Financial Vs. Managerial Accounting:
Reports are provided outside the organization to external investors and creditors.
Financial
Financial Vs. Managerial Accounting:
Reports past activities from a historical perspective
Financial
Financial Vs. Managerial Accounting:
Emphasizes reliability of data
Financial
Financial Vs. Managerial Accounting:
Summarizes data for the entire company as a whole
Financial
Financial Vs. Managerial Accounting:
Must follow GAAP which have specific required external reports
Financial
GAAP
Generally Accepted Accounting Principles
Financial Vs. Managerial Accounting:
Provide reports for internal use only. There is no required format. Information based on management needs.
Managerial
Financial Vs. Managerial Accounting:
Relevance of data is emphasized over reliability
Managerial
Financial Vs. Managerial Accounting:
Focus on timeliness of information
Managerial
Financial Vs. Managerial Accounting:
Analysis is detailed and related to various parts of the organization such as departments or divisions and not for the organization as a whole
Managerial
Financial Vs. Managerial Accounting:
Reports do not follow formats required by GAAP. Common formats developed over the years and are typically used for analysis.
Managerial
General ledger
financial summary of all transactions of the company
relied on by both Financial and Managerial Accounting
organization chart
picture of the structure of responsibility and accountability in the organization
ex. pg. 11
service companies
paid to provide a service to companies and do not manufacture products
70% of all businesses are service companies
IMA
institute of management accountants
goal is to assist those working in managerial accounting positions to develop professionally
provides general guidelines and assistance for managerial accountants
sponsors CMA certification
CMA
certified managerial accountant
certification test sponsored by IMA
managerial accountants goal
provide information and analysis necessary to help management make decisions
projections
estimate that consist of a combination of many opinions of what is expected to occur in the future
standards for ethical conduct for practitioners of management accounting and financial management
IMA developed this code of ethics to assist accountant with making ethical decisions
summary pg. 10
cost
sacrifice of an economic resource
assets, inventory, expensed...
Product Costs - def
all costs required to make a product
DM (direct materials)
DL (direct labor)
OH (manufacturing overhead)
Product costs are recorded...
first as inventory and reported on the balance sheet until the product is sold
Products costs are "matched"...
to the sales revenue and reported on income statements as cost of goods sold when the product is sold
no expense is recorded when the cost initially occurs
Period Costs - definition
all costs incurred during the period to support the operations of the business, other than costs to make the product, are period costs
period costs are/are not related to making the product
period costs are NOT related to making the product
Examples of period costs
corporate HQ
selling the product
warehousing and shipping the product to customers
prime costs
DM and DL
conversion costs
DL and OH
(cost to take DM and convert them into a finished product)
direct costs
Costs that CAN be easily and conveniently traced to one product.
DM and DL
indirect costs
Costs that CAN NOT be easily and conveniently traced to one product.
OH and most period costs
DM
direct materials
become part of the finished product and are easy to track and determine how much is used to make one product
cost significant enough you want to keep track of what is used to make each product
indirect material
when the cost (or quantity) of material to make one product is not cost beneficial to determine, it is considered indirect material and is part of manufacturing overhead (OH)
low cost material that is part of the product or used to make the product that i
DL
direct labor
workers that TOUCH the product or operate machinery during production
indirect labor
ex. management and supervisors
manages the production process
in the plant, not "touching" the product
OH
manufacturing overhead
costs incurred at the manufacturing facility to make the product that are NOT DM or DL
cost of the facility and managing the production process
cost must be incurred AT the manufacturing facility
Key Words: factory, plant, manufactu
variable cost
changes in total in direct proportion to changes in volume (number of units)
per unit cost does not change
DM, DL, variable OH, sales costs you pay only when you sell a product - all variable costs
fixed cost
total cost does not change with changes in volume of activity (can be different than expected, but not due to changes in volume)
as long as you stay within the relevant range
cost per unit will change as volume changes
relevant range
range of activity (volume of units produced or sold) where the assumptions about cost behavior are valid
mixed costs (semi-variable)
contains both variable and fixed component
total fixed cost + total variable cost = total mixed cost
total variable cost (variable cost per activity x quantity of activity)
fixed = minimum cost of having a service ready and available for use
variable = co
opportunity cost
potential benefit given up when one alternative is selected over another alternative as an opportunity cost
not recorded or reported because they do no actually occur
"cost" is the benefit not received
