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SOS Session: BU247 Midterm
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SOS Session: BU247 Midterm



Intermediate Managerial Accounting Course:

Intermediate Managerial Accounting Course:
Midterm material covered in SOS sessions in the Fall of 2010



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SOS Session: BU247 Midterm SOS Session: BU247 Midterm Presentation Transcript

  • BU247 Managerial Accounting
    with Natasha Neumann-Causi and Mike Pegutter
  • Updated Presentation
    This presentation is up to date
    • Uses material from new textbook
    • Follows course outline
    • Contains examples from prior exams and from textbook questions
    • If I miss something, let me know and I will explain it now or in an email
  • General Study Tips
    Know the theory well, do not memorize calculations!
    Practice homework with time constraints
    If you get stuck on a question, leave it and come back later
    When in doubt, GUESS! Never leave a question blank
    Make sure you have answered everythingthe question asked for!!!
  • Exam Outline
    Multiple Choice Questions
    Smaller calculations
    Journal Entries
    True / False or Fill in the Blank
    Theories and Definitions
    Short Answers
    Big Calculations
    Writing out Steps to Calculations
  • Agenda
    PART I: Introduction and CVP Analysis
    • What is management accounting?
    • Cost behaviour
    • Cost-Volume-Profit Analysis
    PART II: Cost Behaviour
    • Variations in cost behaviours
    • Income Statement approaches
    PART III: Cost Allocation
    • Overhead Rate Calculation
    • Applying Overhead
    PART IV: System Design and Allocation
    • Job Order vs. Process
    • Service Departments
    PART V: ABC Costing
  • Managerial Accounting
    For management purposes only
    Cost allocations and calculations
    Budgeting and future planning
    Production decisions
    Product decisions
    Always keep in mind:
    Benefit versus cost tradeoff
    Will the systems aid management?
  • Framework of Cost Accounting
    Strategic Planning – focus on company objectives
    Factory location
    Mergers & acquisitions
    Management Control – focus on resource efficiency
    Budget analysis
    Variance analysis
    Operational Control – task efficiency
    Inventory control
    Cash management
  • Central Layout
    Management accounting involves:
    planning (alternative identification and budgeting)
    controlling (actions and evaluations of those actions)
    directing and motivating (smooth operations, conflict resolution, etc.)
  • Financial vs. Management
  • Decisions & Information
    Decision Process
    Accounting Information Types
    Identify the problem
    Understand the Key Success Factors of the company
    Identify alternative solutions
    Quantitative and qualitative analyses
    Evaluation solutions and chose one
    Implementation of the plan
    Problem Solving Information– used for long-range planning
    Attention Directing Information– used for controlling routine operations
    Scorekeeping Information– used by investors, tax collectors, etc.
  • Key Success Factors
    Critical for an organization’s success
    Example: excellent customer service for fast food companies
    Differ depending on the industry and the company
    Managed carefully to maintain or improve the success of a business
    Considered in decision-making processes and always at the forefront
  • Professional Ethics
    Competence: be able to recognize limitations, follow laws, provide accurate and timely information
    Confidentiality: do not use confidential information and do not give that information
    Integrity: be open about conflicts of interest, avoid actions that would jeopardize reputation
    Credibility: communicate,
    disclose problems and all
    relevant information that
    others need to know
  • Professional Ethics
    Resolution Conflict: follow official policies, or talk to supervisors
    confidentially should be maintained, consult legal professionals
    Corporate Governance: is the set of processes, customs, policies and laws which affect the way a company is directed, administrated or controlled
    should provide incentives for the pursuit of goals which benefit the stakeholders
  • Process Management
    Approaches to improving processes:
    Lean Production – minimize inventory and “pull” units through processes in response to customer orders
    Six Sigma – reduce defective products to near zero by using feedback and numerical data
    Define, Measure, Analyze, Improve, Control
    Computer Technology – refers to the growing popularity of E-commerce and enterprise systems
    Enterprise systems– software program that combines all data
    Risk Management – proactively seeking out potential sources of risk, preparing yourself, or prevent it
  • Cost Behaviour
    A cost driveris source of your total costs
    Example: the number of man hours clocked in a laboratory will make your total cost of R&D rise
    Variable costsare costs that change in direction relation to changes in cost drivers (per unit)
    Example: lab technicians are paid more depending on how many hours they work
    Fixed costsare not immediately affected by changes in the driver (total amounts)
    Examples: rent, insurance payments, taxes
  • Relevant Range
    Relevant rangeand Step Variable Costs are ranges where your per unit variable costs and your fixed costs will stay constant
    Outside of this range these costs will change
    As long as Brick Brewery is making between 30,000 and 75,000 cases of beer, it costs $3.00 a beer to produce and fixed costs are $1.5M a month.
