Formula Accounting

8/22/2019 Formula Accounting

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CHAPTER 2: BASIC MANAGERIAL ACCOUNTING CONCEPTS+ Term :

Term Content

Objective 1: TheMeaning and Uses ofCost

Page 28

+ Accumulating costs Is the way that costs are measure and recorder (page 28)

+ Administrative costsAll cost associated with research, development, and general administrationof the organization that can not reasonably be assigned to either selling or

production (page 37)

+ Allocation costThat an indirect cost is a signed to a cost object by using a reasonable andconvenient method (page 30)

+ Assigning costs Is the way that a cost is linked to some cost object (page 29)

+ CostThe amount of cash or cash equivalent sacrificed for goods and/or servicesthat are expected to bring a current or future benefit to the organization(page 28)

+ Cost objectAny item such as products, customers, departments, projects and on so on,for which costs are measured and assigned (page 29)

+ Direct costs Cost that can be easily and accurately traced to a cost object (page 30)

+ Indirect cost Costs that cannot be easily and accurately traced to a cost object (page 30)

+ Opportunity cost Is the benefit given up or sacrificed when one alternative is chosen overanother (page 31)

+ Variable costIs one that increases in total as output increases and decrease in total asoutput decrease

Objective 2: Product andService Costs

Page 32

+ Conversion costIs the sum of direct material cost and direct manufacturing overhead cost(page 34)

+ Direct laborIs the labor that can be directly traced to the goods being produced (page34)

+ Direct materialsAre those materials that are a part of the final product and can be directlytraced to the goods being produced (page 33)

+ Period costs The costs of production are assets that are carried in inventories until thegoods are sold. Sum of selling expenses and administrative expenses

+ Prime cost Is the sum of direct materials cost and direct labor cost (page 34)

+ Product costs

Are those costs, both direct and indirect, of producing a product in amanufacturing firm or a acquiring a product in a merchandising firm andpreparing it for sale (page 33)Total product cost: equals the sum of direct materials, direct labor, andmanufacturing overhead.

+ Sunk costCannot be changed by any decision. They are not differential costs andshould be ignored when marking decisions.

Objective 3: Preparing

Income Statements

Page 37

+ Cost of goodsmanufactured

The total product cost of goods completed during the current period

+ Cost of goods sold The total product cost of goods sold during the period

+ Gross marginIs the difference between sales revenue and cost of goods sold. Grossmargin does not equal operating income or profit (page 41)

+ Manufacturingoverhead

All product costs other than direct material and direct labor are put into acategory called manufacturing overhead (page 34)

+ Selling costsThose cost necessary to market, distribute and service product or service(page 37)

+ Service FirmNo product to purchase or to manufacturing and no beginning or endinginventories. As a result is no cost of goods sold or gross margin on the

income statement+ WIP Work in process


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+ Formula:

Term Formula

Conversion cost = Direct labor + Manufacturing overhead

Cost of goodsmanufactured

= Direct materials used in production + Direct labor used in production +Manufacturing overhead cost used in production + Beginning WIP inventory Ending WIP goods inventory

Cost of goods sold= Beginning finished goods inventory + Cost of goods manufacturedEnding finished goods inventory

Direct material used in

production

= Beginning inventory of materials + Purchases Ending inventory of

materialsManufacturing Firm:

+ Gross margin = Sales revenues Cost of goods sold (application for Manufacturing firm)

+ Operating income = Gross margin Total expense (application for Manufacturing firm)

Per-unit product cost = Total product cost / Numbers of units

Per-unit cost of goodsmanufacturer

= Total cost of goods manufactured / Numbers of units

Prime cost = Direct materials + Direct labor

Sales revenues = Units sold x Sales price

Operating income ofService Firm

= Operating revenues Total operating expense

Total expense(application forManufacturing firm)

= Selling expense + Administrative expense

Total product cost = Direct materials + Direct labor + Manufacturing overhead


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CHAPTER 3: COST BEHAVIOR+ Term :

Term Content

Objective 1: Basics ofCost Behavior

Page 68

+ Committed fixed cost A fixed cost that cannot be easily changed (page 71)

+ Cost behaviorIs the general term for describing whether a cost changes when the level ofoutput changes. (page 68)

+ Discretionary fixedcosts

Fixed costs that can be changed relatively easily at management discretion(page 71)

+ Fixed Costs (FC):Cost that in total are constant within the Relevant range as the level ofoutput increases or decreases (page 69-71). Two types fixed costs arecommonly recognized: discretionary fixed costs and committed fixed costs.

