Chapter 1 Managerial Accounting and the Business Environment

(9 questions)

Managerial accounting- concerned with providing managers (or those that direct and control a company's operations) with information. Internal. Reports show performance, sales, problems such as declines, or opportunities. Not in accordance with GAAP

Budgets - a detailed plan for the future, usually in formal quantitative terms. prepared under direction of controller aka head of the accounting department annually to represent management's plans

Line position- a position in an organization that is directly related to the achievement of the organization's basic objectives. Ex. Manager of music store is directly related to selling music

Staff position (difference between the two) - a position in an organization that is only directly related to the achievement of the organization's basic objectives. Such positions provide service or assistance to line positions or to other staff positions. Ex. Personnel dept

Three major customer value propositions

1. Customer Intimacy - understand & respond to customer's individual needs better than competitors

2. Operational Excellence - delivery of products & services faster, more conveniently, and at a lower price than competitors

3. Product Leadership - offer higher quality products than competitors

The Five-Step Framework Used to Guide Six Sigma Improvement Efforts

1. Define- establish the scope and purpose of the project. Diagram the flow of the current process. Establish the customer's requirements for the process

2. Measure- gather baseline performance data related to the existing process. Narrow the scope of the project to the most important problems

3. Analyze- identify the root cause(s) of the problems identified in the measure stage

4. Improve- develop, evaluate, and implement solutions to the problems.

5. Control- ensure that problems remain fixed. Seek to improve the new methods over time.

Sarbanes-Oxley Act of 2002- reform legislation enacted to protect the interests of the stockholders who invest in publicly traded companies by improving the reliability and accuracy of the disclosures provided to them. 6 key aspects:

1. Requires that both the CEO and CFO certify in writing that their company's financial statements and accompanying disclosures fairly represent the results of operations (punishable by jail time)

2. Public Company Accounting Oversight Board provides additional oversight over the audit profession. Investigations, disciplinary action, standards and rules

3. Power to ire, compensate, and terminate the public accounting firm that audits a company's financial reports in the hands of the audit committee of the board of directors. All members of the audit committee must be independent

4. Prohibits a public accounting firm from providing a wide variety of nonauditing services to an audit client

5. Requires that a company's annual report contain an internal control report

6. Establishes severe penalties for altering or destroying any documents that may eventually be used in an official proceeding including prison time for management who retaliates against whistle blowers

The Institute of Management Accountants' five Standards of Ethical Conduct (which of following is not)

1. maintain a high level of professional competence

2. treat sensitive matters with confidentiality

3. maintain personal integrity

4. disclose information in a credible fashion

5. objectivity

Chapter 2 Cost Terms, Concepts, and Classifications

(11 questions)

Manufacturing overhead (anything indirect is considered overhead)- all manufacturing costs except direct materials and direct labor

Prime costs (think primary)- direct materials cost plus direct labor cost

Product costs (definition; given multiple types and which is NOT product cost)- all costs that are involved in acquiring or making a product. In the case of manufactured foods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Conversion costs (costs to convert materials into final product; aka NOT materials, but labor and overhead)- direct labor cost plus manufacturing overhead cost

Period cost- costs that are taken directly to the income statement as expenses in the period in which they are

incurred or accrued

Change in activity does what to total variable cost and variable cost per unit? (Variable à change w/ activity when production goes up or down; what happens to total variable cost and cost per unit? Total variable cost will change but unit cost will not)

Sunk cost (definition)- a cost that has already been incurred and that cannot be changed by any decision made now or in the future

Opportunity cost (definition)- the potential benefit that is given up when one alternative is selected over

another

Internal failure cost (definition- ex. Cost of scrap)-

External failure cost (something beyond manufacturing floor not under our control; Ex. out of warranty equipment)-

Four categories of quality costs in a quality cost report (internal/external failure cost are two categories what are other two)

1. Prevention Costs support activities whose purpose is to reduce the number of defects
2. Appraisal Costs (Inspection costs) incurred to identify defective products before they are shipped
3. Internal Failure Costs result from identifying defects before they are shipped to customers
4. External Failure Costs result when a defective product is delivered to a customer

Chapter 5 Cost Behavior: Analysis and Use

(10 questions)

Which costs change with a change in activity within the relevant range? (unit fixed cost will change when level of activity changes)

1. If activity level doubles total variable costs double, etc.

2. variable costs remain constant if expressed on a per unit basis

Step-variable cost (definition)- the cost of a resource that is obtainable only in large chunks and that increases and decreases only in response to fairly wide changes in activity

Variable cost (definition) (no change/increase/decrease)- a cost whose total dollar amount varies in direct proportion to changes in activity level

Discretionary fixed cost- those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research

High-low method of cost analysis (goes through 2 data points; one is high one is low)

Variable Cost= D cost/ D activity

Contribution margin (calculate) Sales - Variable Expenses = Contribution Margin

Traditional Approach to preparing an income statement (difference between two)- organized in a "functional" format emphasizing the functions of production, administration and sales, no attempt is made to distinguish between fixed and variable costs which are lumped together under administrative expense

Contribution Approach to preparing an income statement- an income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated according to organizational functions.

Calculate the high-low method (given high level, what is low level)

Calculate the best estimate of the total monthly fixed manufacturing cost (find total fixed cost using high-low method)

Chapter 6 Cost-Volume-Profit Relationships

(10 questions)

Contribution margin (definition)- the amount remaining from sales revenues after all variable expenses have

been deducted

If both the fixed and variable expenses associated with a product change, what will be the effect on the contribution margin ratio and the break-even point, respectively? (Sales -VC)/Sales = CM ratio = Contribution Margin / Sales

FC/(Sales -VC) = BE (make up values and see if numbers go up or down)

Break-even point (definition)- the level of sales at which profit is zero. The break even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses

Target profit (definition)- profit goal determined by sales volume

Margin of safety (calculation) MoS=Total Budgeted (or Actual) Sales - B-E Sales

MoS % - MoS in $/ Total Budgeted (or Actual) sales in $

Degree of operating leverage (calculation) = Contribution Margin/ Net Operating Income

CVP analysis (question: which is NOT an assumption?)

1.Selling price is constant. The price of a product or service will not change as volume changes

2.Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit and the fixed element is constant in total over the entire relevant range.

3.in multi-product companies, the sales mix is constant

4.in manufacturing companies, inventories do not change, the number of units produced equals the number of units sold

Calculate total fixed expenses (given sales, margin of safety, CM ratio, and degree of operating leverage -

what are their total fixed costs?)

The link is in the formulas.
current sales - breakeven sales = margin of safety
From what you are given, sales and margin of safety, you can find the breakeven sales.
breakeven sales = fixed expenses / CM ratio
From what you now have, breakeven sales and CM ratio, you can calculate the fixed expenses.

Calculate the overall effect on the company's monthly net operating income with a given change (given margin of safety, sales, and VC - find fixed costs; information given on "per unit" valuation and fixed cost also given) if we make x number of units what's our profit going to be calculate at first level of activity to see what profit is, then calculate again with additional 20 thousand advertising expense that will let you sell 100 more units.. is it worth it?