FINAL EXAM REVIEW 6 Show-Your-Work Problems (40%) 1.

Journal Entries (CH2) COGM & COGS 1) Purchase of Raw Materials DR raw materials inventory (RMI) CR cash (or accounts payable) 2) Use of direct material in production (transfer to WIP inventory) DR work in process (WIP) inventory* CR raw materials inventory 3) Direct labor DR WIP inventory CR cash (or wages payable) 4) Manufacturing overhead DR WIP inventory CR various accounts (accounts payable, accumulated depreciation) 5) COGM (transfer from WIP to Finished Goods Inventory) DR Finished goods inventory $(COGM) CR WIP inventory $(COGM) 6) Sale of goods DR Cash (or accounts receivable) $(selling price) CR Sales revenue $(selling price) DR Cost of goods sold (expense) $(COGS schedule) CR Finished goods inventory $(COGS schedule) *total WIP Inventory = (BegRMI + Purch EndRMI) 2. Process Costing (CH3) 1) Calculate the number of equivalent units (units completed) + [(units in EndWIP)*(% complete)] 2) Calculate the cost per equivalent unit [(cost of BegWIP) + (current production costs)]/(#equivalent units) 3) Calculate finished goods inventory (#units completed)*(cost per unit) 4) Calculate EndWIP (total cost)-(finished goods inventory) 3. & 4. NPV, IRR, Payback Period, ARR (CH8) - see CH8 below 5. Cash Receipt Schedule (CH9) - see CH9 below 6. Direct Materials Purchases Budget - see CH9 below - Sheet 12 in Building Blocks CH1: Financial v. Managerial Accounting Financial Managerial Users External Internal Rules GAAP no rules (set by management) Level of detail Summary Much more detailed Timeliness Quarterly financial statements As needed (ex. monthly) Orientation of Information Past results & historical information Historical AND future information CH2: Product v. Period Cost - period: selling (marketing, advertising, commission, etc.) and administrative expenses

- reported on income statement as incurred -product: cost of our product (cost of our inventory) - reported on the balance sheet until sold (then reported as COGS on income statement) - direct v. indirect cost - direct: easily traceable ex. Grocery departments supervisors salary is a direct cost to the grocery department - indirect: shared; not easily traceable; allocate costs ex. General managers salary is an indirect cost shared with all other departments - what is included in manufacturing overhead - indirect materials (materials used at the factory that arent part of the finished product) - indirect labor (supervisors, janitors, security guards, etc. at the factory) - other (rent, utilities, insurance, depreciation, etc. at the factory) - three types of inventory - raw materials inventory: materials we have purchased but not yet used - work-in-process inventory: items we started but have not finished - finished goods inventory: items we have finished but have not sold - once sold, these become COGS - calculate COGM & COGS COST OF GOODS SOLD SCHEDULE Beginning finished goods inventory $ + Purchases/COGM +( ) = (cost of) Goods available for sale $ - Ending finished goods inventory -( ) = Cost of goods sold $ COST OF GOODS MANUFACTURED SCHEDULE 1) Direct Materials Used Beginning DM inventory + DM Purchased = DM available for use - Ending DM inventory = Direct Materials Used 2) Direct Labor Cost: How much you paid assembly line workers 3) Manufacturing Overhead Indirect materials + Indirect labor + Rent, utilities, etc. Total Manufacturing Overhead 4) Total Manufacturing Costs for that Period (1) + (2) + (3) + Beginning work-in-process inventory = (cost of) Goods available to be finished - Ending work-in-process inventory Cost of goods manufactured (completed/finished)

$ +( -( $ $

) )

$ +( +( $

) )

$ +( -( $

) )

CH3: Allocate overhead using traditional approach - job order costing v. process costing (theory) - job order costing: keep track of each individual item or job - ex. Boeing, Rolls-Royce, specially manufactured goods, etc. - process costing: calculate average cost per item/job - used for large volume of similar items (ex. Pepsi) (total cost)/(total units) - equivalent units (help determining average cost) - process costing (allocating overhead using traditional approach) - traditional approach: one rate with one cost driver (total estimated MO)/(total cost driver) CH4: ABC (more accurate) approach of allocating overhead - more than one cost driver [(total cost driver)/(rate per cost driver)]*(activity) - ex. [(depreciation)/(total machine hours)]*(machine hours used) - ex. [($100,000)/(2,500 hours)] = $40/machine hour ($40/machine hour)(20 machine hours) = $800 CH5: Variable, Fixed, and Mixed Costs - variable cost: remain the same per unit, regardless of activity - as activity increases, total variable costs increase - fixed cost: remain the same in total, regardless of activity - as activity increases, fixed cost per unit decreases - 4 methods of splitting costs 1) ENGINEERING APPROACH: company hires an expert 2) SCATTER GRAPH: manually plot historical data 3) REGRESSION: scatter graph, but company uses software; most accurate 4) HIGH-LOW METHOD: use the period with the highest and lowest activity CH6: Contribution v. Traditional Income Statement TRADITIONAL INCOME STATEMENT Sales revenue $ - Cost of goods sold -( ) = Gross profit $ - (Operating expenses + Selling and administrative expenses) -( ) = Net income $ CONTRIBUTION INCOME STATEMENT Sales revenue $ - Variable expenses -( ) = Contribution margin $ - Fixed expenses -( ) = Net income $ - 4 or 5 questions about break-even and target profit in units and in dollars - break-even/target profit in units: - contribution approach: (fixed expenses)/(contribution margin per unit) - equation approach: (sales) (variable expenses) (fixed expenses) = profit [(selling price per unit - variable cost per unit)(units sold)]-(fixed expenses) = profit - break even/target profti in sales: - contribution approach: (fixed expenses)/(contribution margin ratio) - contribution margin ratio: (contribution margin per unit)/(selling price per unit) - equation approach: (sales) (variable expenses) (fixed expenses) = profit

