ACC2002 Managerial Accounting

Midterm Review
ACC2002 Managerial Accounting
Qi (Susie) Wang

Wang 2014

Basic Cost Management

Manufacturing costs are often
combined as follows:
Direct
Material

Direct
Labor

Prime
Cost
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Manufacturing
Overhead

Conversion
Cost
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Basic Cost Management

Manufacturing Overhead
Indirect
Material

Indirect
Labor

Materials used to support the

production process.
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.
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Other
Costs

Cost of personnel who do

not work directly on the
product.
Examples: maintenance
workers, janitors and
security guards.
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we always assume that it is direct labour unless stated otherwise

Basic Cost Management

(cost of completed and transferred out)

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Basic Cost Management

CGM = TMC - WIP
TMC = CGM + WIP
CGS = CGM + FG
CGM = CGS - FG

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CGM: cost of goods manufactured

TMC: total manufacturing costs
WIP: work-in-process
CGS: cost of goods sold
FG: finished goods
: increase
: decrease
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Actual and Normal Costing

job order costing and process costing
using POHr
lecture 1

Actual direct material

and direct labor
combined with
actual overhead.

Actual direct material

and direct labor
combined with
predetermined overhead.

Using a predetermined rate makes it

possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
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Job Order Costing

Work-in-Process Inventory
Direct material cost
Direct labor cost
Manufacturing overhead

Finished Goods Inventory

Product cost transferred
when product is finished

Cost of Goods Sold

Income Summary
Expense closed into
Income Summary at end
of accounting period

Understand how to identify:

Costs associated with beginning WIP
TMC incurred during the period
Costs associated with ending WIP
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ALL the cost will be summarised under each job - easy to trace which job
below to where

Job Order Costing

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on

estimates made at the beginning of the accounting period.
Examples of factors that causes the incurrence of costs
direct labor hours, direct labor costs
machine hours
beginning of the period

POHR =

Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

during the period

Overhead applied = POHR Actual activity

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Job-Order System Cost Flows

Work in Process
(Job-Cost Record)
rmb: direct material and indirect material belongs to raw material inventory!

Direct
Material
Direct
Labor

Overhead
Applied

Mfg. Overhead
actual mfg
overhead

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Indirect Overhead
Material Applied to
Work in
Indirect
Process
Labor
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Job-Order System Cost Flows

+

Raw Materials
Material
Direct
Purchases Material
Indirect
Material

Work in Process
(Job-Cost Record)
Direct
Material

Mfg. Overhead
Indirect
Material

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Job-Order System Cost Flows

Wages Payable
Direct
Labor
Indirect
Labor

Work in Process
(Job-Cost Record)
Direct
Material
Direct
Labor

Mfg. Overhead
Indirect
Material
Indirect
Labor
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Differences Between Job-Order and

Process Costing
Direct Material

Direct Labor
& Overhead
(Conversion)

Manufacturing costs are

allocated using equivalent
units, not physical units

Products

Finished
Goods

Cost of
Goods
Sold
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Calculating and Using Equivalent Units

of Production
To calculate the direct materials and conversion costs
per equivalent unit for the period:
equivalent unit = make units comparable

Materials
cost per
equivalent
unit
Conversion
cost per
equivalent
unit
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Materials cost for the period

Materials equivalent units for the
period
recall: conversion cost = direct labour + mfg overhead

Conversion cost for the period

Conversion equivalent units for the
period
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Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in the
prior period and work done in the current period.
Consider total work done to date:
Equivalent Units of
=
Production

Units Completed and

Transferred Out

Equivalent Units of
Ending WIP

Blends together units and costs from the prior

period and the current period.
Under WA, we use ALL INPUT costs
BUT under FIFO, ONLY newly incurred costs to calculate the cost per equivalent unit
Eg: beginning WIP - BUT it is under costs to account for

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Equivalent Units of Production-FIFO

Method
The First-in, First-out Method
The FIFO method differs from the weighted-average method in two
ways:
The computation of equivalent units
The way in which the costs of beginning inventory are treated

Equivalent units are the sum of

beginning WIP will definitely go to CGM

Units finished in beginning Work-In-Process

Units started and completed
Units started, but partially completed (ending Work-In-Process)

Consider current work done only

The unit costs are based entirely on the production costs incurred during the
period
The costs in the beginning WIP are irrelevant

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Process Costing: 5-Step Procedure

#1: Compute physical flow
#2: Calculate equivalent units

in units
ONLY for outputs

For direct materials and conversion costs

#3: Summarize total costs

#4: Calculate costs per equivalent unit

Under WA, all input costs considered

under FIFO, only newly incurred

(#4 = #3 #2)

in $

#5: Accountability/Cost Reconciliation

(#5 = #2 * #4)
Determine the cost to be removed from WIP and transferred
either to the next production department or to finished goods
Determine the cost of Ending WIP

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Process Costing in Sequential Production

Departments
Two Sequential Production Departments
Work-in-Process Inventory
Work-in-Process Inventory
Production Department A
Production Department B
Direct material
Direct labor
Applied manufacturing
overhead

Cost of goods
completed &
transferred out

Transferredin costs
always added at the beginning of the production process
ALWAYS 100% completed
Need not make any assumption added beginning or throughout

