Revision for Final Exam
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Managerial Accounting
Revision for Final Exam
Part 01 - Chapter 2
Slide 2
Comparison of Financial and Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
Slide 3
The Product
Direct
Materials
Direct
Labor
Manufacturing
Overhead
For financial reporting: Manufacturing
Costs vs Nonmanufacturing Costs
Manufacturing Costs
Slide 4
For financial reporting: Manufacturing
Costs vs Nonmanufacturing Costs
Selling
Costs
Costs necessary to
secure the order and
deliver the product.
Administrative
Costs
All executive,
organizational, and
clerical costs.
Nonmanufacturing
Costs
Slide 5
For financial reporting: Product Costs vs
Period Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs include all
selling costs and
administrative costs.
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement
Slide 6
Prime Cost vs Conversion Cost
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
Manufacturing costs are often
classified as follows:
Slide 7
Basic Equation for Inventory Accounts
Beginning
balance
Additions
to inventory + = Ending
balance
Withdrawals
from
inventory +
Slide 8
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Product Cost Flows
Slide 9
Manufacturing Cost Flows
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Period Costs Selling and
Administrative
Manufacturing
Overhead
Work in
Process
Direct Labor
Balance Sheet
Costs Inventories
Income
Statement
Expenses Material Purchases Raw Materials
Slide 10
For Predicting Cost Behavior: Variable
Cost vs Fixed Cost
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Slide 11
For Decision Making: Differential Cost,
Opportunity Cost and Sunk Cost
Differential cost: differ among
alternatives.
Opportunity cost: potential benefit
given up when selecting one
alternative over another.
Sunk cost: already incurred and
cannot be changed now or in the
future.
Slide 12
End of Part 01 - Chap.2
Job-Order Costing
Part 02 - Chapter 3
Slide 14
Types of Product Costing Systems
Process
Costing
Job-order
Costing
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
Slide 15
Types of Product Costing Systems
Process
Costing
Job-order
Costing
Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Slide 16
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process.
Common allocation base: direct labor hours, direct
labor dollars, or machine hours.
We use an allocation base because:
1. Impossible or difficult to trace MOH to particular jobs.
2. MOH consists of many items like the grease or production
manager’s salary.
3. Many types of MOH are fixed even though output fluctuates during
the period.
Slide 17
Using the Predetermined OverHead Rate (POHR):
Manufacturing Overhead Application
Estimated total MOH for the coming period
Estimated total units in the allocation base
POHR =
Applied Overhead = POHR × Actual DLHs
Slide 18
Problems of MOH Application
The difference between applied MOH and actual
MOH: Underapplied or Overapplied overhead.
Underapplied OH
Applied MOH < Actual MOH
Overapplied OH
Applied MOH > Actual MOH
Slide 19
Disposition of
Under- or Overapplied Overhead
Mfg. Overhead
Actual MOH
$650,000
$30,000 overapplied
Cost of Goods Sold
Unadjusted
Balance
Adjusted
Balance
$30,000
$30,000
Applied MOH
$680,000
Slide 20
Overapplied and Underapplied MOH - Summary
If MOH is ... Close to Cost
of Goods Sold
UNDERAPPLIED INCREASE
Applied MOH < Actual MOH Cost of Goods Sold
OVERAPPLIED DECREASE
Applied MOH > Actual MOH Cost of Goods Sold
Slide 21
End of Part 02 - Chap.3
Process Costing
Part 03 - Chapter 4
Slide 23
Equivalent Units of Production
Equivalent units are the product of the number of partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory.
Slide 24
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one complete product.
Eg: 10,000 units 70% complete
are equivalent to 7,000 complete units.
+ = 1
Slide 25
Calculating Equivalent Units
Using the Weighted-Average Method
Slide 26
Weighted-Average – An Example
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%
Slide 27
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Weighted-Average – An Example
Slide 28
Compute and Apply Costs
Cost per
equivalent
unit =
Cost of beginning
Work in Process
Inventory Cost added during
the period
Equivalent units of production
+
Slide 29
Beginning Work in Process Inventory: 400 units Materials: 40% complete $ 6,119 Conversion: 20% complete $ 3,920
Production started during June 6,000 units Production completed during June 5,400 units Costs added to production in June Materials cost $ 118,621 Conversion cost $ 81,130 Ending Work in Process Inventory: 900 units Materials: 60% complete Conversion: 30% complete
Compute and Apply Costs
Slide 30
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Compute and Apply Costs
Here is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
Slide 31
Computing the Cost of Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Slide 32
End of Part 03 - Chap.4
Cost-Volume-Profit Relationships
Part 04 - Chapter 6
Slide 34
Basics of Cost-Volume-Profit Analysis
CM is used first to cover fixed expenses. Any
remaining CM contributes to net operating income.
