How can we help?

You can also find more resources in our Help Center.

89 terms

ACCT exam 3

Managerial Accounting Ch 7-9, 11
STUDY
PLAY
Chapter 7
Budgeting
Three Levels of Planning
Strategic Planning;

Capital Budgeting;

Operations Budgeting; highest level to lowest level
Strategic Planning
Long-term decisions about the business; big pictue (senior managers, board of directors)
Capital Budgeting
Intermediate-range decisions;
usually involves asset acquisition / disposition (mid-level and senior managers)
Operations Budgeting
Short-term objectives;
Master Budget (usually for year): sales, production, and financing;

broken down into quarters or months
Advantages of Budgeting
time consuming and expensive but:
Promotes planning;
Promotes coordination;
Enhances performance measurement (budget sets goals);
Enhances corrective actions
Budgeting
starts with a projected sales budget;

end result is the pro-forma financial statements
Budgeting Process
Accrual basis;

Start with sales budget;
calculate inventory purchase budget;
calculate GSA budget
Receipts and Payment Schedules
cash receipts schedule comes from sales budget;

cash payments for inventory comes from inventory purchase budget;

cash payments for GSA comes from GSA budget
Cash budget
the net of cash schedules
Pro-Forma Financial Statements
Come from BUDGET, covers a period of time (M, Q, Y);

Accrual Basis - NOT cash basis;

Income Statement; Balance Sheet; Statement of Cash Flows
The Balance Sheet
The balance sheet is a financial statement that indicates the financial condition of a business as of a given point in time. It includes assets, liabilities, and stockholders' equity, and it represents a statement of the basic accounting equation. The assets and liabilities are divided into current and noncurrent classifications on the basis of liquidity, and comparisons of assets and liabilities often provide an indication about the company's ability to meet obligations as they come due (i.e., solvency).
Assets
The assets accounts reported on the balance sheet are listed in order of liquidity and are divided into four categories:

Current Assets;
Long-term Investments;
Property, Plant and Equipment;
and Intangible Assets.
Current Assets
Cash, short-term investments, accounts receivable, inventory, and prepaid expenses.
Long-term Investments
Long-term notes receivable, land, securities, the cash value of life insurance, and special investment funds.
Intangible Assets
Patents, trademarks, and goodwill.
Liabilities and Shareholders' equity
Liabilities and shareholders' equity. Liabilities are divided into two categories:

current liabilities and long-term liabilities.
Current Liabilities
short-term payables
Long-term Liabilities
Long-term notes, bonds and mortgage payables
Shareholders' Equity
Contributed capital and retained earnings.
The Income Statement
Consists of two basic categories:

Revenues and Expenses.

Revenue less expenses equal net income.
Revenues
Asset inflows (or liability decreases) associated with operating transactions during a given period, include sales, fees earned, service revenues, and other revenues (e.g., interest, book gains).
Expenses
Represent the asset outflows (or liabilities increases) required to generate the revenues, include the cost of goods sold, operation expenses (e.g., wages, rent) and other expenses (e.g., interest, book losses).
The Statement of Shareholders' Equity
Consists of the changes in two basic accounts:

Contributed Capital,

and Earned Capital (primarily Retained Earning).
The Statement of Cash Flow
Contains three categories:

cash flows from Operating activities,

Investing activities,

and Fina
Chapter 8
Flexible Budgets, Standard Costs, and Variance Analysis
Static Budgets
Static budgets are prepared for a single, planned level of activity (best guess). Performance evaluation is difficult when actual volume differs from the planned volume. Comparing static budgets with actual costs is like comparing apples and oranges.
Evaluating Performance
The relevant question is . . .
"How much of the favorable cost variance is due to lower volume, and how much is due to good cost control?"

To answer the question, we must FLEX the budget to the actual volume.
Flexible Budgets
Shows revenue and expenses that should have occurred at the actual sales level (what would the static budget look like if we knew the actual sales volume?);

Reveal variances due to good cost control or lack of cost control (takes out the effect of difference in volume);

Improve performance evaluation (more accurate assessment of cost control)
Preparing a Flexible Budget
Static budget - before the period begins;

Flexible budget - after the period using known sales volume.

Both use Standard prices forecasted from past experiences.
Static Budgets and Performance
Total variance (favorable and unfavorable) are due to differences in activity and cost control.
Flexible Budget Performance Report
How much variance is due to fewer units (static v. flex), and how much is due to cost control (flex v. actual)
Standard Cost Systems
A standard represents the amount a price, cost, or quantity should be, based on certain anticipated circumstances.

Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production.
Standard Costs
Predetermined before the period begins; used for planning material, labor and OH requirements;

benchmarks for measuring performance - "what should happen
Use of Standards by Nonmanufacturing Organizations
Standard cost analysis may be used in any organization with repetitive tasks.

A relationship between tasks and output measures must be established.
Standard Costs
Managers focus on quantities and costs that exceed standards, a practice known as "management by exception"
Standard Cost Variances
Compare actual to flex budget:

Standard Cost Variances = Price Variance + Usage Variance
Price Variance
the difference between actual and standard price
Usage Variance
the difference between actual and standard quantity
Material Variances
Based on totals, never per unit!!!

Total Material Variance = Material Price Variance + Material Usage Variance
Material Price Variance
(AQ x SP) - (AQ x AP)
Material Usage Variance
(SQ x SP) - (AQ x SP)
Labor Variances
Based on totals, never per unit!!!

