Managerial Accounting (Accounting 2020 | Weber State)

Table of Contents

[[#Introduction]]
[[#Cost Concepts]]
[[#Job Order Costing]]
[[#Cost Volume Profit-Analysis (CVP)]]
[[#Activity Based Costing]]
[[#Budgeting]]
[[#Variance and Standards]]
[[#Short-Term Decision Making]]

Introduction

[[#Table of Contents]]

Accounting Overview

• Accounting: Recording, estimating, organizing, and summarizing financial information.
• Financial Accounting: Reporting to external parties (investors, lenders) using GAAP/IFRS. It is company-wide, precise, and verifiable.
• Managerial Accounting: Provides information to internal users for planning, controlling, and decision-making. It is not mandatory, uses segment reports, and relies on timely, credible judgments, assumptions, and estimates.

Key Functions

• Planning: Establishing goals and developing plans to achieve them.
  • Budget: A plan for the future expressed in quantitative terms.
• Controlling: Ensuring the plan is correctly executed by gathering, evaluating, and responding to feedback.
  • Performance Report: Compares budgeted data to actual data.
• Decision Making: Selecting a course of action from competing alternatives. It is the most fundamental managerial skill.

Types of Firms

• Retail: Reselling products.
• Service: Providing actions or services.
• Manufacturing: Transforming materials into finished products.

Managerial vs. Financial vs. Tax Accounting

Key Concepts

• Goal of a Firm: Maximize wealth by maximizing economic profit.$$\text{Economic Profit}=\text{Revenue}-\text{Costs}$$
• Opportunity Cost: The benefit forgone by choosing one action over another.
• Sunk Cost: A cost that has already been incurred and cannot be recovered. It should not affect current decisions.

Ethics and Professional Standards (IMA)

• Competence: Maintain professional knowledge, perform duties in accordance with standards, provide accurate and supported information.
• Confidentiality: Do not disclose confidential information, avoid using information for unethical advantage.
• Integrity: Mitigate conflicts of interest, avoid prejudice, avoid discrediting the profession.
• Credibility: Communicate fairly and objectively, disclose all relevant information.

Enterprise Risk Management

• Preventative Controls: Stop harm before it occurs (e.g., authorization, segregation of duties).
• Detective Controls: Detect harm after it occurs (e.g., reconciliation, performance reviews).

Strategy

• Customer Intimacy: Customizing products to fit specific needs.
• Operational Excellence: Providing faster, more convenient, and affordable products.
• Product Leadership: Offering superior products.

Big Data

• 5 V's:
  • Variety: Different formats of data.
  • Volume: Size or amount of data.
  • Velocity: Rate at which data is received and acted upon.
  • Value: Resources used to analyze data.
  • Veracity: Accuracy of data.

Cost Concepts

[[#Table of Contents]]

Cost Classifications

• Cost Object: Anything for which cost data is desired (e.g., products, departments).
• Direct Cost: Easily traced to a cost object (e.g., direct materials, direct labor).
• Indirect Cost: Not easily traced to a cost object (e.g., manufacturing overhead).
  • Common Cost: A cost that supports multiple cost objects.

Manufacturing Costs

• Direct Materials (DM): Raw materials that become part of the finished product.
• Direct Labor (DL): Labor costs directly associated with production.
• Manufacturing Overhead (MOH): All other manufacturing costs (indirect materials, indirect labor, depreciation, utilities, etc.).
• Product Cost: DM + DL + MOH (inventoriable costs).
• Prime Cost: DM + DL.
• Conversion Cost: DL + MOH (costs to convert materials into finished products).

Period Costs

• Selling Costs: Costs incurred to secure customers (e.g., advertising, sales commissions).
• Administrative Costs: General management costs (e.g., executive salaries, office supplies).
• General Costs: Any other non-manufacturing costs.

Cost Behavior

• Variable Cost: Changes in proportion to changes in activity level.
• Fixed Cost: Remains constant regardless of activity level.
  • Committed Fixed Costs: Long-term, multiyear commitments (e.g., depreciation).
  • Discretionary Fixed Costs: Short-term, annual or less (e.g., advertising).
• Mixed Cost: Contains both variable and fixed elements.
• Relevant Range: The range of activity where cost behavior is linear.
• Irrelevant Range: The range where cost behavior is non-linear.

Decision-Making Concepts

• Differential Cost: Difference in cost between two alternatives.
• Differential Revenue: Difference in revenue between two alternatives.
• Incremental Cost: Additional cost incurred by producing one more unit.
• Opportunity Cost: Potential benefit given up when one alternative is chosen over another.
• Sunk Cost: Cost that has already been incurred and cannot be recovered.

