Managerial Accounting Final Exam

Managerial Accounting Final exam Learning Objectives: Chapter 1 – LO1 – LO6 1. Understand cost classifications used for assigning costs to cost objects: (direct costs and Indirect cost) a. Direct Costs – is a cost that can be easily and conveniently traced to a specified cost object. i. Example – if a company printed 1,000 flyers the cost of the paper would be a Direct Cost. b. Indirect Costs – is a cost that cannot be easily and conveniently traced to a specified cost object. i. Example – a factory managers Salary would be a indirect cost of a particular variety. 2. Identify and give examples of each of the three basic manufacturing cost categories a. Direct Materials – Materials that become part of the product are easily traced to the finished goods i. Example – the plastic produced by company A will be the direct materials for the laptops made by company B b. Direct Labor – Labor costs that can be easily traced to individual units of product. i. Example – Assembly line works at a car manufacturing plant. c. Manufacturing Overhead – all manufacturing costs that cannot be classified as Direct Materials or Direct Labor. i. Example – Things like the salary of janitors, supervisors, material handlers, night security guards are all classified as manufacturing overhead. 3. Understand cost classifications used to prepare financial statements: (Product costs and Period Costs) a. Product Costs – all costs involved in acquiring or making a product. Product costs “attach” to a unit pf product as it is purchased or manufactured and they stay attached to each unit of product unit it is sold. i. Work in process goods – consists of units of product that are only partly complete. ii. Finished goods – consists of completed units of product that have not yet been sold to customers. b. Period Costs – all costs that are not product costs. All selling and administrative expenses. 4. Understand costs classifications used to predict cost behavior: (Variable costs, Fixed Costs, and Mixed Costs) a. Variable Costs – total cost varies in direct proportion with changes in activity within the relevant range. i. Activity Base – is a measure of whatever causes the incurrence of a variable cost. b. Fixed Costs – is a cost that remains constant, in total, regardless of changes in the level of activity. i. Committed fixed costs – Long term costs that are hard to change and if adjusted they will impact long run capacity. (PPE) ii. Discretionary fixed costs – Short run annual choices, if changed there will not be an impact on long run capacity. c. Mixed Costs – Costs that contain both variable and fixed cost elements. 5. Understand cost classifications used in making decisions: (Differential costs, Sunk Costs, Opportunity costs). a. Differential Costs – a future cost that differs between any two alternatives. (Always relevant costs) b. Sunk Costs – is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. c. Opportunity Costs – is the potential benefit that is given up when one alternative is selected over another. 6. Prepare income statements for a merchandising company using the traditional and contribution formats. a. Traditional Format – Costs are organized according to function. Created for External reporting b. Contribution Format – costs are organized according to behavior. Internal reporting. Chapter 5 Appendix 5A – LO10 – LO11 . Analyze a mixed cost using a scattergraph plot and the high-low method a. Scattergraph plot – Use a line that best represents the data. i. Once you determine that the dependent and independent variables have a linear relationship you can analyze the mixed cost based on the line. b. High-low Method – Separates a mixed cost into its Variable components by looking at the change in cost between the high and the low levels of activity. i. this method takes the highest data point on the graph and the lowest data point on the graph and makes draws a linear relationship between them. The variable cost is estimated by dividing the difference in costs between the high and low levels of activity by the change in activity between those two points. . Analyze a mixed cost using a scattergraph plot and the least square regression method. a. Least Square regression method – a line is created through that data using all of the data points. This line is created based on creating the smallest error from the line. i. Goodness of fit – the percent of change of the depend variable that is explained by changes in the independent variable. b. Scattergraph – Chapter 5 – LO1 – LO9 1. Explain how changes in activity affect contribution margin and net operating income a. Contribution Margin – is the amount remaining from sales revenue after variable expenses have been deducted. i. For each product that is sold the total sales will go up. For example, say a company sells 350 widgets at $250 per unit. And has a fixed expense of $35,000. The companies CM will be $35,000. So CM minus fixed expenses the net income will equal $0. So as the number of total units sold goes up so does the CM. Sales (350 widgets) $250 per unit $87,500 Variable expenses $150 Per unit $52,500 Contribution Margin $35,000 Fixed Expenses $35,000 Net Operating income $0 b. Net Operating income – As the total number of units sold goes up so does the total CM and since the Fixed Expenses don’t move when the CM gets bigger so will the total Net operating income. 2. Prepare and interpret a cost-volume-profit (CVP) graph and a profit graph a. CVP Graph – “Cost-Volume-Profit Graph” – highlights CVP relationships over wide ranges of activity. i. Preparing – PG. 80 ii. Interpret – where the 2 angular lines meet is the break-even point between Sales and total expenses. Where the total revenue line meets to horizontal line that is where revenue is greater than total fixed expenses. b. Profit Graph – “Profit = unit CM *Q – fixed expenses” this graph starts at a negative which is whatever you fixed expenses are. Then you use your equation to graph your line going up towards 0. Once 0 is hit that is your break even point then the rest of the line is your total profit. PG.81 3. Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume. a. Contribution Margin – CM ratio = (contribution margin / Sales) when sales go down the contribution margin will go down with sales. And when CM goes down so will the net operating income because fixed expenses don’t change. PG. 82 4. Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume. a. Variable costs – for example if there is a $10 increase in materials because of higher quality raw materials that will make your variable cost per unit go up by $10. So that will decrease your contribution margin by $10 per unit. But with the better-quality part they expect an increase in sales (Increase by 80 units). According to this with the increase in sales there will be a $3,200 jump in contribution margin therefore that’s how much net income will increase. b. Fixed costs – Current Sales are 400 widgets for a total sale of $100,000. Sales manager suggests a $10,000 dollar increase in Marketing would increase to 520 widgets. Since this would increase sales and variable costs stay the same the CM would go up by $12,000 thus making a total net income of $2,000. Original 400 units sold Sales Variable Costs Contribution Margin Fixed Costs Net income $100,000 $60,000 $40,000 $35,000 $5,000 Variable costs change $10 increase in Mat. Costs – increase units sold to 480 $120,000 $76,800 $43,200 $35,000 $8,200 Increase net income by $3,200 Fixed Costs Change $10,000 increase in Fixed costs. = increase units sold to 520. $130,000 $78,000 $52,000 $45,000 $7,000 Increase net income by $2,000 5. Determine the break-even point. a. Equation method – “Profit = Unit CM*Q – fixed Expenses” b. Formula method – “Unit Sales to break even = (Fixed Expenses / Unit CM)” c. Break even in sales dollars – “Dollar Sales to break Even = (Fixed Expenses / CM ratio)” 6. Determine the level of sales needed to achieve a desired target profit. a. Equation method – i. “profit = unit CM * Q – Fixed Expenses” b. Formula Method – i. “Attain the target profit = (Target Profit + Fixed Expenses/Unit CM)” 7. Compute the margin of safety and explain its significance. a. Margin of safety – “MS = total sales – Break-Even Sale” i. This is how much our sales can drop before we start to exercise negative profits. 8. Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income. a. Operating income – is a measure of how sensitive net operating income is to a given percentage change in dollar sales. i. “Degree of operating income = (Contribution Margin / Net operating income)” 9. Compute the break even point for a multiproduct company and explain the effect of shifts in the sales mix on contribution margin and the break-even point. a. Sales Mix – refers to the relative proportions in which a companies products are sold. Chapter 8 – LO1 – LO10 1. Understand why organizations budget and the processes they use to create budgets. a. Why companies budget – Budgeting is used for “planning” and “controlling” i. Planning – developing goals and preparing various budgets to achieve those goals ii. Controlling – gathering feedback to ensure that the plan is being properly executed or modified as circumstances change. b. Responsibility Accounting – is that a manager should be held responsible for those items – and only those items – that the manger can actually control to a significant extant. c. Continuous or perpetual budget – is a 12-month budget that rolls forward one month as the current month is completed. d. Zero-based budget – all budgets start at zero, you would estimate the resources required to achieve the periods goals. e. Minimum level budget – base is established to cover the committed costs expenditures beyond the base required justification. f. Incremental budget – budget figures are calculated as a dollar of percent change from the prior year. 2. Prepare a sales budget, including a schedule of expected cash collections. PG. 198 3. Prepare a production budget PG. 200 4. Prepare a direct materials budget, including a schedule of expected cash distributions for purchases of materials. PG. 201 5. Prepare a direct labor budget PG. 202-203 6. Prepare a Manufacturing overhead budget PG. 204 7. Prepare a cash Budget PG. 208 8. Prepare a Budgeted income statement PG. 211 9. Prepare a budgeted balance sheet Chapter 10 – LO1 – LO3 1. Compute the direct materials price and quantity variance and explain their significance. a. Materials price Variance – AQ (AP – SP) b. Materials quantity variance – SP (AQ – SP) 2. Compute the direct labor rate and efficiency variance and explain their significance. a. Labor Rate Variance – AH(AR – SR) b. Labor Efficiency Variance – SR(AH – SH) 3. Compute the variable manufacturing overhead rate and efficiency variance and explain their significance. a. Variable manufacturing overhead rate Variance – AH(AR – SR) b. Variable Manufacturing overhead efficiency Variance – SR(AH – SH) Chapter 6 – LO4 – LO5 4. Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions a. Traceable Fixed Costs – of a segment is a fixed cost that is incurred because of the existence of the segment. b. Common Fixed cost – is a fixed cost that supports the operations of more than one segment. 5. Compute companywide and segment break even points for a company with traceable fixed costs a. Dollar sales for company break even = (Traceable fixed costs + Common fixed Expenses) / (Overall CM ratio) b. Dollar sales for segment to break even = (segment traceable fixed expenses) / Segment CM ratio Chapter 11 – LO1 – LO2 1. Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. a. ROI – ROI = (Net operating income) / (Average operating assets) b. Sales Change – c. Expenses Change – d. Assets change – 2. Compute residual income and understand its strengths and weaknesses a. Residual Income = (Net operating income)-(average op. assets * Min. required ROR)