+ Variable costsDefined as costs that in total vary in direct proportion to changes in outputwithin the Relevant range (page 72)

+ Relevant rangeThe range of output over which an assumed cost relationship is valid for thenormal operations of a firm (page 69)

Objective 2: Mixed Costsand Step Costs

Page 74

+ Mixed costs Cost that have both a fixed and a variable component (page 74)

+ Step cost behaviorA cost that display a constant level of cost for a range of output and thejumps to a higher level of cost at some point, where it remains for a similarrange of output (page 74)

Objective 3:Method forSeparating Mixed Costsinto Fixed and VariableComponents

Three method: High-Low method (page 78-79), Scattergraph method (page81), Least squares method (regression)s

+ Dependent variable A variable whose value depends on the value of another variable (page 77)

+ Independent variable Is a variable that measures output and explains changes is the cost or otherdependent variable (page 77)

+ Formula:

Term Formula

Fixed Costs = Total cost - Total variable cost

High-Low method

Step 1: Find the high point/high output and the low point/low output for agiven data setStep 2: Using the high and low points, calculate the variable rate

Variable rate = (High point cost Low point cost)/ (High point output Low point output)Step 3: Calculate the fixed cost using the variable rate (step 2) and eitherthe high point or low point.

Fixed cost = Total cost at high point (Variable rate x Output at highpoint)Or:

Fixed cost = Total cost at low point (Variable rate x Output at lowpoint)Step 4: Form the cost formula for handling based on the high-low method

Total cost = Fixed cost + (Variable rate x Number of .)*Note: If required calculate fixed cost for the year then fixed cost square by12 month.

Mixed cost = Total fixed cost + Total variable cost

Total costs = Total fixed cost + (Variable rate x Units of output)

Total variable costs = Variable rate x Units of output


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CHAPTER 4: COST-VOLUME-PROFIT ANALYSYS+ Term :

Term Content

Objective 1: Break-evenpoint in Unit and in SalesDollars

Page 116

+ Break-even point (BE)The break-even point is the point where total revenue equal total cost(i.e., the point of zero profit. Two type: break-even point unit and break-even point in sales dollar (page 116)

+ Contribution margin (CM) Contribution margin is the difference between sales and variableexpense (page 117)

+ Contribution margin (CM)

income statement

The income statement format that is based on the separation of sots intofixed variable components is called the contribution margin incomestatement (page 117)

+ Contribution margin ratio The contribution margin ratio is the proportion of each sales dollaravailable to over fixed costs and provide for profit (page 121)

+ Variable cost ratio Is the proportion of each sales dollar that must be used to cover variablecosts (page 121)

Objective 2: Units and Sales

Dollars Needed to Achieve a

Target Income

Determine the number of units that must be sold, and the amount ofrevenue required, to earn a targeted profit (page 123)

Objective 3: Graphs of CVP

Relationships

Page 126

+ Cost-Volume-Profit graphDepicts the relationship among cost, volume, and profit (income) byplotting the total revenue line and the total cost line on a graph (page128)

+ Profit-volume graph Visually porttrays the relationship between profits (operating income)and unit sold (page 126)

Objective 4: Multiple-Product

Analysis:

Page 130

+ Common fixed expense The common fixed expense are he fixed costs that are not traceable tothe segment and would remain even if one of the segment as eliminated

+ Direct fixed expense The direct fixed expense are those fixed cost that can be traced to eachsegment and would be avoided if the segment did not exist.

