Final Exam ACC 406 Notes
Introductory Management Accounting (Toronto Metropolitan University)
Final Exam ACC 406 Notes
Introductory Management Accounting (Toronto Metropolitan University)
WEEK 1
Production Costs:
Raw Materials
Direct Materials Used:
- Beginning Inventory + Purchases - Ending Inventory
Direct Labour
Production Overhead
- costs incurred in the manufacturing facilities (other than materials and labour) - depreciation, rent and property taxes on the manufacturing facilities
- depreciation on the manufacturing equipment
- managers and supervisors in the manufacturing facilities
- repairs and maintenance employees in the manufacturing facilities - electricity and gas used in the manufacturing facilities
- indirect factory supplies, and much more
Non-Production Costs
- Expenses taht are outside of the manufacturing facilities Administrative Costs
- Selling Costs
Conversion Costs
- Direct labour - Overhead
Period Costs
- Other costs of running a company that are not carried in inventory - Administrative + Selling Expenses
Costs of Goods Manufactured (For the Period)
= Direct Materials + Direct Labour + Manufacturing Overhead + (Beginning WIP - Ending WIP) Cost of Units Sold
=COGM + Finished Goods, Beginning + Units Finished for the Period - Finished Goods, Ending
Prime Cost
- Direct Materials + Direct Labour
WEEK 2
Cost Behavior:
- Can be:
- Fixed
- Discretionary Fixed Costs:
- Can be changed relatively easily at management discretion (advertising)
- Comitted Fixed Costs
- Cannot be easily changed (leasing of machinery/warehouse space) - mixed
- Salaries that have commissions (fixed yearly + commission) - Variable
- Costs that change based on output - Cost Driver: - cause costs to change
Step Costs
- Displays a constant cost for a certain interval which increases to a new cost level after
High-Low Method
- Variable Rate = (High Point Cost - Low Point Cost) / (High Point Output - Low Point Output)
- Fixed Cost
= Total Cost at High (or) Low Point - (Variable Rate * Output at High/Low pt) - Total Cost:
= Fixed Cost + (Variable Rate * Specified output)
Scattergraph Method
- Draw a line of best fit to the data points on the graph - Intercept is the fixed cost
- Use the high-low method to determine the variable rate
Method of Least Squares
- Measure distance from points to line - Square the differences
- Add up squared differences
WEEK 3
Cost-Volume-Profit Analysis
- Number of units that must be sold to break-even
- Impact of reduction of fixed costs on the break-even point - Impact on the increase in profit
Contribution Margin:
= Sales - Variable Costs - Variable Cost Ratio:
= total variable cost / sales
= unit variable cost / price
- Amount left over after variable costs to contribute to fixed costs - Provides insight into the profit potential of a company
Unit Contribution Margin
= Sales price per unit - Variable Cost per Unit Contribution Margin Ratio:
= Contribution Margin / Sales
- Percent of each sales dollar available to cover fixed costs and provide income Change in Income from Operations:
Change in sales dollars x Contribution Margin Ratio Change in Income from operations
= Change in Sales units x Unit contribution margin Operating Income
= Sales - Total variable expenses - Total fixed expenses Operating Income
= (Price x Number of Units Sold) - (Variable cost per unit x Number of Units Sold) - Total fixed costs
Number of Units to Hit Target Income
= (Fixed Cost + Target Income) / (Price - Variable Cost per Unit) Degree of operating leverage (DOL)
= (Total Contribution Margin / Operating Income)
- A measure of the sensitivity of profit changes to changes
in sales volume
- It helps to measure the percentage change in profits resulting from a percentage change in sales.
