evaluate the profitability of cost effectiveness of each department's activities. 2. set up a responsibility accounting system to control costs and expenses and evaluate managers' performances by assigning costs and expenses to the managers responsible for controlling them.

question

Profit center

answer

incurs costs and generates revenues (selling departments)

question

Cost center

answer

incurs costs without directly generating revenues

question

Investment center

answer

incurs costs and generates revenues, and is responsible for effectively using center assets

question

Direct expenses

answer

costs readily traced to a department because they are incurred for that department's sole benefit.

question

Indirect expenses

answer

costs that are incurred for the joint benefit of more than one department and cannot be readily traced to only one department.

question

Return on investment (ROI)

answer

investment center net income / investment center average invested assets or profit margin x investment turnover

question

Residual income

answer

investment center net income - target investment center net income

question

Balance scorecard

answer

a system of performance measures, including nonfinancial measures, used to assess company and division manager performance. Four perspectives: 1. Customer: what do customers think of us? 2. Internal processes: which of our ops are critical to meeting customer needs? 3. Innovation and learning: how can we improve? 4. Financial: what do our owners think of us?

question

Statement of cash flows

answer

reports cash receipts (inflows) and cash payments (outflows) during a period.

question

Preparing the statement of cash flows

answer

1. compute the net increase or decrease in cash 2. compute and report the net cash provided or used by operating activities (using either the direct or indirect method) 3. compute and report the net cash provided or used by investing activities 4. compute and report the net cash provided or used by financing activities 5. compute the net cash flow by combining net cash provided or used by operating, investing and financing activities and then prove it by adding it to the beginning cash balance to show that is equals the ending cash balance

question

Building blocks of financial statement analysis:

answer

1. Liquidity and efficiency: the ability to meet short-term obligations and to efficiently generate revenues. 2. Solvency: the ability to generate future revenues and meet long-term obligations. 3. Profitability: the ability to provide financial rewards sufficient to attract and retain financing. 4. Market prospects: the ability to generate positive market expectations.

question

Tools of analysis:

answer

1. Horizontal: comparison of a company's financial condition and performance across time. 2. Vertical: comparison of a company's financial condition and performance to a base amount. 3. Ratio: measurement of key relations between financial statement items.

question

Dollar change

answer

analysis period amount - base period amount

question

Percent change

answer

[(analysis period amount - base period amount) / base period amount] x 100

question

Trend percent

answer

(analysis period amount / base period amount) x 100

question

Common-size percent

answer

(analysis amount / base amount) x 100

question

Current ratio

answer

current assets / current liabilities

question

Acid-test (quick) ratio

answer

(cash + short-term investments + current receivables) / current liabilities

question

Accounts receivable (AR) turnover

answer

Net sales / net average accounts receivable

question

Inventory turnover

answer

COGS / average inventory

question

Days' sales uncollected

answer

(net AR / net sales) x 365

question

Days' sales in inventory

answer

(ending inventory / COGS) x 365

question

Total asset turnover

answer

net sales / average total assets

question

Debt-to-equity ratio

answer

total liabilities / total equity

question

Times interest earned

answer

income before interest expense and taxes / interest expense

question

Profit margin

answer

net income / net sales

question

Return on total assets

answer

net income / average total assets or profit margin x total asset turnover or (net income / net sales) x (net sales / average total assets)

question

Return on common stockholders' equity

answer

(net income - preferred dividends) / average common stockholders' equity

question

Price-earnings ratio

answer

market price per common share / earnings per share

question

Dividend yield

answer

annual cash dividends per share / market price per share

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