+ Sales mix Sales mix is the relative combination of products being sold by a firm(page 131)

Objective 5: CVP Analysis

and Risk and Uncertainty

Page 133

+ Cost structure Mixed of fixed cost relative to variable costs is referred to as its cost

structure (page 138)+ Degree of operating

leverage (DOL)

Can be measured for a given level of sales by taking the ratio ofcontribution margin to operating income (page 138)

+ Indifference point The quantity at which two systems produce the same operating incomeis referred to as the indifference point (page 140)

+ Margin of safety The margin safety is the units sold or the revenue earned above thebreak-even volume (page 137)

+ Operating leverage Is the use of fixed costs to extract higher percentage changes in profitsas sales activity changes (page 137)

+ Sensitivity analysis Is a what-if technique that examines the impact of changes inunderlying assumption on a answer (page 140)


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+ Formula:page 142

Term Formula

Break-even point in units: = Fixed cost (FC) / (Price Unit variable cost)

Break-event point in salesdollars

= Fixed cost / Contribution margin ratio

= Fixed cost / (1-Variable cost ratio)

Contribution margin per unit = (Price Unit variable cost) / Price

Contribution margin (CM)

ratio

= Total contribution margin / Sales

= Total contribution margin per unit / PriceDegree of operating leverage(DOL)

= Total contribution margin / Operating income

Expected operating income = Operating income + (Percentage change in profit x Operating income)

Margin of safety (MS) in unit = Sell Break-even sales

Margin of safety (MS) insales revenue

= Price x (Sell Break-even sales)

Operating Income (OI)= Sales Total variable expenses Total fixed expenses (page 117)= (Price x Unit sold) (Unit variable cost x Units sold) Fixed cost

Percentage change in profit = Degree of operating leverage x Percent change in sales

Sales Revenue to Achieve aTarget Income Sales dollar to earn target income = (Fixed cost + Target income) /Contribution margin ratio (page 125)

Sales revenues = Price x Unit sold

Unit and Sales Dollars Needto Achieve a Target Income

Number of units = (Fixed cost + Target income) / (Price Variable costper unit) (page 124)

Variable cost ratio = Total variable cost / Sales = Unit variable cost / Price


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CHAPTER 7: ACTIVITY-BASED COSTING AND MANAGEMENT+ Term :

Term Content

Objective 1: Limitations ofFunctional-Based CostAccounting Systems

Page 274

+ Nonunit-Related OverheadCosts

The use of either plantwide rates or department rates assumes that aproducts consumption of overhead resources is related strictly to theunits produced (page 274)

+ Type of Cost: Page 275

- Unit-level Varies with output volume (eg., units); traditional variable costs

- Batch-level Varies with the number of batches produced

- Product-sustaining Varies with the number of product lines

- Facility-sustaining Necessary to operate the plant facility but does not vary with units,batches, or product lines

+ Activity driversActivity drivers, then, are factors that measure the consumption ofactivities by products and other cost objects and can be classified aseither unit-level or nonunit-level (page 276)

+ Product diversity Product diversity mean that products consume overhead activities insystematically different proportions (page 276)

+ Consumption ratio The proportion of each activity consumed by a product is defined as theconsumption ratio (page 276)

+ Illustrating the Failure of

Unit-Based Overhead Rates

To illustrate how traditional unit-based overhead rates can distortproduct costs (page 276-277)

Objective 2:Activity-based

Product Costing: Detailed

Description

Page 280

+ Activity Dictionary List the activities in a organization along with some critical activityattributes (page 282)

+ Activity Attributes Financial and nonfinancial information items that describe individualactivities (page 282)

+ Assigning Costs to

Activities

Once activities are identified and described, the next task is to determinehow much it costs to perform each activity (page 283)

+ Assigning Costs to

Products

Objective 3:Activity-Based

Customer Costing and

Activity-Based Supplier

Costing

Page 285

+ Activity-Based Customer

Costing

Customers are cost objects of fundamental interest (page 286)

+ Activity-Based Supplier

Costing

The cost of a supplier is much more than the purchase price of thecomponents or materials acquired (page 287)

Objective 4: Process-Value

Analysis

Page 290

+ Driver Analysis Driver analysis is the effort expended to indentify those factors that arethe root cause of activity cost. (page 291)

+ Activity Analysis: Activity analysis is the process of identifying, describing, and evaluatingthe activities that an organization perform (page 291)


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- Value-Added Activities Those activities necessary to remain is business are called value-addedactivities (page 291)

- Nonvalue-Added ActivitiesAll activities other than those that are absolutely essential to remain inbusiness, and therefore considered unnecessary, are referred to asnonvalue-added activities.

