1. How does managerial accounting differ from financial accounting? Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. In financial accounting:
1) Reports to those outside the organization: Owners, Creditors, Tax authorities, Regulators.
2)Emphasizes financial consequences of past activities.
3) Must follow GAAP/IFRS.
Managerial accounting is concerned with providing information to managers for use within the organization. In managerial accounting:
1)Reports to managers inside the organization for: Planning, Controlling, Decision making.
2) Emphasizes decisions affecting the future, emphasizes timeliness
3) Need not follow GAAP/IFRS
2. Why do companies prepare budgets? A budget is a detailed plan for the future that is usually expressed in formal quantitative terms. The budget defines quantity, how many you intend to spend for your actions of replenishment of a campus.
3. What skills do managers need to succeed? Managers need to succeed strategic management skills, enterprise risk management skills, process management skills, measurement skills, and leadership skills.
Theme 2. Managerial Accounting and Cost Concepts
1. What are the three major elements of product costs in a manufacturing company. direct materials, direct labor, and manufacturing overhead.
2. Define the following: (a) direct materials - those materials that become an integral part of the finished product (b) indirect materials - materials which used in production alternatively.
(c) direct labor - Employees or workers who are directly involved in the production of goods or services (d) indirect labor - Employees or workers who do not directly produce goods or services and (e) manufacturing overhead - all manufacturing costs except direct materials and direct labor
3. Explain the difference between a product cost and a period cost. A product cost is any cost involved in purchasing or manufacturing goods. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.
4. Distinguish between (a) a variable cost - are costs that change in proportion to the production (b) a fixed cost - costs that are independent of production (c) a mixed cost - costs that include fixed and variable costs.
5. What effect does an increase in volume have on (a) unit fixed costs - Volume will effect unit fixed cost in that it decreases, (b) unit variable costs - Volume will effect unit variable cost in that it increases (c) total fixed costs - Total fixed cost in constant regardless of volume, (d) total variable costs - Total variable cost changes with volume
6. Define the following terms: (a) cost behavior - how a cost changes as the level of activity changes (b) relevant range - is the level of activity with minimum and maximum values.
7. What is meant by an activity base when dealing with variable costs? Activity base is a measure of whatever causes the incurrence of a variable cost. Activity base is a measure for variable cost. (Units produced, service calls, units sold, number of cups...)
8. Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear? The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range
9. Does the concept of the relevant range apply to fixed costs? Explain. Yes, as the level of activity change, the level of fixed costs need to change to support the operation
10. What is the major disadvantage of the high-low method? that it only utilize 2 data points, not enough to predict accurate result. It can misrepresent the true cost behavior during the normal season
11. Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?
a = fixed costs b = variable costs X-level of activity
12. What is the difference between a contribution format income statement and a traditional format income statement? contribution format is used as an internal planning and decision making. But traditional format are prepared primarly for external purpose
13. What is the contribution margin? The amount remaining from sales revenues after all variable expenses have been deducted
14. Define the following terms: differential cost - the difference in cost between two alternative courses of action, opportunity cost - the potential benefit that is given up when one alternative is selected over another sunk cost - cost that has already been incurred and that cannot be changed by any decision
15. Only variable costs can be differential costs. Do you agree? Explain. No they are not the same things. Differential costs are ones that differ between different alternatives. Differential costs are used interchangeably with the terms avoidable, incremental, and relevant costs. However, variable costs are simply ones that vary with different activity levels. They do not necessarily differ between alternatives.
Theme 3. Process costing
1. Under what conditions would it be appropriate to use a process costing system? used when a homogeneous product is produced on a continuous basis
2. In what ways are job-order and process costing similar?
1. same basic purposes: assign materials, labors, and overhead costs to products 2. same basic manufacturing accounts 3. costs flow through the accounts
3. Why is cost accumulation simpler in a process costing system than it is in a job-order costing system? because costs only need to be assigned to departments. Job-order costing system often keep track of the costs of hundreds/thousands of job.