  • Cost – Volume – Profit Analysis
    Total Sales
    Total Costs
    Breakeven Point
    Fixed Costs
  • Breakeven Analysis
    Calculating how many units need to be sold before you can start making some profits
    Equation Approach:
    Contribution Margin Method:
  • CVP Analysis Example
    A Playstation3 console is priced at $300 but costs about $250 each to make. Sony’s fixed costs for its gaming departments total about $17M a month and they manage to sell about 1M consoles a month. Calculate Sony’s breakeven point in dollars
    Step 1: Which formulas?
    We need to end up with a breakeven,
    point in dollars, which means we need to
    To calculate contribution margin as a %.
    Step 2: Contribution Margin %
    CM = $300 - $250 = $50/unit
    CM% = $50/$300 = 0.16667
    Step 3: BEP in Dollars
    $17M x 12 months = $204M/year fixed costs
    $204M/0.16667 = $1,123.976M
    Step 4: Concluding Sentence
    Sony will have to sell $1,123,976,000
    worth of PS3 in order to breakeven
  • Changes in Volume and Sales
    It helps to create simple income statements to help show what the contribution margin is and how it changes when multiple components are changing
    Also consider using this formula:
  • CM Changes Example
    Assume basketballs can be made at a variable cost of $5/unit and with fixed costs totalling $50,000 per month. Each basketball is sold for $15/each and current sales total 5,000 units per month. Consider the following:
    A) What is the profit impact if variable costs decrease by $2/unit, advertising costs are increased by $25,000 per month and therefore sales increase by 1,500 units?
    B) What price should be charged in order to achieve $75,000 in monthly profits (keeping everything else the same)?
    Condition B
    Required: $75,000 in Net Income
    $75,000 = (Price - $5)(5,000 units) – $50,000
    $125,000 = Price(5,000 units) - $25,000
    $150,000 = Price(5,000)
    Price = $30
  • Margin of Safety
    The excess of budgeted (or actual) sales over the break-even volume of sales
    Sports Illustrated sells 3.5 million magazines a month at an average price of $5. The cost to produce one magazine is approximately $0.50. Fixed expenses per month are $15M. What is their margin of safety?
    Step 1: Breakeven Unit Sales
    Breakeven Point in Units = (Fixed Costs)/(CM per unit)
    Breakeven Point in Units = $15M/(5-0.5) = 3,333,333.33
    Round up to 3,333,334 units
    Step 2: Margin of Safety
    Margin of Safety = Total Sales – Breakeven Sales
    MOS = 3.5M – 3.33M
    Margin of Safety is 166,667 units
  • CVP with Product Mixes
    Companies which sell more than one product involves a ratio called a ‘sales mix’
    Management will try playing around with ratios like these to see which combination is more profitable
    In situations with sales mixes the calculations for CM will change to ‘average contribution per unit’:
  • Multiproduct Example
    Bob’s tree farm sells two types of trees: pine and maple. The sales mix is 3:1 respectively. Each pine tree sells for $20 and each maple sells for $30. Bob estimates that each pine tree costs about $12 to grow and maintain until it is sold and about $15 for maples since they need more water. Bob’s fixed costs are $27,000 per year. Calculate Bob’s breakeven point in units.