Sales (500 bicycles) 250,000$
Less: Variable expenses 150,000
Contribution margin 100,000
Less: Fixed expenses 80,000
Net operating income 20,000$
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Slide 35
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
0 100 200 300 400 500 600
Sales
Total expenses
Fixed expenses
Preparing the CVP Graph
Break-even point
(400 units or $200,000 in sales)
Units Loss Area
Profit Area
Slide 36
Unit CM vs CM Ratio
Unit CM = SP per unit – VE per unit
CM per unit
SP per unit CM Ratio =
Profit = Unit CM × Q – Fixed expenses
Profit = CM ratio × Sales – Fixed expenses
Slide 37
Target Profit Analysis
Target profit + Fixed expenses
CM per unit =
Unit sales to attain
the target profit
Target profit + Fixed expenses
CM ratio =
Dollar sales to attain
the target profit
Slide 38
Break-even sales
Fixed expenses
CM ratio =
Dollar sales to
break even
Fixed expenses
CM per unit =
Unit sales to
break even
Slide 39
Margin of safety vs Degree of Operating
Leverage
Margin of safety = Total sales - Break-even sales
Contribution margin
Net operating income
Degree of
operating leverage =
Slide 40
Cost Structure and Profit Stability
There are advantages and disadvantages to
high fixed cost and low fixed cost structures.
An advantage of a high fixed
cost structure is that income
will be higher in good years. A disadvantage of a high fixed
cost structure is that income
will be lower in bad years.
Companies with low fixed cost structures enjoy greater
stability in income across good and bad years.
Slide 41
Key Assumptions of CVP Analysis
Selling price is constant.
Costs are linear and can be accurately divided
into variable and fixed elements.
In multiproduct companies, the sales mix is
constant.
In manufacturing companies, inventories do not
change (units produced = units sold).
Slide 42
Exercises for Chapter 6
6 - 5
6 - 12
Slide 43
End of Part 04 - Chapter 6
Variable Costing
Part 05 - Chapter 7
Slide 45
Overview of Absorption and Variable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Variable
Costing
Absorption
Costing
Product
Costs
Period
Costs
Product
Costs
Period
Costs
Slide 46
Summary of Key Insights
Slide 47
Advantages of Variable Costing and the Contribution Approach
Advantages
Management finds it more useful.
Consistent with CVP analysis.
Net operating income is closer to
net cash flow.
Profit is not affected by changes in inventories.
Consistent with standard costs and flexible budgeting.
Impact of fixed costs on profits emphasized.
Easier to estimate profitability of products and segments.
Slide 48
Major criticism of Absorption Costing
Profits will depend not only on sales,
but on changes in inventories.
By increasing production and building up inventory,
profits increased without any increase in sales
or reduction in costs
Slide 49
Exercises for Chapter 7
7 - 2
7 - 5
Slide 50
End of Part 05 - Chap. 7
Profit Planning
Part 06 - Chapter 9
Slide 52
The Master Budget: An Overview
Production budget
Selling and
administrative
budget
Direct materials
budget
Manufacturing
overhead budget Direct labor
budget
Cash Budget
Sales budget
Ending inventory
budget
Budgeted
balance sheet
Budgeted
income
statement
Slide 53
Manufacturing Overhead Budget
Depreciation is a noncash charge.
Slide 54
Selling Administrative Expense Budget
Slide 55
The Cash Budget
Slide 56
Exercises for Chapter 9
9 - 5
9 - 6
9 - 7
Slide 57
End of Part 06 - Chap. 9
Flexible Budgets
Part 07 - Chapter 10
Slide 59
Improve performance evaluation.
May be prepared for any activity
level in the relevant range.
Show costs that should have been
incurred at the actual level of
activity, enabling “apples to apples”
cost comparisons.
Help managers control costs.
Let’s look at Larry’s Lawn Service.
Characteristics of Flexible Budgets
Slide 60
Activity Variances
Planning
budget revenues
and expenses
Flexible
budget revenues
and expenses
The differences between
the budget amounts are
called activity variances.
