Managerial Accounting

Revision for Final Exam

Part 01 - Chapter 2

Comparison of Financial and Managerial

Accounting
Financial Accounting

Managerial Accounting

External persons who

make financial decisions

Managers who plan for

and control an organization

Historical perspective

Future emphasis

3. Verifiability
versus relevance

Emphasis on
verifiability

Emphasis on relevance
for planning and control

4. Precision versus
timeliness

Emphasis on
precision

Emphasis on
timeliness

5. Subject

Primary focus is on
the whole organization

Focuses on segments
of an organization

6. GAAP

Must follow GAAP

and prescribed formats

Need not follow GAAP

or any prescribed format

Mandatory for
external reports

Not
Mandatory

1. Users
2. Time focus

7. Requirement

Slide 2

For financial reporting: Manufacturing

Costs vs Nonmanufacturing Costs
Manufacturing Costs
Direct
Materials

Direct
Labor

Manufacturing
Overhead

The Product
Slide 3

For financial reporting: Manufacturing

Costs vs Nonmanufacturing Costs
Nonmanufacturing
Costs
Selling
Costs

Administrative
Costs

Costs necessary to
secure the order and
deliver the product.

All executive,
organizational, and
clerical costs.

Slide 4

For financial reporting: Product Costs vs

Period Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Cost of Good Sold

Inventory

Period costs include all

selling costs and
administrative costs.

Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement

Slide 5

Prime Cost vs Conversion Cost

Manufacturing costs are often

classified as follows:
Direct
Material

Direct
Labor

Prime
Cost

Manufacturing
Overhead

Conversion
Cost

Slide 6

Basic Equation for Inventory Accounts

Beginning
balance

Additions
to inventory

Ending
balance

Withdrawals
from
inventory

Slide 7

Product Cost Flows

Work
In Process

+
=

Beginning work in
process inventory
Manufacturing costs
for the period
Total work in process
for the period
Ending work in
process inventory
Cost of goods
manufactured

Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold

Slide 8

Manufacturing Cost Flows

Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative
Slide 9

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

as activity level changes.

Variable cost per unit remains

the same over wide ranges
of activity.

Fixed

Total fixed cost remains

the same even when the
activity level changes.

Average fixed cost per unit goes

down as activity level goes up.

Slide 10

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 11

End of Part 01 - Chap.2

Slide 12

Job-Order Costing
Part 02 - Chapter 3

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 14

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 15

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
managers salary.
3. Many types of MOH are fixed even though output fluctuates during
the period.

Slide 16

Manufacturing Overhead Application

Using the Predetermined OverHead Rate (POHR):

POHR =

Estimated total MOH for

the coming period
Estimated total units in the
allocation base

Applied Overhead = POHR Actual DLHs

Slide 17

Problems of MOH Application

The difference between applied MOH and actual
MOH: Underapplied or Overapplied overhead.

Underapplied OH

Overapplied OH

Applied MOH < Actual MOH

Applied MOH > Actual MOH

Slide 18

Disposition of
Under- or Overapplied Overhead
Cost
of Goods Sold
Unadjusted
Balance
$30,000
Adjusted
Balance

Mfg. Overhead
Actual
MOH

Applied
MOH

$650,000

$680,000

$30,000

$30,000
overapplied

Slide 19

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 20

End of Part 02 - Chap.3

Slide 21

Process Costing
Part 03 - Chapter 4

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 23

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.
Slide 24

Calculating Equivalent Units

Using the Weighted-Average Method

Slide 25

Weighted-Average An Example
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units
Work in process, June 1

300

Units started into production in June

6,000

Units completed and transferred out

of Department A during June

5,400

Work in process, June 30

900

Materials Conversion
40%

20%

60%

30%

Slide 26

Weighted-Average An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Materials
Units completed and transferred
out of the Department in June

5,400

Conversion
5,400

Work in process, June 30:

900 units 60%

540

900 units 30%

Equivalent units of Production in
the Department during June

270
5,940

5,670

Slide 27

Compute and Apply Costs

Cost per
equivalent =
unit

Cost of beginning
Work in Process + Cost added during
Inventory
the period
Equivalent units of production

Slide 28

Compute and Apply Costs

Beginning Work in Process Inventory:
400 units
Materials: 40% complete
$
6,119
Conversion: 20% complete
$
3,920
Production started during June
Production completed during June
Costs added to production in June
Materials cost
Conversion cost
Ending Work in Process Inventory:
Materials:
60% complete
Conversion: 30% complete

6,000 units
5,400 units
$ 118,621
$ 81,130
900 units

Slide 29

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

Total
Cost

Cost to be accounted for:

Work in process, June 1
Cost added in Assembly
Total cost

Materials

Conversion

10,039
199,751

6,119
118,621

3,920
81,130

209,790

$ 124,740

85,050

Equivalent units
Cost per equivalent unit

5,940
$

21.00

5,670
$

15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

Slide 30

Computing the Cost of Units Transferred Out

Assembly Department
Cost of Ending WIP Inventory and 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