Direct material
Direct labor
Applied manufacturing
overhead

Transferred-in costs (costs transferred out from the 1st department)

The costs assigned to the units transferred out of one department remain assigned to
those units as they enter the next department
Conceptually similar to direct material costs
Direct material costs relate to raw materials, whereas transferred-in costs relate to partially
completed products
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more precise product costing decisions

ABC-Overhead Costs Allocation

Step #1: Identify and classify major activities in
manufacturing products, and allocate overhead to cost pools
Step #2: Identify cost driver that has a strong correlation to
the costs accumulated in the cost pool
Step #3: Compute overhead rate for each cost driver

Step #4: Assign overhead costs for each cost pool to

products, using the overhead rate (cost per driver)
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Overhead Costs Allocation ExampleABC System

Step #4 Assign Overhead to Products
Activity Cost Pools

Cost Drivers

Expected Use of Cost

Driver per Activity

Setting up machines
Machining

Number of setups
Machine hours

1,500 setups
50,000 machine hours

Inspecting

Number of inspections

2,000 inspections

Activity Cost
Pools
Setting up
machines
Machining
Inspecting
Total
Units Produced
Overhead per Unit
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Activity-Based
Overhead Rates

Product A
Expected Use of
Cost
Cost Drivers
Assigned

Expected Use of Cost

Drivers per Product
Product A
Product B
500
1,000
30,000
20,000
500

1,500

Product B
Expected Use
Cost
of Cost Drivers Assigned

$200/setup

500

$100,000

1,000

$200,000

$10/machine hour
$50/inspection

30,000
500

$300,000
$25,000
$425,000
25,000
$17

20,000
1,500

$200,000
$75,000
$475,000
5,000
$95

what we need to find out is the overhead per unit - combined with DL and DM per unit to get total product cost per unit (estimated)
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for pricing decision: eg 150% * total product cost per unti

Cost per Pay Per View

show

Total Pay Per View Bill

Cost Behavior: Variable Cost

Number of Pay Per

View shows watched

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Number of Pay Per

View shows watched
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Monthly Basic
Cable Bill

Monthly Basic cable Bill

per hour watched

Cost Behavior: Fixed Cost

Number of hours watched

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Number of hours watched

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Total Utility Cost

Cost Behavior: Semivariable Cost

Variable
Utility Charge
Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)

semivariable and curvilinear cost: our focus

FOCUS: find out the relevant range - usually determined by highest and lowest point (assumde that the cost behaviour is constant within the
range)

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apply high-low method upon finding the relevant range

The High-Low Method

cost function

Total
Costs

Fixed
Costs

Variable
Costs per
Unit

Number
of Units

unknowns = fixed cost and variable cost

Steps:
Determine the variable cost per unit as follows:

Determine the fixed cost using the above equation:

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The High-Low Method

Total Cost

if we high-low method -> next step is to estimate the cost at a certain activity level
If it is within the activity level, we can use this function
BUT if it is outside the relevant range, we cannot use this function to predict the cost unless qn assumes that the current cost
behaviour continues into the future periods

Relevant Range

Activity
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CVP Analysis
at the break even point the firm makes 0 profit

The break-even point is the point in the

volume of activity where the organizations
revenues and expenses are equal.
Sales
$ 250,000
Less: variable expenses 150,000
Contribution margin
100,000
Less: fixed expenses
100,000
Net income
$
-

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CVP Analysis: Break-even point

Sales revenue Variable expenses Fixed expenses = Profit

Unit
Sales
sales volume
price in units

Unit
Sales
variable volume
expense in units

Fixed expense
Unit CM

Break-even point
=
(in units)

if selling price and variable cost not given, total given use total/units -> units selling price

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CVP Analysis: Break-even point

Calculate the break-even point in sales dollars rather
than units by using the contribution margin ratio (CM
Ratio).

Contribution margin
Sales
Fixed expense
CM Ratio

= CM Ratio

Break-even point
=
(in sales dollars)
break even point / selling price = break even points
(SALES DOLLAR)
(UNITS)

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CVP Analysis: Break-even point

Target profit:
before-tax number

Unit sales to attain

Target profit + Fixed expenses
=
the target profit
Unit CM

Target profit after tax ():

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CVP Analysis

what will be the effect on unit CM if fixed expense, selling price changes?

Changes in Fixed Costs

Changes in Contribution Margin
Selling price
Variable cost per unit

Analysis with Multiple Products

ONLY USE SALES UNIT AND NOT SELLING PRICE FOR SALES MIX!!!

sales mix
Break-even point
Break-even
point
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Fixed expenses
Weighted-average unit contribution margin
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CVP Analysis: Operating Leverage

Operating leverage is
the extent to which an organization uses
fixed costs in its cost structure

Operating leverage factor

the higher this factor is -> the more the company relies on fixed expense

Operating leverage
factor

Contribution margin
Net income

% change in sales * operating leverage

factor = % change in profits
sales change, variable costs changes, fixed cost remains constant -> net income changes

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CVP Analysis
Safety Margin
The difference between budgeted sales
revenue and break-even sales revenue.
Safety Margin in dollars = Total sales - Break-even sales
Safety Margin in units = Total sales units - Break-even units

The amount by which sales can drop before

losses begin to be incurred.
READ THE QUESTIONS

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