Accounting Final

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Managerial accounting

Back 1

Managers need to be able to plan, direct, and control the business. This means that sometimes they have to estimate future demand in order to plan appropriately. No regulation. Management if free to gather whatever information they need. Reported Continuously

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Key users of managerial accounting

Back 2

Internal users(managers, employees, executives) People working INSIDE the company

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Financial Accounting

Back 3

For external users(investors, creditors) People OUTSIDE of the company. Highly regulated to protect the public interest. Reported Periodically.

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Product Cost

Back 4

All costs related to obtaining or manufacturing a product intended for sale. For a manufacturing company, this includes Direct Materials(DM), Direct Labor(DL), and Manufacturing Overhead(MOH).

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Period Cost

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General, selling and administrative(GS&A) costs that are expenses in the period they occur.

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Product Cost

Back 6

(In)Direct Materials, (In)Direct Labor, Factory supervisor, Janitor for the manufacturing facility, Manufacturing Overhead, Depreciation on production equipment

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Period Cost

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CEO’s salary, Administrative Employees Salary, HR’s salary, Sales Commissions, Advertising, Accounting Department, Research and Development, Depreciation of office equipment

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Fixed Costs

Back 8

does not change regardless of the number of items sold

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Variable Costs

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Cost that in total changes in direct proportion to changes in volume of activity; remains constant per unit when volume of activity changes

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Fixed Cost Behavior

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Total versus per-unit fixed costs behave differently. The total cost for the band remains constant (fixed) at $48,000. In contrast, fixed cost per unit decreases as volume (number of tickets sold) increases. The term fixed cost is consistent with the behavior of total cost. Total fixed cost remains constant (fixed) when activity changes. However, there is a contradiction between the term fixed cost per unit and the per-unit behavior pattern of a fixed cost. Fixed cost per unit is not fixed. It changes with the number of tickets sold.

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Variable Cost Behavior

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The total cost of the band increases proportionately as ticket sales move from 2,700 to 3,000 to 3,300. The variable cost per ticket remains $16, however, regardless of whether the number of tickets sold is 1, 2, 3, or 3,000. The behavior of variable cost per unit is contradictory to the word variable. Variable cost per unit remains constant regardless of how many tickets are sold.

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Mixed Costs

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Mixed costs (semivariable costs) include both fixed and variable components. For example, Star Productions, Inc., frequently arranges backstage parties at which VIP guests meet members of the band. Party costs typically include a room rental fee and the costs of refreshments. The room rental fee is fixed; it remains unchanged regardless of the number of party guests. In contrast, the refreshments costs are variable; they depend on the number of people attending the party. The total party cost is a mixed cost. Assuming a room rental fee of $1,000 and refreshments costs of $20 per person, the total mixed cost at any volume of activity can be computed as follows: Total cost = Fixed cost + (Variable cost per party guest X # of guests)

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Contribution Margin

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Such income statements first subtract variable costs from revenue; the resulting subtotal is called the contribution margin. The contribution margin represents the amount available to cover fixed expenses and thereafter to provide company profits. Net income is computed by subtracting the fixed costs from the contribution margin. A contribution margin style income statement cannot be used for public reporting (GAAP prohibits its use in external financial reports), but it is widely used for internal reporting

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Relevant Cost

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Frequently called avoidable costs.

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Irrelevant Cost

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If Pecks Department Stores eliminates the children’s department, the company can eliminate the cost of the department manager’s salary but cannot get rid of the salary of the company president. The costs that stay the same are not relevant.

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Sunk Cost

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Historical costs are frequently called sunk costs. Because sunk costs have been incurred in past transactions, they cannot be changed and are not relevant for making current decisions.

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Avoidable Cost

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Avoidable costs are the costs managers can eliminate by making specific choices.

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Opportunity Cost

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An opportunity cost is the sacrifice that is incurred in order to obtain an alternative opportunity.

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Strategic planning

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involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue, and identifying the most profitable market niche. Upper-level management is responsible for these decisions. Strategic plans are descriptive rather than quantitative. Objectives such as “to have the largest share of the market” or “to be the best-quality producer” result from strategic planning.

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Capital budgeting

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focuses on intermediate range planning. It involves such decisions as whether to buy or lease equipment, whether to stimulate sales, or whether to increase the company’s asset base.

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Operations budgeting

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concentrates on short-term plans.

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Master budget

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A key component of operations budgeting is the master budget which describes short-term objectives in specific amounts of sales targets, production goals, and financing plans. The master budget describes how management intends to achieve its objectives and directs the company’s short-term activities. The master budget normally covers one year. It is frequently divided into quarterly projections and often subdivides quarterly data by month. Effective managers cannot wait until year-end to know whether operations conform to budget targets. Monthly data provide feedback to permit making necessary corrections promptly.

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What order do you prepare budgets within the master budget?

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The master budget usually includes (1) operating budgets, (2) capital budgets, and (3) pro forma financial statements. The budgeting process normally begins with preparing the operating budgets, which focus on detailed operating activities. Preparing the master budget begins with the sales forecast. The accuracy of the sales forecast is critical because all the other budgets are derived from the sales budget.