4. What is meant by the term equivalent units of production when the weighted-average method is used? Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department's ending work in process inventory.
Theme 4. Variable Costing and Segment Reporting: Tools for Management
1. What is meant by a productís contribution margin ratio? How is this ratio useful in planning business operations? A product's CM Ratio shows how the contribution margin will be affected by a change in total sales. If the CM ratio is 40%, then for every dollar increase in sales, the contribution margin will increase by 40 cents ($1 Sales X CM Ratio of 40%). Net operating income will also increase by 40 cents, assuming fixed costs are not affected by change in sales. Thus, the CM ratio can be used to determine by what percentage sales need to increase to reach a specific target profit or contribution margin.
2. In all respects, Company A and Company B are identical except that Company Aís costs are mostly variable, whereas Company Bís costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits? Explain. Company B will realize greater profits, as fixed costs are generally not effected by an increase in sales volume. If costs are more variable-oriented, then there will be a lower contribution margin, resulting in lower net operating income.
3. What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis? The relative proportions in which a companyís products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
Constant sales mix assumption. The assumption is usually made in CVP analysis that the sales mix will not change. Under the constant sales mix assumption, the break-even level of sales dollars can be computed using the overall contribution margin (CM) ratio.
Overall CM ratio = Total contribution margin/ Total sales
4. Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income? if sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus, net operating income would decline. With a lower contribution margin ratio, the break-even point would be higher.
Theme 5. Cost-Volume-Profit Relationships
1. What is the basic difference between absorption costing and variable costing? absorption costing include all manufacturing costs. Variable costing include only variable costs.
2. Are selling and administrative expenses treated as product costs or as period costs under variable costing? (Fixed and variable) selling administrative expenses are treated as PERIOD costs for both variable and absorption costing
3. Explain how fixed manufacturing overhead costs are shifted from one period to another under absorption costing? They are included in product costs along with direct materials, direct labor, and variable manufacturing overhead.
4. What are the arguments in favor of treating fixed manufacturing overhead costs as product costs? Absorption costing advocates argue that: 1- absorption costing does a better job of MATCHING COSTS WITH REVENUES than variable costing 2-all manufacturing costs must be assigned to products to properly state the full cost of costing a product 3-managers, misled when they work with product cost information that fails to include the allocated share of fixed cost, make incorrect pricing decisions
5. What are the arguments in favor of treating fixed manufacturing overhead costs as period costs? Variable costing advocates argue that: 1- fixed manufacturing costs are not really the cost of any particular unit of product. These costs are incurred to have the capacity to make products during a particular period and should be charged against that period as period costs according to the marketing principle.
6. If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why? If production and sales are equal, net operating should be the same under absorption and variable costing. When production equals sales, inventories do not increase or decrease.
7. If the units produced exceed unit sales, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why? Absorption costing will usually show higher net operating income than variable costing. Because, when production increase under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to future periods (Less expenses are recorded). In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing.
8. Under absorption costing, how is it possible to increase net operating income without increasing sales? net operating income can be increased by increasing the level of production without any increase in sales. If production exceeds sales, units of product are added to inventory. And their reducing the current period's expenses and causing operating income to increase.
9. How does Lean Production reduce or eliminate the difference in reported net operating income between absorption costing and variable costing? differences in reported operating income between absorption and variable costing arise because of changing levels of inventory. In lean production, goods are produced strictly to customers' orders. With production geared to sales, inventories are largely (or entirely) eliminated. If inventories are completely eliminated, they are zero from one period to another and absorption costing and variable costing will report the same net operating income
10. What is a segment of an organization? Give several examples of segments. any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Ex: departments, operations, sales territories, divisions, and product lines.
11. What costs are assigned to a segment under the contribution approach? costs are assigned to a segment if and only if the costs are traceable to the segment.