Percentage Change in Profits
= DOL * Percentage Change in Profits
Break Even Point (BEP)
- The point at which income is zero
Break Even Units
- Amount of units required to have zero operating income
= Fixed cost / (Price - Unit Variable Cost) Break-even point in sales dollars
- Fixed cost / contribution margin ratio - Fixed Cost / 1 - Variable cost ratio
Margin of Safety
= Sales - Break-even sales
= Sales units - Break-even units
WEEK 4
Job Order
- Produce a wide varety of services or products that are distinct - Cost accumulated by job
- Unit cost: total job costs / unit produced for that job
Process Costing
- Produce identical products or services - Cost accumulated by process or department
- Unit cost: process cost for the period / units produced in the period
Normal Costing/Estimating Overhead
1. Calculate predetermined overhead rate
Overhead rate = estimated annual overhead / estimated annual activity level (direct labour cost) 2. Apply overhead to production
Applied Overhead = Predetermined overhead rate * actual activity level (Direct labour cost)
3. Reconcile applied overhead with actual overhead or allocate applied overhead to WIP and finished goods ending inventories
Actual Overhead - Applied Overhead = Under/:Over applied Overhead
Add underapplied overhead to COGS, Subtract Overapplied overhead to COGS
Job Order-Costing
1. Calculate Overhead Rate
2. Calculate Applied overhead per Job
= Direct Labour * Overhead Rate 3. Compute Ending Balances
WIP: Add the applied overhead for jobs that are not completed COGS: Add the applied overhead for jobs that are completed
WEEK 5 (CHAPTER 7)
Functional-Based Costing Systems
- Based on volume measures: Direct labour and machine hours - Two types:
- Plantwide rates - Departmental rates
Unit-Level Activities - activities performed each time a unit is produced
Non-Unit-Level Activities - Activities that are not performed each time a unit is produced
Activity-Based Costing (ABC)
Product Diversity:
- Products may consume overhead at different rates because of:
- Product costs will be distorted whenever unit-based overhead costs do not vary in direct proportion to non-unit based overhead consumed
- Product size
- Product complexity - Setup time
- Batch size
Calculating Activity-Based Unit Costs
1. Find the Deluxe to Normal ratio in terms of cost driving hours (consumption ratio) 2. Calculate activity rates (Activity cost/cost driving hours)
3. Multiple activity rates by hours to find unit cost Activity-Based Management (ABM)
- Used for cost reduction
Velocity - the number of units that can be produced in a certain time
WEEK 6 (CHP 9)
Production Budget (for the period):
Units to be Produced = Expected Unit Sales + Units in Ending Inventory - Units in Beginning Inventory - Take the sum of all Units to be Produced
Direct Materials Purchases Budget:
Direct materials to be purchased = Direct Materials needed for production + Desired direct materials in EI - Direct materials in BI
Overhead Budget:
- Shows the expected cost of all production costs other than direct materials and labour (utilities and janitorial services)
- Separated into fixed and variable costs (variable rate is calculated) Variable Costs: Variable Rate * Direct Labour hours needed for one unit
Fixed Costs: (Budgeted fixed overhead/Budgeted direct labour hours) * Labour hours needed to create one unit
Selling and Admin. Expenses Budget:
- Includes: Variable expenses, salaries average, utilities, depreciation, advertising for quarters Cash budget
○ Measures when cash inflows and outflows are likely to occur
○ Helps manager plan when cash needs to be borrowed when loans need to be repaid
REQUIRED Budgets:
sales, production, direct materials purchased, direct labour, overhead, selling/admin expenses, cash
WEEK 7 (CHP 10)
Managerial Performance - budgets set standards that are used to control and evaluate management; they identify revenues and costs in total that an organization should experience if plans are executed as expected
- compared with actual costs and actual revenues with corresponding budgeted amounts at the same level of activity
- Overall variance is computed and broken down to price and efficiency variance
Unit Standards: Quantity Standard * Price Standard
- Adopted to improve planning and control and facilitate product costing 2 Types of standards:
- Ideal standards - demand maximum efficiency
- Currently available standards - achieved under efficient operating conditions
Standard Hours = Unit Labour Standard * Actual Output (Part of Standard Quantity)
Total Budget Variance:
(don’t forget foil) Price Variance:= (AP - SP)*AQ OR
[Actual Quantity of Input at Actual Price (AQ*AP)] - [Actual Quantity of Input at Standard Price (AQ * SP)]
Usage Variance:
= (AQ - SQ)*SP OR
[Actual Quantity of Input at Standard Price (AQ * SP)] - [Standard Quantity of Input at Standard Price (SQ * SP)]
Total Variance
= (AQ * AP ) - (SQ * SP) OR
[Actual Quantity of Input at Actual Price (AQ*AP)] - [Standard Quantity of Input at Standard Price (SQ * SP)]
Favourable Variances - ACTUAL Price or Quantityis less than STANDARD Price or Quantity Unfavourable Variances - ACTUAL Price or Quantity is greater than STANDARD Price or Quantity This includes Materials Variances
When should we decide to investigate?
- Management determines the acceptable range of performance (standard deviation) - Variance is within the range, they are assumed to be caused by random factors
- Variance is outside the range, the deviation is most likely to be caused by controllable factors (in a noncontrollable case: managers revise the standard)
Breaking Down Total Variance:
Total Material Variance can be broken down into:
1.