Income Statement Formats

Traditional Income Statement

Contribution Income Statement

• Contribution Margin: The amount remaining from sales after covering all variable expenses. It contributes toward covering fixed costs and generating profit.

Cost Estimation

• High-Low Method: Used to estimate fixed and variable costs.$$\text{Variable Cost per Unit}=\frac{\mathrm{\Delta }Y}{\mathrm{\Delta }X}$$$$\text{Fixed Cost}=\text{Total Cost}-(\text{Variable Cost per Unit}\times \text{Activity Level})$$
• Total Cost Equation:$$\text{Total Cost}=\text{Fixed Cost}+(\text{Variable Cost per Unit}\times \text{Activity Level})$$

Manufacturing Cost Flows

• Raw Materials (RM): Warehouse inventory.
• Work in Process (WIP): Factory inventory where products are being manufactured.
  • Direct materials are transferred from RM to WIP.
  • Direct labor and MOH are added to WIP.
  • Cost of Goods Manufactured (COGM): Cost of completed goods transferred from WIP to Finished Goods.
• Finished Goods (FG): Inventory of completed products ready for sale.
• Cost of Goods Sold (COGS): Cost of goods sold to customers.

T-Accounts

• Key Equation:$$\text{Beginning Balance}+\text{Debits}-\text{Credits}=\text{Ending Balance}$$
• Key Accounts:
  • Cash
  • Raw Materials (RM)
  • Work in Process (WIP)
  • Finished Goods (FG)
  • Cost of Goods Sold (COGS)
  • MOH Reconciliation

Estimating Manufacturing Overhead (MOH)

• Predetermined Overhead Rate:$$\text{Rate}=\frac{\text{Budgeted MOH Cost}}{\text{Budgeted Cost Driver}}$$
• Applied MOH:$$\text{Applied MOH}=\text{Rate}\times \text{Actual Cost Driver}$$
• Actual MOH: The real MOH cost incurred during the period.
• Underapplied MOH: When actual MOH exceeds applied MOH.
• Overapplied MOH: When applied MOH exceeds actual MOH.
• Move to COGS:
  • Overapplied: Dr MOH, Cr COGS
  • Underapplied: Cr MOH, Dr COGS
• Prorate method:
  • Use ending balances
    • divide each by total for percent
      • Times percent by reconciliation
  • To WIP, FG, and COGS
  • Use Ending Balance pre-adjustment
  • Overapplied: Dr MOH, Cr WIP, FG, COGS proportionally
  • Underapplied: Cr MOH, Dr WIP, FG, COGS proportionally

Job Order Costing

[[#Table of Contents]]

Overview

• Used by manufacturing firms that produce custom or unique products for specific customers.
• Costs are accumulated by job.
• Suitable for firms producing a few goods for a few customers.

Cost Accumulation

• Direct Materials (DM): Traced directly to each job.
• Direct Labor (DL): Calculated as:$$\text{DL Cost}=\text{Labor Rate}\times \text{Time Worked}$$
• Manufacturing Overhead (MOH): Applied to jobs using a predetermined overhead rate based on a cost driver (e.g., machine hours, labor hours).

Departmental Overhead Rates

• Overhead costs can be broken down by departments.
• Each department may have its own cost driver and predetermined overhead rate.
• Total applied MOH is the sum of applied MOH from all departments.

Economies of Scale

• Decreasing average total cost as production volume increases.
• Contribution Margin per Unit:

Cost Volume Profit-Analysis (CVP)

[[#Table of Contents]]
What if?
Goal: Maximize Economic Profit $Profits=Revenues-Costs$

• $Costs=\text{Fixed Cost}+(\text{Variable Cost}\times Driver)$
• $Revenue=Price\times \text{Units Sold}$

$$ \text{Contribution Margin per Unit} = \text{Price} - \text{Variable Cost per Unit} $$

$$Profit = (P \times Units) - Fixed + (Variable \times Units)$$

$$Profit = Units \times (P - VC) - FC$$

• Use to find break even point $\text{Break Even Units}=FC/CM$

$$\text{Contribution Margin Ratio} = \frac{P-VC}{P}$$

• $CMR=(Rev-TVC)/Rev$
• The amount that goes toward fixed cost
• $1-CMR$ = Amount that goes toward variable cost

$$Profit = (Rev \times CMR) - FC $$

Margin of Safety

$$ \text{Safety Margin} = \text{Revenue

} - \text{Break Even Revenue}$$

$\text{Percent Safety Margin}=\frac{\text{Safety Margin}}{\text{Revenue}}$

Operating Leverage

$$\text{Operating Leverage} = \frac{\text{Total Contribution Margin}}{Net Income} $$

$OL=\frac{Rev-VC}{Rev-VC-FC}$

• $NI\times OL=TCM$
• High: lots of fixed costs
• Specific to time period

Activity Based Costing

[[#Table of Contents]]

When?