12. Distinguish between a traceable cost and a common cost. Give several examples of each? Traceable cost of a segment is a cost that arises specifically because of the existence of that segment. If the segment were eliminated, the cost would disappear.(Examples- salary of the department's supervisor, and the costs of supplies used by the department.)A common cost is a cost that supports more than one segment. If one of the supported segments were eliminated, there would be no change in the common fixed cost. (Examples- salary of the general counsel of the entire company, the lease cost of the headquarters building, corporate image advertising)
13. Explain how the segment margin differs from the contribution margin. The contribution margin is the difference between sales revenue and variable expenses. The segment margin is the amount remaining after deducting traceable fixed expenses from the contribution margin. The contribution margin is useful as a planning tool for many decisions. The segment margin is useful in assessing the overall profitability of a segment.
Theme 6. Activity-Based Costing: A Tool to Aid Decision Making
1. In what fundamental ways does activity-based costing differ from traditional costing methods such as job-order costing? An activity-based costing system typically includes a number of activity cost pools, each of which has its unique measure of activity. These measures of activity often differ from the allocation bases used in traditional costing systems
2. Why is direct labor a poor base for allocating overhead in many companies? There is no direct link between the level of direct labor and overhead. Overhead cost driven by factors such as product diversity and complexity as well as by volume, for which direct labor has served as a convenient measure.
3. Why are top management support and cross-functional involvement crucial when attempting to implement an activity-based costing system? to motivate all employees to embrace the need to implement ABC. Use ABC data to help evaluation the employee and reward system. Cross-functional employees are important because they possess knowledge of operations that is needed to design an effective ABC system.
4. What types of costs should not be assigned to products in an activity-based costing system? Organization-sustaining costs, customer-level costs, and the costs of idle capacity
5. When activity-based costing system is used, why do manufacturing overhead costs often shift from high volume products to low volume products? In traditional cost systems, product-level costs are spread across all products. As a consequence, high-volume products are assigned the bulk of such costs. In an activity-based costing system, batch-level and product-level costs are assigned more appropriately. This results in shifting product-level costs back to the products that cause them and away from the high-volume products.
6. Why is the activity-based costing system unacceptable for external financial reports? unacceptable for external financial reports for two reasons. First, activity-based product costs exclude some manufacturing costs and include some nonmanufacturing costs. Second, the first-stage allocations are based on interviews rather than verifiable, objective data.
Theme 7. Profit Planning
1. What is budgetary control? is the process of managing items in a budget to make sure that expenses stay within expectations.
2. Why is the sales forecast the starting point in budgeting? because sales impacts/ drives virtually every aspect of a firm's activities.
3. How can budgeting assist a company in planning its workforce staffing levels? The direct labor budget can be used to forecast work force labor needs, and allowing the avoidance of erratic swings
4. Describe the flow of budget data in an organization. Who are the participants in the budgeting process and how do they participate? flow of budgeting is upward and downward. The initial flow should be from the bottom of the organization upward. All levels of an organization should participate in the budgeting process. Any issues should be resolved in discussions between the individuals who prepared the budgets and their managers.
Theme 8. Standard Costs and Variances
1. If the materials price variance is favorable but the materials quantity variance is unfavorable, what might this indicate?
2. Should standards be used to identify who to blame for problems?
3. What effect, if any, would you expect poor-quality materials to have on direct labor variances?
4. If variable manufacturing overhead is applied to production on the basis of direct labor hours and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or unfavorable, or could it be either? Explain.
5. Why can undue emphasis on labor efficiency variances lead to excess work in process inventories?
Theme 9. Financial Statement Analysis
1. What is the basic purpose for examining trends in a companyís financial ratios and other data? What other kinds of comparisons might an analyst make?
2. Would you expect a company in a rapidly growing technological industry to have a high or low dividend payout ratio?
3. What is meant by the dividend yield on a common stock investment?