    Step 1: Contribution Margin for Each Product
    Maple = $30-$15 = $15
    Pine = $20 - $12 = $8
    Step 2: Average Contribution Margin per Unit
    =(CM of pines x Sales mix %) + (CM of maples x Sales mix %)
    = ($8 x 75%) + ($15 x 25%)
    = $9.75
    Step 3: Breakeven Point in Units
    BEP = Fixed Costs / Average CM per Unit
    BEP = $27,000 / $9.75
    BEP = 2,769.23
    Bob needs to sell 2,770 trees to breakeven
  • Cost Structure and Operating Leverage
    Cost structure is relative proportion of fixed costs and variable costs
    Operating leverage shows the proportion of your fixed costs
    The higher the operating leverage, the higher a company’s fixed costs are compared to variable costs so small changes in the volume of sales will result in large changes in income (and opposite)
  • Cost Structure and Operating Leverage
    High Operating Leverage
    High Fixed / Low Variable Costs
    Higher CM/Unit
    Higher Break-even Point
    Greater Risk
    Greater Potential Returns
    Low Operating Leverage
    Low Fixed / High Variable Costs
    Lower CM/Unit
    Lower Break-even Point
    Reduced Risk
    Lower Potential Returns
  • Cost Behaviours
    Step costschange abruptly at intervals of activity because the resources and their costs come in indivisible chunks (example: salaries)
    Mixed costscontain both variable and fixed cost elements
    Example: maintenance costs – supplies + labour
    Management Influenced Costs
    Capacity costs- fixed costs incurred when achieving a desired production level (example: building a plant)
    Committed fixed costs-large indivisible chunks of cost that the company is obligated to pay
    Example: mortgage payments
    Discretionary fixed costsare heavily influenced by management’s decisions each period on how much to spend on things like advertising, research and development, training, etc.
    Example: no more lavish award ceremonies every quarter for top salesmen
    These costs do not have clear connections to production output levels
    Every cost could essentially be committed / discretionary but it depends on contracts you have and your ability to change it
  • Measuring Cost Behaviour
    The mixed cost function is an equation of the cost and its driver; a linear equation looks like this
    Salesmen are paid guaranteed salaries of $50,000 per year plus 2% commission on sales. The dollar value of sales each salesman brings in is the cost driver. Calculate the total cost of wages given the following situations:
    Situation A
    Total Cost = $50,000 + ($400,000)2% = $58,000
    Situation B
    Total Cost = $50,000 + ($600,000)2% = $62,000
  • Activity Analysis Methods
    • Engineering Analysis– review of costs from past experiences
    • Account Analysis– review of accounting records and the subjective evaluation of patterns
    • High-Low Analysis– simple linear algebra method (unreliable results)
    • Scattergraph Analysis– line of fit method on a graph; where the intercept is the total fixed costs and every point on the line is an estimated total level of activity (X) and total costs (Y)
    - this method heavily uses the mixed cost function
    • Regression Analysis– a process of finding the equation that best fits the data
    Activity analysesare used to identify appropriate cost drivers for each individual activity and their effects on the costs of making a product
    Measuring Cost Behaviour
  • High-Low Analysis Example
    Given the following information, determine the cost equation for custodial services
    Step 1: High and Low Levels of Activity
    High  500 hours at $6,345
    Low  250 hours at $4,375
    Step 2: Change in Activity and Variable Cost
    Change in Cost = $6,345 - $4,375 = $1,970
    Change in Hours = 500 – 350 = 250 hours
    Variable cost = $1,970/250 hours = $7.88
    Step 3: Fixed Cost Estimate (Using July Numbers)
    Total Fixed Cost = Total Cost – Total Variable Cost
    Total Fixed Cost = $5,570 – (360 x $7.88) = $2,733.20
    Step 4: Cost Equation
    Y = $2,733.20 + $7.88X
  • Regression Analysis
    All the points are considered whereas the scattergraph considers only the points on the line of best fit
    The goal is to minimize the sum of the square errors
    This is the most accurate method
    Regression Analysis Output
    - The word “Constant” which appears on an output is the fixed cost
    - “R-squared” is an indicator of the accuracy of the results, the closer this number is to 1, the more X (independent) explains changes in Y (dependent)
    - “X-Coefficient” is the variable cost which is multiplied by the cost driver
    Excel Commands
    - LINEST() gives the slope of the line of best fit
    - INTERCEPT () gives the intercept of the line (fixed cost)
    - RSQ() gives the ‘r-squared’ value
  • Cost Behaviour: Product and Period Costs
    Product Costs– all costs involved in the purchase or manufacture of products which are expensed when the product is sold
    For a manufacturer these would include direct labour, direct materials, etc.
    Inventory for a manufacturer (DM, WIP, FG)
    For a retailer these would include freight costs, purchases, etc.