• Lots of product diversity
• Costs are not unit-level
• Complex manufacturing process (high overhead cost)
• Low data processing cost (collecting and using)
• Some products have a higher margin
• Actions do not seem to align with competitors
• Line managers no not believe costs
• Complex products are very profitable but not priced at a premium

When the benefits outweigh the costs

• Costs:
  • More complex calculation
  • More complex data collection
  • Change of culture
• Benefits
  • More accurate costing
  • Better ability to properly set prices - especially when costs are large

Cost Pool: Uses it's own cost driver and rate
Can be used for only MOH or applied to SG&A

• What are they using it for?

Guide to Activity Based Costing

1. Define Activities and Identify cost driver (drivers are unique)
2. Assign budgeted costs to cost pool and calculate budgeted cost driver
3. Calculate budgeted rate
4. Assign cost (applied ABC)

$$ \text{Activity Rate} = \frac{\text{Budgeted Cost}}{\text{Budgeted Driver}}$$

How do costs vary depending on cost drivers?

• Units
• Hours
• Customers
• Batches
• Products

First stage allocation

• Assign all costs to different pools (Budgeted Cost)
  • Does not need all product costs
• Assign an Activity Measure (Budgeted driver)
  • Correlated with cost
  • Easy to measure accurately

Budgeting

Planning Budget

• $\text{Planned Units}\times \text{Standard}$
  Flexible Budget
• $\text{Actual Units}\times \text{Standard}$
• Reworking the planning budget to the actual level of sales
• Budgets may not be the same
• Actual Units $\times$ Standard Costs and Usages
  Actual Budget
• Actual Units $\times$ Actual Costs and Usages

Plan

• Developing goals and preparing budgets to achieve those goals
• Make goals
• Plan how to meet goals
• How to allocate scare resources
• Foresee problems
  Control
• Gathering feedback to ensure that the plan is being properly executed or modified as circumstances change
• Coordinate across divisions
• Create evaluation benchmarks

Perpetual budget: Creating a budget that rolls forward as it's completed

How

Top-Down

• Top managers set budgets - Big picture
• Advantages
  • Sets expectations
  • Can push lower management to improve
  • Often improves coordination
• Disadvantages
  • May not get "buy-in"
    Bottom-Up (Participative)
• Lower managers set budgets, then all are compiled
• Advantages
  • Buy-in
  • More Accurate
• Disadvantages
  • "Slack" (easy goals)

Cost Function:

$Cost=(Variable\times Units)+Fixed$

Avoid

• Too Easy
• Too Hard
• Conflicting Goals

Production Budget

• $\text{Production Budget}=\text{Units to sell}+\text{Needed for Next month}-\text{From last month}$
  • $Need-Have$
• Goal: How many units to make
• Selling
• Ending FG
• (Beg FG)
  DM (Material Purchase)
• Using
• Ending RM
• (Beg RM)
  DL
• Using
• Overtime
  MOH
• Based on cost driver

Cash Budget

• Beginning Cash
• +Cash In
• Cash Available
• (Dispersements)
• Net Cash
• +Loan
• Ending Cash

Income Statement: Units to sell (not to make)

• Cash flows are what's made

Variance and Standards

[[#Table of Contents]]

Budgets as a control

• Beyond planning, budgets are used to verify that goals are met
• Compare results to plan
• Explain why they differ to make better future plans

Variances

Documentation of differences between budgets and results

• Always a positive number (labeled as Favorable - F, or Unfavorable - U)

Activity Variance: Difference in sales output

• Planning - Flexible
• Cross out Actual
• Memorize: Activity ignores Actual
  Spending Variance: Difference in cost or usage
• Flexible - Actual
• Cross out Planning
• Memorize: sPending ignores Planning

Favorable: Lower cost (or cost driver) or higher revenue
Unfavorable: Higher cost (or cost driver) or lower revenue

Standards

• What should go into making a product
• Standard Usage: Unit Quantity of material, labor, machine hours, etc.
  • ? / Unit
  • Production
• Standard Cost: Cost of one unit of what is being used (1 pound, 1 hour, etc.)
  • $ / Unit
  • Purchasing
    Standard Usage $\times$ Standard Cost = $ / Unit

Ideal Standards (perfect)

• Pushes managers to improve
• Standards will likely not be met
  Normal Standards (average)
• Attainable
• May not lead to fast improvements