Slide 61
Revenue and Spending Variances
Flexible budget revenue Actual revenue
The difference is a revenue variance.
Flexible budget cost Actual cost
The difference is a spending variance.
Slide 62
Exercises for Chapter 10
10 - 2
10 - 8
10 - 9
Slide 63
End of Part 07 - Chap. 10
Standard Costs
Part 08 - Chapter 11
Slide 65
Standard Costs
Standards are benchmarks for
measuring performance.
Two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonald’s, hospitals,
construction and manufacturing companies.
Slide 66
Standard Costs
Direct Material
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Type of Product Cost
Am
ou
nt
Direct Labor
Manufacturing Overhead
Standard
Slide 67
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between
actual price and
standard price
Quantity Variance
Difference between
actual quantity and
standard quantity
Slide 68
Variance Analysis
Materials price variance
Labor rate variance
VOH rate variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
A General Model for Variance Analysis
Price Variance Quantity Variance
Slide 69
A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Slide 70
Responsibility for Labor Variances
Production Manager
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
Slide 71
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per direct labor hour
Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910
to make 1,000 Zippies.
Zippy
Quick Check
Slide 72
Hanson’s labor rate variance (LRV) for the
week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Quick Check Zippy
Slide 73
Hanson’s labor efficiency variance (LEV)
for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
Quick Check Zippy
Slide 74
Learning Objective 5
Compute delivery cycle time,
throughput time, and
manufacturing cycle
efficiency (MCE).
Slide 75
Process time is the only value-added time.
Delivery Performance Measures
Wait Time Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
Slide 76
Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time =
Wait Time Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
Delivery Performance Measures
Slide 77
Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Slide 78
Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
Slide 79
Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
Slide 80
End of Part 08 - Chap. 11
Segment Reporting
Part 09 - Chapter 12
Slide 82
Cost, Profit, and Investments Centers
Responsibility
Center
Cost
Center
Profit
Center
Investment
Center
Cost, profit,
and investment
centers are all
known as
responsibility
centers.
Slide 83
Omission of Costs
Costs assigned to a segment should include all
costs attributable to that segment from the
company’s entire value chain.
Product Customer
R&D Design Manufacturing Marketing Distribution Service
Business Functions
Making Up The
Value Chain
Slide 84
Return on Investment (ROI) Formula
ROI = Net operating income
Average operating assets
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
Income before interest
and taxes (EBIT)
Slide 85
Net Book Value vs. Gross Cost
Most companies use the net book value of
depreciable assets to calculate average
operating assets.
Acquisition cost
Less: Accumulated depreciation
Net book value
Slide 86
Understanding ROI
ROI = Net operating income
Average operating assets
Margin = Net operating income
Sales
Turnover = Sales
Average operating assets
ROI = Margin Turnover
Slide 87
Increasing ROI
There are three ways to increase ROI . . .
Increase
Sales
Reduce
Expenses Reduce
Assets
Slide 88
Increasing ROI – An Example
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
ROI = Margin Turnover
Net operating income
Sales
Sales
Average operating assets × ROI =
What is Regal Company’s ROI?
Slide 89
Increasing ROI – An Example
$30,000
$500,000 ×
$500,000
$200,000 ROI =
6% 2.5 = 15% ROI =
ROI = Margin Turnover
Net operating income
Sales
Sales
Average operating assets × ROI =
Slide 90
Investing in Operating Assets to Increase
Sales
Assume that Regal's manager invests in a $30,000 piece of equipment that increases sales by
$35,000, while increasing operating expenses by $15,000.
Let’s calculate the new ROI.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
Slide 91
Investing in Operating Assets to Increase
Sales
$50,000
$535,000 ×
$535,000
$230,000 ROI =
9.35% 2.33 = 21.8% ROI =
ROI increased from 15% to 21.8%.
ROI = Margin Turnover
Net operating income
Sales
Sales
Average operating assets × ROI =
Slide 92
Criticisms of ROI
In the absence of the balanced
scorecard, management may
not know how to increase ROI.
Managers often inherit many
committed costs over which
they have no control.
Managers evaluated on ROI
may reject profitable
investment opportunities.
Slide 93
End of Part 09 - Chap. 12
Relevant Costs for Decision Making
Part 10 - Chapter 14
Slide 95
Cost Concepts for Decision Making
A relevant cost is a cost that differs
between alternatives.