    Period Costs– costs expensed immediately without ever being included in inventory
    Selling & administrative costs
  • Cost Methods: Absorb & Vary
    Absorption Costing –includes manufacturing overhead in the costs which are assigned to inventory
    “Full Costing”, in accordance with GAAP
    Costs are classified by function (selling vs. manufacturing)
    Inventory costs consider both variable and fixed costs
    This method produces a higher inventory value since it includes fixed costs
    With this method, fixed manufacturing overhead costs are included in inventory, and a formula is used in order to allocate costs to ‘work-in-process’
  • Cost Methods: Absorb & Vary
    Variable Costing – this approach tries harder to separate fixed costs from variable costs and uses a style of income statements which highlights the total fixed costs
    “Direct Costing”
    Costs are classified by behaviour (variable vs. fixed)
    Inventory costs consider only variable costs
    This method helps with CVP analyses
    Production does not affect operating income under this approach
    Under variable costing fixed costs can be attributed to separate divisions and therefore controlled more easily
  • Absorption vs. Variable
    ABC Company
    Absorption Income Statement
    Sales $75,000
    Cost of Goods Sold:
    Direct Material 10,000
    Direct Labour 15,000
    Overhead 7,000
    Gross Profit $43,000
    Selling Expenses 15,000
    Admin. Expenses 17,000
    Operating Income $11,000
    ABC Company
    Variable Costing Income Statement
    Sales $75,000
    Variable Expenses:
    Direct Material 10,000
    Direct Labour 15,000
    Overhead 3,000
    Variable Selling 8,000
    Variable Admin 8,000
    Contribution Margin $31,000
    Fixed Expenses:
    Overhead 4,000
    Selling & Admin 16,000
    Operating Income $11,000
  • Absorption vs. Variable
    Variable costingstatements are considered easier to understand because net operating income is only affected by changes in unit sales
    We cannot do CVP analysis with absorption costingbecause it considers overhead to be a variable cost
    Both methods can be used when filing tax returns, but only absorption costingis allowed for external purposes
    For absorption costing we use units produced; whereas with variable costing we use units sold
  • Segmented Income Statements
    Income statements for parts of a whole company
    A contribution format is used and traceable fixed costs should be separated from common fixed costs to allow for CVP analysis and segment margin calculations
    Absorption formation may be used anyway
    Traceable fixed costsare fixed costs incurred by that particular segment alone such as the rent for its facility
    Common fixed costsare incurred by the whole company such as the executive salaries or patent protection legal fees
    Common costs cannot be arbitrarily assigned to segments because managers will be put in charge of costs they have no control over
  • Segmented Income Statements
    Segment margin is the best gage of the long-run profitability of a segment
    Traceable costs of one segment may be common costs to another
    Not in Handout
  • Cost Management Systems
    Costs are sacrifices of resources for a particular purpose (such as money for materials)
    Acost objectiveis a department or product for which cost information is collected
    Direct costscan be identified exclusively with a given cost objective (i.e. – a product) in an economical way (can be easily and reliable measured)
    Indirect costs cannot...
    Overtime premium– an indirect cost which includes wages paid to workers in excess of their regular hours
    Idle time– wages paid for unproductive time (when everyone is standing around)
    Defects– scrap, warranty claims, the cost of poor customer relationships (if you can figure out a $ for that)
  • Cost Management Systems
    Differential Costs (Revenues) are the difference in cost (revenue) between two alternatives
    Example: If you are decided between buying a car that costs $20,000 or buying a bus pass for the next 5 years which will in total cost $15,000
    The differential cost is $5,000
    Opportunity Costsare the potential benefit that is given un when one alternative is selected over another
    Example: You are deciding to either buy a car that costs $20,000 or spend the money on a college diploma which would raise your salary from $10,000/year to $25,000/year
    The opportunity cost of buying the car would be the $15,000 in increased wages.
    Sunk Costsare costs already incurred and paid for that are in the past and cannot be changed and therefore have no bearing on future decisions
    Example: If you are decided between buying a car that costs $20,000 or buying a bus pass for the next 5 years which will in total cost $15,000 but you’ve already bought your bus pass for this month which cost $80.
    You’ve bought the pass already, it’s in the past and shouldn’t affect your decision here.
  • Manufacturing Costs
    For companies who create their inventory from scratch, there are three main categories of costs:
    Direct Material Costs– cost of acquiring materials used
    Direct Labour Costs – wages or labour that is exclusive to production
    Factory Overhead Costs – all other costs (utilities, equipment depreciation, etc.)