+ Activity Performance

Measurement

Page 295

+ Quality Cost Management Page 296

+ Environmental Cost

Management:

Page 297

+ Formula:

Term Formula

Objective 1:

Activity Rates = Activity cost / Driver quantity (Total)

Activity-Based Product costs: Page 279

+ Plantwide rate based ondirect labor hours

= Total overhead costs / Total direct labor hours

+ Product costs for eachproduct, using this singleunit-level overhead rate

Step 1: Calculate overhead cost

Overhead costs = Plantwide rate x _____ hours

Step 2: Calculate total cost

Total cost = Prime cost + Overhead costs

Step 3: Calculate unit cost

Unit cost = Total cost / Units produced

Activity-Based Unit Costs

Step 1: Calculate overhead cost

Overhead costs = Activity rate x _____ hours

Step 2: Calculate total cost

Total cost = Prime cost + Overhead costs

Step 3: Calculate unit cost

Unit cost = Total cost / Units produced

Consumption Ratios = Amount of driver / Total driver quantity

Objective 2:

Assigning Cost to Activity= Percent of ____ x Total of ____

Assigning Cost to ProductStep 1: Activity rate = Activity cost / TotalStep 2: Cost = Activity rate x Number of activityStep 3: Unit cost = Total cost / Number of ___

Objective 3:

Activity-Based CustomerCosting

Step 1: Calculate activity rates:

= Activity cost / ____ quantity (Total)

Step 2: Calculate customer-driven cost

= Activity rate x Per ___


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CHAPTER 9: PROFIT PLANNING

+ Term :

Term Content

Objective 2: Preparing theOperating Budget

Page 374

1. Sales budgetThe sales budget is approved by the budget committee and describesexpected sales in units and dollars (page 373)

2. Production budget The production budget tells how many units must be produced to meet

sales needs and to satisfy ending inventory requirements (page 374)

3. Direct materials purchases

budget

The direct materials purchases budget tells the amount and cost of rawmaterials to be purchased in each time period; it depends on theexpected use of materials in production and the raw materials inventoryneeds of the firm (page 376)

4. Direct labor budgetThe direct labor budget shows the total direct labor hours and the directlabor cost needed for the number of units in the production budget (page376)

5. Overhead budget The overhead budget show the expected cost of all production costsother than direct materials and direct labor (page 378)

6. Selling and administrative

expense budget

The selling and administrative expense budget, outlines planed

expenditures for non-manufacturing activities (page 380)

7. Ending finished goods

inventory budget

The ending finished goods inventory budget supplies information neededfor the balance sheet and also serves as an important input for thepreparation of the cost of goods sold budget (page 378)

8. Cost of goods sold budget The cost of goods sold budget reveals the expected cost of the goods tobe sold and is show in Cornerstone 9-7 (page 380)

Objective 3: Preparing the

Financial Budget

Page 382

1 .The cash budgetThe basic structure of a cash budget includes cash receipt,disbursements, any excess or deficiency of cash, and financing (page

382)2. The budgeted balance

sheet

The budgeted balance sheet depends on information contained in thecurrent balance sheet and in the other budgets in the master budget(page 387)

3. The budgeted for capital

expenditures

+ Formula:page 392Term Formula

Production budget

Unit to be produced = Expected unit sales + Units desired ending

inventory (EI) Units in beginning inventory (EI)

Direct material purchasesPurchases = Direct materials needed for production + Direct materials in

desired ending inventory Direct materials in beginning inventory

Formula Accounting

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