All standards come from past data

Efficiency and Price Variance

Efficiency Variance = (Actual Usage - Flexible Usage) $\times$ Standard Price

• Standards come from planning budget
  Price Variance = (Standard Price - Actual Price) $\times$ Actual Purchases
• Price per unit
• Purchases will not always equal usage
  Efficiency Variance + Price Variance = Total (DM, DL, etc.) Variance
  $\mathrm{\Sigma }$ Total ( ) Variance = Spending Variance

Standard Quantity

$$Units \times \text{Quantity per Unit} $$

Standard Cost

$$\text{Standard Quantity} \times \text{Standard price} $$

Spending Variance

$$\text{Actual Cost} - \text{Standard Cost} $$

• Favorable if Standard > Actual
• Also called cost variance

Cost Variance

$$(\text{Actual Price} - \text{Standard price}) \times \text{Actual Quantity} $$

• Favorable if Standard > Actual

Efficiency Variance

$$\text{Actual Quantity} - \text{Standard Quantity} $$

• Favorable if Standard > Actual
• Also called Material Quantity Variance

Chapter 7 - Activity Based Costing

[[#Activity Based Costing]]

ABC Costing

• When to use ABC vs Plant-Wide rates

Calculate Activity Rates

• ABC
• Traditional
• First Stage Allocation (cost / driver)
  • Getting the $ into the pool
• Second Stage Allocation (jobs / product)

Rate = Cost / Driver
ABC Rate = What changes / The thing that changes it

Chapter 8 - Budgeting

[[#Budgeting]]

What is the goal of the budget?

Why Budget

• Planning and Control
  How
• Top Down
• Participative Budgeting
• Pros and Cons

Production Budgets

• Units to Manufacture
• DM to Purchase
• DL to Purchase
• Variable MOH Expected Expense

Flow of Budgets

• Sales Forecast to Revenue Budget
• Revenue to Purchases Budget (or Production Budget)
• Cash Budget

Planning Budget (Income Statement)

Chapter 9 - Flexible Budgets

Making a Flexible Budget

• Actual $\times$ Standards

Creating Standards

• Ideal vs. Practical (Ch. 10)
• Standards may use cost functions (TC = FC + VC * Activity Measure)

Activity Variance

• Planning vs Flexible

Spending Variance (Revenue)

• Actual and Flexible

Chapter 10 - Standards

Spending Variances

Price and Efficiency (Volume) Variances

• Direct Labor, Direct Materials, Var. MOH
• Remember inventory issues for DM
• Know how to calculate and interpret variances

Workout: Forward Multiple Choice: Backward

Is the spending variance due to price or quantity

• Line by line

Formulas

Short-Term Decision Making

[[#Table of Contents]]

Forecasting is an Art.
Mechanics of Decisions is a Science (focus of chapter).

Good Decisions

1. Identify Options
2. Forecast Consequences
3. Make Profit Maximizing Choice
4. Watch out for Constrained Resources

Everything Method

1. Identify All Costs and Benefits to each option
2. "Pro-forma" (budgeted) income statements
3. Choose the biggest Income (lowest cost)

• Pro: Already have income statement
• Con: Includes less relevant data

**Relevant Cost and Benefit Method

(Method used in class)

1. Identify Options.
2. Dismiss Irrelevant costs and benefits.
   • Good Idea to keep variable costs to give an accurate Contribution Margin
3. Identify relevant (differential) costs and benefits of each option.
4. Pick profit-maximizing option.
5. Identify net benefit.

• Pro: Cannot always get projected income statement, Including irrelevant costs may distract.
• Cons: May not give the full picture, even if the decision is the same.
  • Better to include irrelevant info than disregard relevant info.

Relevant: a result of choosing an option

• Best to examine what changes
• Opportunity cost is relevant

Irrelevant: Anything that stays the same with all options

• Sunk costs is generally irrelevant
• Fixed costs may be irrelevant

Capital Budgeting

Tax savings due to depreciation

• In Class: Straight Line Depreciation and Single Tax Rate
• In reality: MACRS (accelerated) depreciation and Graduated tax rates (incremental tax brackets)

Profitability Index

Financial Statement Analysis

1. Compare data within a company over time
2. Compare data across companies

Garbage In, Garbage Out

Ratios

• Valuable, but often don't tell the entire story

Analysis

Vertical Analysis (Apples to Apples)

Change everything to percentages

• Balance Sheet = % of Assets, Liabilities, Equity
• Income Statement = % of Revenues

Horizontal Analysis (Timeline)

Look at the company though time
Change everything to $\mathrm{\Delta }$%