    These costs can be combined and reduced to two categories
    Prime Costsinclude direct labour and material costs
    Conversion Costsinclude the costs of converting material into finished products (direct labour and factory overhead costs)
    Prime Costs
    Direct Materials
    Direct Labour
    Factory Overhead
    Conversion Costs
  • Cost Allocation
    Cost Allocationis the process of linking costs or cost pools (multiple costs grouped together) with one or more cost objects through identifying and selecting cost drivers
    Synonyms of cost allocation  cost tracing, assignments, distributions, apportionment
    Synonyms of cost drivers  allocation base, activity measure
  • Manufacturing Overhead Cost Allocation
    The POHR is used no matter what the real overhead costs are and what the actual allocation activity is
    The per unit cost calculated above ≠ marginal cost of the product; if an additional unit was produced the per unit cost would slightly decrease
    Journal Entry Examples in “Extras”
  • Underapplied / Overapplied
    Since the POHR contains estimates, the manufacturing overhead that we actually incur and the amount applied to Work in Process using the POHR will differ 99% of the time
    Underapplied overhead- overhead applied to jobs is less than the total amount of overhead actually incurred
    this will result in a remaining debit balance in the manufacturing overhead account
    Overapplied overhead- overhead applied to jobs is greater than the total amount of overhead actually incurred
    this will result in a remaining credit balance in the manufacturing overhead account
    The difference between applied overhead and actual overhead can be dealt with in three ways:
    Close directly to Cost of Goods Sold Expense
    Allocate proportionately between WIP, Finished Goods, and COGS Expense
    based on their relative dollar value
    Carry the balance in manufacturing overhead over to the next year
  • Overhead Application Example
    Toyota has incurred a total of $15.0M in manufacturing overhead this month with a total of 500,000 labour hours worked on cars. Calculate the manufacturing overhead applied to Work-in-Progress cars over the month using a predetermined overhead rate of $12/hour. Was the manufacturing overhead overapplied, underapplied, or perfect ? Provide the journal entry required to close any unapplied overhead to cost of goods sold.
    Step 1: Apply Overhead
    Applied Overhead = POHR X Actual Direct Labour Hours
    Applied Overhead = $12/hour X 500,000
    Applied Overhead = $6.0M
    Step 3: Journal Entry
    Debit : Cost of Goods Sold $9M
    Credit : Manufacturing Overhead $9M
    Step 2: Over/Underapplied?
    = Actual Overhead – Applied Overhead
    = $15M - $6M = $9M Underapplied
  • POHR and Capacity
    Biggest criticisms of using the POHR:
    Using estimates and budgeted activity levels will result in product costs that fluctuate all the time
    Applies costs that had nothing to do with products like idle time
    Using capacity limits instead of the estimated number of allocation base will reduce the overhead rate
    the difference between the capacity rate and the POHR is the idle capacity cost
    Equipment is leased for $400,000 / year. A plant working at full capacity can produce 80,000 units, but the company estimates 60,000 will be made.
    The POHR will be $6.67/unit using the regular formula but if we use capacity units instead it will only be $5/unit.
  • Professional Ethics
    How will understating the estimated direct labour hours in the base for the POHR affect operating income?
    • Artificially high overhead rate
    • Overapplied overhead  debit balance in manufacturing overhead account
    • This will reduce COGS when the account is closed
    • This will result in higher net income
    Not in Handout
  • Product Costing Systems
    Process Costing– the company mass produces one homogenous product
    Costs are accumulated by departments and thus calculates
    unit costs by department as well
    Production is uniform on all units
    Job – Order Costing System– the company builds to order a range of unique products
    Direct materials and labour will be allocated to each job
    as they are incurred
    Indirect costs (like overhead) will accumulate over
    time and then be allocated
  • Process Costing
    A processing departmentis any part of a company where work is performed on a product
    Transferred-in costsare those that were used in one department and then sent to another department
    The Processing Story in “Extras”
  • Equivalent Units (Weighted Average Method)
    The number of complete units you could get from putting together all the partially complete units that are sitting around in Work in Process inventory at the end of a period
    Example: one unit that is 70% done put together with another unit 30% complete makes one completely finished equivalent unit
  • Equivalent Units Example (Weighted Average Method)
    Given the information below, calculate the equivalent units both in terms of materials and conversion costs and also calculate the total cost per equivalent unit.