Slide 31

End of Part 03 - Chap.4

Slide 32

Cost-Volume-Profit Relationships
Part 04 - Chapter 6

Basics of Cost-Volume-Profit Analysis

Racing Bicycle Company
Contribution Income Statement
For the Month of June
Sales (500 bicycles)
$
250,000
Less: Variable expenses
150,000
Contribution margin
100,000
Less: Fixed expenses
80,000
Net operating income
$
20,000

CM is used first to cover fixed expenses. Any

remaining CM contributes to net operating income.
Slide 34

Preparing the CVP Graph

Break-even point
(400 units or $200,000 in sales)

$350,000

Profit Area

$300,000

$250,000

$200,000

Sales
Total expenses
$150,000

Fixed expenses

$100,000

$50,000

$0

Loss Area

100

200

300

400

500

600

Units
Slide 35

Unit CM vs CM Ratio
Unit CM = SP per unit VE per unit
CM Ratio =

CM per unit
SP per unit

Profit = Unit CM Q Fixed expenses

Profit = CM ratio Sales Fixed expenses

Slide 36

Target Profit Analysis

Unit sales to attain
Target profit + Fixed expenses
=
the target profit
CM per unit

Dollar sales to attain

Target profit + Fixed expenses
=
the target profit
CM ratio

Slide 37

Break-even sales

Unit sales to
=
break even

Fixed expenses
CM per unit

Dollar sales to
Fixed expenses
=
break even
CM ratio

Slide 38

Margin of safety vs Degree of Operating

Leverage
Margin of safety = Total sales - Break-even sales

Degree of
operating leverage

Contribution margin
= Net operating income

Slide 39

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 A disadvantage of a high fixed
will be higher in good years. 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 40

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 41

Exercises for Chapter 6

6-5
6 - 12

Slide 42

End of Part 04 - Chapter 6

Slide 43

Variable Costing
Part 05 - Chapter 7

Overview of Absorption and Variable Costing

Absorption
Costing

Variable
Costing
Direct Materials

Product
Costs

Direct Labor

Product
Costs

Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Period
Costs

Variable Selling and Administrative Expenses

Period
Costs

Fixed Selling and Administrative Expenses

Slide 45

Summary of Key Insights

Slide 46

Advantages of Variable Costing

and the Contribution Approach
Management finds
it more useful.

Consistent with
CVP analysis.
Net operating income
is closer to
net cash flow.
Consistent with standard
costs and flexible budgeting.

Advantages
Easier to estimate profitability
of products and segments.

Impact of fixed
costs on profits
emphasized.

Profit is not affected by

changes in inventories.
Slide 47

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 48

Exercises for Chapter 7

7-2
7-5

Slide 49

End of Part 05 - Chap. 7

Slide 50

Profit Planning
Part 06 - Chapter 9

The Master Budget: An Overview

Sales budget
Ending inventory
budget

Direct materials
budget

Production budget

Direct labor
budget

Selling and
administrative
budget

Manufacturing
overhead budget

Cash Budget

Budgeted
income
statement

Budgeted
balance sheet

Slide 52

Manufacturing Overhead Budget

Depreciation is a noncash charge.

Slide 53

Selling Administrative Expense Budget

Slide 54

The Cash Budget

Slide 55

Exercises for Chapter 9

9-5
9-6
9-7

Slide 56

End of Part 06 - Chap. 9

Slide 57

Flexible Budgets
Part 07 - Chapter 10

Characteristics of Flexible Budgets

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.
Improve performance evaluation.

Lets look at Larrys Lawn Service.

Slide 59

Activity Variances

Planning
budget revenues
and expenses

Flexible
budget revenues
and expenses

The differences between

the budget amounts are
called activity variances.
Slide 60

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 61

Exercises for Chapter 10

10 - 2
10 - 8
10 - 9

Slide 62

End of Part 07 - Chap. 10

Slide 63

Standard Costs
Part 08 - Chapter 11

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, McDonalds, hospitals,

construction and manufacturing companies.
Slide 65

Standard Costs

Amount

Deviations from standards deemed significant

are brought to the attention of management, a
practice known as management by exception.

Standard

Direct
Labor

Direct
Material

Manufacturing
Overhead

Type of Product Cost

Slide 66

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Difference between
actual price and
standard price

Difference between
actual quantity and
standard quantity
Slide 67

A General Model for Variance Analysis

Variance Analysis

Price Variance

Quantity Variance

Materials price variance

Labor rate variance
VOH rate variance

Materials quantity variance

Labor efficiency variance
VOH efficiency variance
Slide 68

A General Model for Variance Analysis

Actual Quantity

Actual Price

Actual Quantity

Standard Price

Price Variance

Standard Quantity

Standard Price

Quantity Variance

(AQ AP) (AQ SP)

(AQ SP) (SQ SP)

AQ = Actual Quantity
AP = Actual Price

SP = Standard Price
SQ = Standard Quantity
Slide 69

Responsibility for Labor Variances

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.

Production Manager

Quality of training
provided to employees.
Slide 70

Quick Check

Zippy

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.

Slide 71

Quick Check

Zippy

Hansons labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.