ex. opportunity cost of going to college is the amoun
sunk cost
cost that is already paid and can not be recovered by a decision made now or in the future is a sunk cost
ex. tuition for this semester that is already paid that will not be refunded if the class is dropped
committed cost
investments in facilities and equipment used in day to day operations are committed costs
must be incurred or the company cannot operate
1) long-term in nature, difficult to change once a commitment has been made
2)can not be significantly reduced without
discretionary cost
management can decide whether to spend in certain areas for certain things
costs can be eliminated for short periods of time without changing the long-term goals of the company
ex. training, replacing office furniture, travel
step cost
increases incrementally as more units are made or sold
considered to be a variable cost by companies that do not use a method to separate the fixed and variable part of cost and only classify costs as variable or fixed
cost sheet
provides an estimated detail of what is required to make one product or provide one unit of service
included:
direct material that become part of the product
direct labor making the product
all other costs incurred at the manufacturing facility (OH) to ma
Direct Material - on cost sheet
The cost sheet provides the following ESTIMATES related to one product or service:
the different types of DM required
the quantity of each type of DM required
the cost for one quantity of each DM required
Direct Labor - on cost sheet
The cost sheet provides the following ESTIMATES related to one product or service:
the different types of DL required
the quantity of hours required for each DL type
the cost per hour paid for each type of DL
Manufacturing Over head - on cost sheet
The cost sheet provides the following ESTIMATES related to one product or service:
the activity the company does that causes the company to spend the majority of manufacturing overhead costs
the quantity of the activity required to make one product
the av
How does the cost sheet state the quantity and cost for each different type of product cost?
quantity required x cost for 1 quantity = total cost for each
standard
the estimate of what is required to make the product
amount you expect to pay and the quantity you expect to use to make one produce
"standard" is "per each
quantity standard
how much is expected to be used to make one product
cost (price) standard
how much is expected to be paid for one quantity
two most common types of standards
ideal and practical
ideal standards
can be attained only under ideal/perfect circumstances
practical standards
are "tight" but attainable (allow for normal downtime and waste)
pre-determined overhead rate
used to estimate the amount of manufacturing OH cost to allocate to each (one) product
managerial accountant determines the production activity that causes the company to incur the majority of manufacturing OH costs and this activity is used to allocate m
allocate manufacturing OH - allocate the cost on a per unit basis
easiest, most straight forward
total manufacturing OH $ / # total units made = total MOH cost per unit
acceptable method to use IF all products made by the company required the same amount of MOH costs to make each and every product
when is it not the case that all products made by the company required the same amount of MOH costs to make each and every product?
all products are not made using the same steps of production
all products are not the same size
all products do not required the exact amount of time to manufacture
differing amounts of space and supervision are required to make products
cost sheet usage
determine the quantity of DM to purchase
determine how many employees with different skill levels must be hired
value inventory (units on hand x cost per unit = $ value of inventory)
price the product
monitor the efficiency of DL
monitor the cost of mater
contribution margin
difference between total revenues and total variable costs
amount available to "contribute" towards covering fixed costs
once fixed costs are covered, contribution margin adds to profits
contribution margin per unit
difference between the sales price per unit and all variable costs per unit
amount operating income increases when one more unit is sold and decreases when one less unit is sold
contribution margin ratio/percentage
gives the amount (in cents) of every sales dollar that is added to operating incomes when sales dollars decrease
contribution margin income statement
aka a variable cost income statement
used to determine how operating income is expected to change as sales change
break even
occurs when operating profit equals $0, which occurs when total contribution margin is equal to total fixed costs
any sales above the break-even point will result in profit
margin of safety
estimates the amount sales can decrease for a profitable company before the company is no longer profitable
for unprofitable company, it estimates how much sales must increase before the company becomes profitable
often computed in both number of units so
operating leverage
used to estimate how much operating income will change when total sales dollars change
operating leverage factor
absolute value and always a positive number
always multiplied by the % change and is never multiplied by a dollar amount
flexible budget
used by management to determine total estimated sales, costs, and profits at various sales levels
variance
difference in actual and budget at the same volume