    (answer in the handout)
  • Service Department Cost Allocations
    Operating departmentsare the ‘heart and soul’ of the organization and carry out its purpose in life
    Service departmentssupport the company and its operating departments; their costs incurred by these departments are allocated unto the operating departments which in turn allocate all costs to units produced
    Reciprocal Servicesis the term used to describe the concept of service departments and operating departments provided services to each other
  • Service Allocation Methods: Direct
    Ignore transactions between service departments and assume service departments only provide to operating departments
    All costs are allocated to operating departments based on the proportion of total allocation base
  • Direct Method Example
    The accounting department of Cars Inc. has incurred $2.5M in costs over the year. Management has calculated that the accounting team has worked 50,000 hours this year and employs 110 people.
    The cafeteria has incurred $1M in costs over the year, employs 20 and has worked 8,000 hours.
    Cars Inc.’s manufacturing plant has incurred $10M in costs this year, has worked 60,000 hours and employs 200 people.
    The customization plant incurred $15M in costs, has worked 40,000 hours and employs 100 people.
    Assume the allocation bases for accounting and cafeteria departments are hours and employees, respectively.
  • Service Allocation Method: Step-Down
    Service Department “A” provides services to Service Department “B” (but no reciprocation) and both pass on to the Operating Departments
    All costs incurred by service departments are allocated to operating departments based on the proportion of total allocation base
    - Order matters, we need to know which service department serves the other
  • Step-Down Method Example
    The accounting department of Cars Inc. has incurred $2.5M in costs over the year. Management has calculated that the accounting team has worked 50,000 hours this year and employs 110 people.
    The cafeteria has incurred $1M in costs over the year, employs 20 and has worked 8,000 hours.
    Cars Inc.’s manufacturing plant has incurred $10M in costs this year, has worked 60,000 hours and employs 200 people.
    The customization plant incurred $15M in costs, has worked 40,000 hours and employs 100 people.
    Assume the allocation bases for accounting and cafeteria departments are hours and employees, respectively.
  • Service Allocation Method: Reciprocal
    Service Department “A” provides services to Service Department “B” and vice versa
    Know what it is, but not how to do it.
  • Activity-Based Costing
    A non-traditional way of allocating costs
    ABC costing is more careful about which costs are considered; only costs that are affected by product-related decisions are used
    not all manufacturing costs, some non-manufacturing costs
    ABC costing has the highest number of cost pools and overhead application rates
    POHR applies to the entire factory and all its departments
    Process costing uses different overhead rates for departments
    ABC costing has as many rates as there are activities
    The ABC costing method has the ability to segregate costs associated with unused capacity
  • Activity Costing
    An activity is an event that causes the consumption of overhead resources (i.e. taking customer orders)
    Five Levels of Activity
    Unit-Level Activities– activities that arise each time a product is produced (i.e. electricity)
    Batch-Level Activities– activities that involve processing or handling batches of product (i.e. moving them)
    Product-Level-Activities – activities related to products that must be done regardless of production (i.e. marketing and engineering design)
    Customer-Level-Activities – have to do with the customers themselves (i.e. customer service)
    Organization-Sustaining-Activities – are done no matter what else is going on
    This is the only type of activity directly related to volume of production
  • General Structure of ABC
  • Implementation of ABC
    Identify and define activities
    There is no ‘right’ or ‘wrong’, there is ‘accurate’ and ‘less accurate’
    Assign overhead costs to activity cost pools
    Only overhead, no direct or indirect
    Calculate activity rates
    Using total activity estimates for each activity
    Assign overhead costs to cost objects
    Common cost objects: products, orders, customers
    Prepare management reports
  • Management Reports
    Product Margin Calculation
    These costs are assigned using other cost systems
    Calculated using the ABC Costing process
    This company is losing money every time it makes Product B
    With this we can make big decisions such as whether we should consider cutting out Product B
    Product A did not do any product design
  • Management Reports
    Customer Profitability Analysis
    Calculated using the ABC Costing process (Stage 4)
    Notice that we now add customer relations costs
    Here we can make decisions such as whether or not it is worth keeping this customer
  • ABC vs. Traditional Costing
    Traditional costing uses one plant wide manufacturing overhead rates
    All shipping, marketing and administrative expenses are not allocated to the product
    Same in for traditional and ABC
    Only one cost pool: overhead
    We are not losing money on this product according to this method
    Product B is “undercosted” giving it a much higher product margin than it should
  • Cons of ABC Costing