Slide 72

Quick Check

Zippy

Hansons labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.

Slide 73

Learning Objective 5

Compute delivery cycle time,

throughput time, and
manufacturing cycle
efficiency (MCE).

Slide 74

Delivery Performance Measures

Order
Received

Wait Time

Production
Started

Goods
Shipped

Process Time + Inspection Time

+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time

Process time is the only value-added time.

Slide 75

Delivery Performance Measures

Order
Received

Wait Time

Production
Started

Goods
Shipped

Process Time + Inspection Time

+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time

Manufacturing
Cycle
=
Efficiency

Value-added time
Manufacturing cycle time
Slide 76

Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days

Move 0.5 days

Queue 9.3 days

What is the throughput time?

a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Slide 77

Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days

Move 0.5 days

Queue 9.3 days

What is the Manufacturing Cycle Efficiency (MCE)?

a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
Slide 78

Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days

Move 0.5 days

Queue 9.3 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 79

End of Part 08 - Chap. 11

Slide 80

Segment Reporting
Part 09 - Chapter 12

Cost, Profit, and Investments Centers

Cost
Center

Cost, profit,
and investment
centers are all
known as
responsibility
centers.

Profit
Center

Investment
Center

Responsibility
Center

Slide 82

Omission of Costs
Costs assigned to a segment should include all
costs attributable to that segment from the
companys entire value chain.
Business Functions
Making Up The
Value Chain
R&D

Product
Design

Customer
Manufacturing Marketing Distribution Service

Slide 83

Return on Investment (ROI) Formula

Income before interest
and taxes (EBIT)

Net operating income

ROI =
Average operating assets
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
Slide 84

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 85

Understanding ROI

Net operating income

ROI =
Average operating assets
Net operating income
Margin =
Sales
Sales
Turnover =
Average operating assets
ROI = Margin Turnover
Slide 86

Increasing ROI
There are three ways to increase ROI . . .
Reduce
Increase Expenses Reduce
Sales
Assets

Slide 87

Increasing ROI An Example

Regal Company reports the following:

Net operating income
Average operating assets
Sales
Operating expenses

$ 30,000
$ 200,000
$ 500,000
$ 470,000

What is Regal Companys ROI?

ROI = Margin Turnover

ROI =

Net operating income

Sales

Sales
Average operating assets
Slide 88

Increasing ROI An Example

ROI = Margin Turnover

ROI =

Net operating income

Sales

$30,000
ROI =
$500,000

Sales
Average operating assets

$500,000
$200,000

ROI = 6% 2.5 = 15%

Slide 89

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.

Regal Company reports the following:

Net operating income
Average operating assets
Sales
Operating expenses

$ 50,000
$ 230,000
$ 535,000
$ 485,000

Lets calculate the new ROI.

Slide 90

Investing in Operating Assets to Increase

Sales

ROI = Margin Turnover

ROI =

Net operating income

Sales

ROI = $50,000
$535,000

Sales
Average operating assets

$535,000
$230,000

ROI = 9.35% 2.33 = 21.8%

ROI increased from 15% to 21.8%.
Slide 91

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 92

End of Part 09 - Chap. 12

Slide 93

Relevant Costs for Decision Making

Part 10 - Chapter 14

Cost Concepts for Decision Making

A relevant cost is a cost that differs

between alternatives.

Slide 95

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 96

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 97

Identifying relevant costs

1. The sunk cost in this situation is:

A. $10,000
B. $26,800
C. $11,200
D. $0

Slide 98

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 99

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 100

Key Terms and Concepts

When a limited resource of
some type restricts the
companys 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 101

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 102

Utilization of a Constrained Resource: An

Example
Ensign Company produces two products and
selected data are shown below:
Product
2

1
Selling price per unit
Less variable expenses per unit
Contribution margin per unit
Current demand per week (units)
Contribution margin ratio
Processing time required
on machine A1 per unit

60
36
$ 24
2,000
40%
1.00 min.

50
35
$ 15
2,200
30%
0.50 min.

Slide 103

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 104

Utilization of a Constrained Resource

The key is the contribution margin per unit of the
constrained resource.
Product
1
Contribution margin per unit
Time required to produce one unit
Contribution margin per minute

24
$
15
1.00 min.
0.50 min.
$
24
$
30

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.
Slide 105

Utilization of a Constrained Resource

Lets see how this plan would work.
Alloting Our Constrained Resource (Machine A1)

Weekly demand for Product 2

Time required per unit
Total time required to make
Product 2
Total time available
Time used to make Product 2
Time available for Product 1
Time required per unit
Production of Product 1

2,200 units
0.50 min.
1,100 min.

2,400
1,100
1,300
1.00
1,300

min.
min.
min.
min.
units

Slide 106

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.

Production and sales (units)

Contribution margin per unit
Total contribution margin

Product 1
1,300
$
24
$ 31,200

Product 2
2,200
$
15
$ 33,000

The total contribution margin for Ensign is $64,200.

Slide 107

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 108

Exercises for Chapter 13

13 - 5
13 - 12

Slide 109

End of Part 10 - Chap. 13

Slide 110