Slide 96
Identifying Relevant Costs
An avoidable cost is a cost that can be eliminated,
in whole or in part, by choosing one alternative
over another. Avoidable costs are relevant costs.
Unavoidable costs are irrelevant costs.
Two broad categories of costs are never relevant
in any decision. They include:
Sunk costs.
Future costs that do not differ between the
alternatives.
Slide 97
Identifying relevant costs
The Tolar Company has 400 obsolete desk
calculators that are carried in inventory at a total cost
of $26,800. If these calculators are upgraded at a
total cost of $10,000, they can be sold for a total of
$30,000. As an alternative, the calculators can be
sold in their present condition for $11,200.
Slide 98
Identifying relevant costs
1. The sunk cost in this situation is:
A. $10,000
B. $26,800
C. $11,200
D. $0
Slide 99
Identifying relevant costs
2. What is the net advantage or disadvantage to the
company from upgrading the calculators?
A. $8,800 advantage
B. $18,000 disadvantage
C. $20,000 advantage
D. $8,000 disadvantage
Slide 100
Identifying relevant costs
3. Assume that Tolar decides to upgrade the
calculators. At what selling price per unit would the
company be as well off as if it just sold the calculators
in their present condition?
A. $8
B. $30
C. $53
D. $67
Slide 101
Key Terms and Concepts
When a limited resource of
some type restricts the
company’s ability to satisfy
demand, the company is
said to have a constraint.
The machine or
process that is
limiting overall output
is called the
bottleneck – it is the
constraint.
Slide 102
Utilization of a Constrained Resource
A company should not necessarily promote those
products that have the highest Unit CM.
Rather, total CM will be maximized by promoting
those products or accepting those orders that
provide the highest CM in relation to the
constrained resource.
Slide 103
Utilization of a Constrained Resource: An
Example
Ensign Company produces two products and
selected data are shown below:
Product
1 2
Selling price per unit $ 60 $ 50
Less variable expenses per unit 36 35
Contribution margin per unit 24$ 15$
Current demand per week (units) 2,000 2,200
Contribution margin ratio 40% 30%
Processing time required
on machine A1 per unit 1.00 min. 0.50 min.
Slide 104
Utilization of a Constrained Resource: An
Example
Machine A1 is the constrained resource and is being used at 100% of its capacity.
There is excess capacity on all other machines.
Machine A1 has a capacity of 2,400 minutes per week.
Should Ensign focus its efforts on Product 1 or Product 2?
Slide 105
Utilization of a Constrained Resource
Ensign can maximize its contribution margin
by first producing Product 2 to meet customer
demand and then using any remaining
capacity to produce Product 1. The
calculations would be performed as follows.
The key is the contribution margin per unit of the
constrained resource.
Product
1 2
Contribution margin per unit $ 24 $ 15
Time required to produce one unit ÷ 1.00 min. ÷ 0.50 min.
Contribution margin per minute 24$ 30$
Slide 106
Utilization of a Constrained Resource
Let’s see how this plan would work.
Alloting Our Constrained Resource (Machine A1)
Weekly demand for Product 2 2,200 units
Time required per unit × 0.50 min.
Total time required to make
Product 2 1,100 min.
Total time available 2,400 min.
Time used to make Product 2 1,100 min.
Time available for Product 1 1,300 min.
Time required per unit ÷ 1.00 min.Production of Product 1 1,300 units
Slide 107
Utilization of a Constrained Resource
According to the plan, we will produce 2,200
units of Product 2 and 1,300 of Product 1.
Our contribution margin looks like this.
Product 1 Product 2
Production and sales (units) 1,300 2,200
Contribution margin per unit 24$ 15$
Total contribution margin 31,200$ 33,000$
The total contribution margin for Ensign is $64,200.
Slide 108
Managing Constraints It is often possible for a manager to increase the capacity of a
bottleneck, which is called relaxing (or elevating) the constraint,
in numerous ways such as:
1. Working overtime on the bottleneck.
2. Subcontracting some of the processing that would be done
at the bottleneck.
3. Investing in additional machines at the bottleneck.
4. Shifting workers from non-bottleneck processes to the
bottleneck.
5. Focusing business process improvement efforts on the
bottleneck.
6. Reducing defective units processed through the bottleneck.
These methods and ideas are all consistent with the Theory
of Constraints.
Slide 109
Exercises for Chapter 13
13 - 5
13 - 12
Slide 110
End of Part 10 - Chap. 13
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