    ABC costing is not typically used for external reporting because
    Don’t need all the detail
    Cost too muchto start using ABC Costing
    GAAP standards don’t like ABC
    There is a lot of subjectivity
    ABC costing has its own limitations too
    It costs a lot of money
    Resistance from the employeeswhen new systems are put in place
    Misinterpretation of the results
    Many companies like to allocate all their costs to the productsrather than to customers and orders
    Everyone needs to conform to GAAP
  • Final Study Tips
    • Your textbook is good
    • Read your end-of-chapter summaries posted on MyLearningSpace
    • Practice questions in order to understand concepts better
    • Do not memorize how to
    do calculations
  • Manufacturing Overhead Entries
    All costs incurred by a company will be recorded as expenses in the accounting books over the year
    Direct materials used are taken out of ‘Raw Materials’ and placed into ‘Work-in-Process’
    Materials that are indirectly used over the course of the period are also taken out of ‘Raw Materials’ but are instead placed in ‘Manufacturing Overhead’
    Wage costs are added to ‘Work-in-Process’ or ‘Manufacturing Overhead’ depending on whether they are direct or indirect labour expenses
    Any other costs that are incurred by the manufacturing facilities are also debited to manufacturing overhead over the course of the period
    Any other costs that are incurred by the manufacturing facilities are also debited to manufacturing overhead over the course of the period
    When the product is complete, all the costs incurred to produce it are sent to ‘Finished Goods Inventory’ until the product is sold; at which time those costs then go to ‘Cost of Goods Sold Expense’
  • The Processing Story
    Raw materials are bough by the company and are debited to the ‘raw materials inventory’ asset account
    When processing departments need raw materials, a journal entry is recorded to show where the materials went
    The workers of the company do their jobs and are paid; but when a company has different processing departments, the cost of labour is assigned to the department the employee works in
    Manufacturing overhead is incurred randomly over the course of the period
    Manufacturing overhead is applied to each processing department using a predetermined rate
    When department A has completed its job, it passes on its inventory to department B (transferred-in costs)
    When the last department is done making the product, all its inventory is passed into “Finished Goods Inventory” (storage)
    When the products are sold, their cost is finally debited to Cost of Goods Sold Expense and that’s the end!
  • The Basics
    Debits and credits just represent the sides of a “general ledger” which is a book used to record transactions
    DO NOT think of them as positives and negatives
    These are used in a double-entry accounting system to create a logical method of financial reporting
    “Normal balances” for accounts refer to which side of the general ledger represents an increase for the account
    debits = assets, expenses
    credits = liabilities, owner’s equity, revenue
  • The Basics
    Assets are future benefits to the company which resulted from past events
    Objects that will be used to make money
    Objects that will be sold for money
    Cash to spend on more objects
    Liabilities are sacrifices the company will have to make, or IOUs they have from the past
    Equity is what is left over when assets are netted against liabilities; or, what is left for the owners of the company to claim as theirs
    See part II
  • The Basics
    Everything is based around the same simple formula:
    Assets = Liabilities + Owner’s Equity
    When writing any transaction, this formula must apply.
  • Transaction Examples
    On December 1, $25,000 of office supplies was bought on credit. What is the transaction?
    On April 10, $100,000 worth of cash dividends was paid out to shareholders. What is the transaction?
    A new employee was hired on October 22, 2010. What is the transaction?
    NOTICE: Transactions are never written with negative numbers.
  • Accounting Cycle
    Something happens – is it a transaction or not?
    Journalization – writing transactions down in a journal
    Posting – calculating totals for all accounts on a daily or monthly basis (or automatically)
    Trial Balance – making sure all debits equal all credits and all accounts have their correct balances
    must always net to zero
    Adjustments – updating accruals, expensing prepaid accounts, calculating depreciation, unearned revenue, inventory, etc.
    Adjusted Trial Balance
    Financial Statements
    some people like to use work sheets to help them create financial statements
    Closing – wiping out temporary accounts (expenses and revenues) to get ready for the new year
    Post-Closing Trial Balance
    Reversing Entries – If necessary.. usually only if you’ve made a mistake and have to go back and fix it
  • Adjusting Entry Examples
    On April 1, 2010 XYZ spent $24,000 for a year’s worth of insurance. Prepare the adjusting journal entries for December 31.
    In August 2010 Magazines Inc. received $36,360 for year-long subscriptions which started September 1. Prepare the adjusting journal entries for December 31.
    ABC’s employees are paid $12,000 every other Friday. December 31, 2010 is the company’s year end, but also halfway through a pay-period. Which accounts are affected by this and what amounts should appear on the company’s financial statements?