CH7: Relevant v. Not Relevant Information - relevant: any information that makes an impact (difference) when deciding between alternatives 1) must happen in the future 2) must differ between alternatives - keep or replace - make or buy - accept special offer or reject special offer - compare offer to variable cost, and multiply units by difference CH8: Capital Budgeting - capital budgeting: process of deciding whether to invest or not in capital projects - cost of capital (theory) - cost of obtaining the cash - NPV, IRR, Payback Period, and ARR - NPV: Is the investment worth it? 1. Calculate present value of cash flows 1) Present value of annual cash flows (using PV of annuity table) 2) Present value of salvage value (using PV of $1 table) 3) add the first two to find PV of cash flows 2. Calculate NPV: (present value of cash flows) (cost of investments) - IRR: What percent are we making? 1. Calculate the factor: (cost of investment)/(net annual cash inflows) 2. Find the factor and corresponding percentage in PV of annuity table - Payback Period: How many years does it take to recover our investment? (cost of investment)/(net annual cash inflows) - ARR: The percent investors will see in our GAAP financial statements - uses depreciation expense (others dont because its not a cash flow) 1. Calculate annual depreciation: [(cost)-(residual)]/(#years) 2. Calculate annual accounting income: (net annual cash flows) - (annual depreciation) 3. Accounting rate of return: (annual accounting income)/(cost of investment) CH9: Budgeting - purchases budget (3 questions) PRODUCTION BUDGET (used in PURCHASES BUDGET) JAN FEB MAR APR Sales forecast 600 400 550 700 + Desired ending inventory 40 55 70 60 = Total needed 640 455 620 760 - Beginning inventory 60 40 55 70 = Quantity to be produced 580 415 565 690 DIRECT MATERIALS BUDGET (PURCHASES BUDGET) JAN FEB MAR Quantity to be produced 580 tables 415 565 x Materials per unit x 14 ft wood 14 14 = Materials needed = 8120 ft 5810 7910 + Desired ending inventory + 1162 ft (A) 1582 1932 - Beginning inventory - 300 ft (B) 1162 1582 = Quantity to be purchased = 8982 ft 6230 8260 x Cost per ft x $2.50/ft 2.50 2.50 = COST OF PURCHASES = $22,455 $15,575 $20,650

APR 690 14 9660

(A): 20% of the next months materials needed (B): the ending inventory from the previous month - cash receipts schedule (5 questions) CASH RECEIPT (COLLECTION) SCHEDULE JAN FEB 2 months prior (25%) (25%)($500,000) (25%)($750,000) 1 month prior (60%) (60%)(750,000) (60%)(400,000) Current credit (15%) (15%)(400,000) (15%)(450,000) Cash 40,000 45,000 Total $675,000 $540,000

MAR (25%)($400,000) (60%)(450,000) (15%)(550,000) 55,000 $507,500

CH10: Standard (Budgeted) Amount - variance - DM Variances: usage and price - DM usage variance: (actual quantity used)*(standard price) v. (standard quantity allowed)*(standard rate) (standard quantity allowed) = (actual units produced)*(standard per unit) - DM price variance: (actual quantity purchased)*(actual rate) v. (actual quantity purchased)*(standard rate) - DL Variances: rate and efficiency - DL rate variance: (actual hours worked)*(actual rate) v. (actual hours worked)*(standard rate) - DL efficiency variance: (actual hours worked)*(standard rate) v. (standard hours allowed)*(standard rate) (actual hours allowed) = (actual units produced)*(standard per unit) - favorable v. unfavorable - favorable: actual amount < budgeted amount - unfavorable: actual amount > budgeted amount - 15 questions calculating variances - dont have to know MO variance (sheet 16) CH11: Centralized v. Decentralized Management Style - centralized: top management is making most of the decisions - decentralized: decision making is delegated to lower level managers - read section in the book - residual income (may be a negative number) and ROI (6 questions) - ROI: (income*)/(assets**) = % *income aka profit **assets aka investments - residual income: (actual income) (required income) = $ (required income) = (required return)*(assets)