a. Materials Price Variance (MPV)
= (AP - SP) * AQ
Difference between : what should have been paid for raw materials and the actual price - Variance belongs to purchasing agent
- Factors:
- Quality,
- Quantity discounts,
- Distance of the source from the plant b. Labour Rate Variance (LRV)
= (AR - SR) * AH
Difference between : what should have been paid to direct labourers and the actual price - Variance determined by external forces; labour markets, union contracts
- Factors:
- more skilled workers used for less skilled tasks, - unexpected overtime
2. Materials Usage Variance (MUV) = (AQ - SQ) * SP
Difference between : the direct materials actually used vs direct materials used for the actual output
- Factors:
- Scrap - Waste - rework
a. Labour Efficiency Variance (LEV)
= (AH - SH) * SR
Actual Hours vs hours that should have been used difference
- Production managers responsible for use of direct labour (once the cause is discovered responsibility may be assigned elsewhere)
Two Methods:
1. Formula Approach Using the direct formulas
- MPV, LRV is the price variance - MUV, LEV is the usage variance 2. Columnar Approach
Using the Total Budget Variance approach (above)
WEEK 8 (CHP 11)
PERFORMANCE REPORTS:
- Compare actual costs with budgeted costs for the same budgeted level of activity STATIC BUDGET:
It’s unfavourable for the static budget to be less than actual costs
- Compare actual costs with budgeted costs (will be different levels of activity - units produced )
FLEXIBLE BUDGET:
It’s favourable for the flexible variance to be greater than actual costs
- Compare actual costs with the actual levels of activity (aka units produced) (will be equal levels of activity)
Two types:
1. Before the fact
- Used to generate financial results for plausible scenarios 2. After the fact
- Used to compute what costs should have been for the actual level of activity
- Expected costs are then compared with the actual costs in order to assess performance
Varied Expenses Overhead:
Columnar Approach:
Formula Approach:
VOH Spending Variance: (AVOR - SVOR) * AH VOH Efficiency Variance: (AH - SH) * SVOR
Total Variable Overhead Variance: VOH Spending Variance + VOH Efficiency Variance
Total Fixed Overhead Variance:
* SHp = Actual Hours
** SHp * SFOR = Budgeted Fixed Overhead
*** SH * SFOR = Standard Fixed Rate at Standard Hours Formula Approach:
Fixed Overhead Spending Variance: AFOH - BFOH Fixed Overhead Efficiency Variance: (SHp - SH) * SFOR
Required Budgets:
sales, production, direct materials purchased, direct labour, overhead, selling/admin expenses, cash
WEEK 9 (CHP 13)
Short-Run Decisions - evaluate opportunity costs with an immediate or limited end in view
- Often small-scale actions that serve a larger purpose; producing instead of buying it from suppliers Relevant (or Differential/Incremental) Costs - consists of variable and fixed costs (considering
supply/demand)
Make or Buy Decision - Decision Process:
1. Identify feasible alternatives
2. IDentify which costs are relevant
3. Compare total relevant costs of manufacturing with cost of buying 4. Make a choice
Example:
Determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each.
1. What are the alternatives?
- Make the component in-house
- Purchase the component from an outside supplier
2. Relevant costs of internal production and external purchase - Producing in-house:
- Direct labour - Direct materials - Variable overhead
- Purchasing the component externally - Purchase price
3. Which alternative is more cost-effective and by how much?
- 47,500 - (Cost of goods sold) - Making the goods
4. Now assume that the fixed overhead includes $10,000 of avoidable cost (purchased externally). Which alternative is more cost-effective and by how much?
- Include the fixed costs in the calculations. Alternative is better
Special Orders
- Offering a product or service at a price that is different from its usual price- This can be attractive, especially when firm is operating below maximum productive capability - Order could be from a new geographical area
- Reject or accept this order?
- Calculate cost per unit
Keep-Or-Drop Decisions - pertains to segments, like a product line - Contribution margin
- Segment margin (if negative drop it)
Complementary Effects - merger between companies
- Requires managerial accountants to estimate relevant costs - Costs that would go away when two companies merged - Which costs would remain
- Calculate contribution margin, subtract admin/adv expenses to find the differences Further Processing of Joint Products
- Joint products
- Include both common precesses and costs up to split-off point
- Split-off point
- The point at which separate products become distinguishable - Common costs are not relevant to the decision making
- Compare contribution to income Product Mix Decisions
- Organizational mix has a significant impact on priftability - Maximize total profit
- Fixed cost will not change iwth mix - Maximize total contribution margins
- Limitations on resouces are called “constraints” (maximum amount of machine production, for example)
1. Calculate contribution margin per labour hour 2. Take the product with priority first (sell it first)
3. Left over hours can be calculated with the second product to find the optimal mix Cost-Based Pricing
- Most companies start with cost to determine rpice Price = Product cost + Markup
- Markup is percentage of cost (including costs not included in base cost and desired profitO - Advantage: ease of use
Target Costing
- Determining cost of a product or service based on the target price
- Marketing department determines what characteristics and price for a product are most acceptable to consumers
- Company’s engineers design and develop the product such that cost and profit can be covered by tha price
Desired profit = Profit Margin * Target Price Target Cst = Target Price - Desired Profit