Total Labor Variance = Labor Price Variance + Labor Usage Variance
Labor Price Variance
(AQ x SP) - (AQ x AP)
Labor Usage Variance
(SQ x SP) - (AQ x SP)
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;
Quality of training provided to employees
Variable Overhead Variance
Based on totals, never per unit!!! Flex Budget - Actual
Fixed Overhead Spending Variance
Based on totals, never per unit!!! Budget - Actual
Selecting Variances to Investigate
Management by exception tells us to consider:

The materiality of a variance (big enough to make a difference in decisions?),
How frequently it occurs (symptom of a larger problem),
The capacity to control the variance,
and The costs and benefits of investigating.
Chapter 9
Responsibility Accounting
Responsibility Accounting
Accounting data that provides information:

Relating to the responsibilities of individual managers;
To evaluate managers on controllable items;
What are individual managers responsible for?
What can they do that will make a difference?
Decentralization
Decision Making is Pushed Down;
Decentralization often occurs as organizations continue to grow;
Why managers have different responsibilities
Advantages of Decentralization
Improves quality of decisions;
Improves productivity;
Improves performance evaluation;
Develops lower-level managers;
Encourages upper-level management to concentrate on strategic decisions
Challenges of Decentralization
Goal Congruence: Organization's lower-level managers make decisions that achieve top-management goals;

Big challenge: manager's goals must be same as the company's goals.
Managerial Performance Measurement
Cost Center (lowest level of responsibility; evaluated on cost variances, CH8):
Cost control, Quantity and quality of services;
Profit Center (evaluated basted on income statement):
Profitability;
Investment Center (highest level of responsibility):
Return on investment (ROI),
Residual income (RI)
Return on Investment (ROI)
Rate of return investment center managers earn on their assets;

ROI = Income / Operating Assets;
ROI = Margin x Turnover;

Operating assets are only those assets used in production.
Margin
Margin = Income / Sales Revenue;

The amount of income generated by each dollar of sales
Turnover
Turnover = Sales Revenue / Operating Assets;

The amount of sales produced by every dollar invested in operating assets
Evaluating ROI
What is the history?

What are the industry/division standards
Goal Congruence
managers and company agree on decisions; incongruence (or sub-optimization) results when managers make decisions based on what is good for them (ie, choosing investments based on ROI when bonuses are paid based on ROI), rather than what is good for company
Hurdle rate
The ROI that the companies requires of investments; the desired rate of return
Residual Income (RI)
Net operating income that an investment center earns above the desired ROI.

RI = Actual Income - (Operating Assets x Desired ROI)
Advantages of Residual Income
Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.

Therefore... Goal Congruence
Comparing ROI and RI
calculate for each scenario:
current,
for investment alone;
current + investment
Chapter 11
Product Costing
Costs Can Be Assets or Expenses
Product Cost; Period Cost
Product Cost
Held as asset on balance sheet until sold, then goes to income statement as COGS;

Balance sheet = Raw material, Work in process, Finished goods.
Period Cost
Expensed when incurred
Manufacturing Cost Flow
Product Cost made up of Direct Labor, Direct Material, and Manufacturing Overhead
Manufacturing Overhead
All other manufacturing costs; Indirect Material, Indirect Labor, Other Costs
Indirect Material
Materials used to support the production process.

Ex: grease for machines, cleaning supplies.

Kept as raw material until used.
Indirect Labor
Cost of personnel who do not work directly on the product.

Ex: Production Supervisor.
Other Costs
Depreciation on manufacturing equipment;

Ex: rent & utilities for factory
Cost Flow in Manufacturing Companies
3 types of inventory accounts: Raw Materials, Work in Process, Finished Goods
Raw Materials (RM)
Materials waiting to be used;

direct or indirect materials
Work in Process (WIP)
Partially completed goods; some material, some labor and some applied OH used;

moved to finished goods at Cost of Goods Manufactured (COGM)
Finished Goods (FG)
Completed goods waiting to be sold;

moved out as COGS
T-Accounts
Cash, Raw Materials, Work in Process, Finished Goods, COGS, Manufacturing OH;

All have BB & EB except MOH.

EVERYTHING is labeled.

COGS goes on Income Statement
Flow of Overhead Costs
Using a Predetermined Overhead Rate (POHR) makes it possible to estimate total product costs sooner.

Actual overhead for the period is not known until the end of the period.
Predetermined Overhead Rate (POHR)
used to apply overhead to products, is determined before the period begins.

POHR = (Estimated manufacturing overhead cost for the period) / (Estimated allocation base for the period)
Applied Overhead
= POHR x Actual Activity;

POHR is based on estimates, and determined before the period begins;

Actual Activity is the actual amount of the allocation base such as units produced, direct labor hours, or machine hours.
Too much OH applied
too much cost in inventory (WIP, FG, COGS);

COGS is too high, profit is too low
Too little OH applied
too little cost in inventory (WIP, FG, COGS);

COGS is too low, profit is too high
Timing
Before period = calculate POHR;

During period = apply OH using POHR and actual allocation base;

After period = Adjust for over- or under-applied OH (OH Variance to zero out MOH, applied to COGS accounts)
Terminology
Estimated OH = Budgeted OH (used before period, POHR);

Applied OH = Allocated OH (used during period to get OH to products in WIP account);

Actual OH = Incurred OH (used after periods to close out OH variance)
Total Manufacturing Costs
Direct Material, Direct Labor (wages), applied OH
Cost of Goods Available for Sale
All goods in Finished Goods Account (BB + COGM)
Income Statement
Sales - COGS = Gross Margin;

Gross Margin - Expenses = Net Income
Filling in T-Accounts
Cash (?), RM, WIP, FG == BB & EB; COGS, MOH == entries as incurred;

MOH == zero out at end of period, balancing entry COGS.

COGS goes to Income Statement.