1. Managerial and Cost Accounting

2. Know the major differences between financial accounting and Managerial Accounting Given a set of factory overhead data, be able to use the high-low method to compute the fixed and variable factory overhead rates. Given appropriate cost figures, be able to compute associated cost tables using either the job order costing or the process costing method. Understand the different pricing strategies

3. CharacteristicManagerial AccountingFinancial Accounting Service PerspectiveInternal to ManagersExternal to stockholders Time FramePresent and Future for planning and control Past financial statements are historical Reporting Frequency and promptness Control reports issued frequently (daily) and promptly (one day after period end) Most financial statements issued monthly a week or more after month end Degree of Precision of data used Reasonable accuracy desired, but “close counts” relevance is often more important than reliability High accuracy desired, with time usually available to achieve it – reliability is of utmost importance Reporting StandardsNone imposed because of internal data Imposed by generally accepted accounting principles and FASB Breadth of ConcernMicro- individual units of the organizational plan and act Macro—financial Statements are for the whole organization

4. Different from accounting used for your tax preparation Tax Accounting: tells you HOW MUCH you sold and What you spent it on Managerial accounting: tells you Where your income came from and Why you spent it Two aspects of Managerial Accounting Getting accurate information Understanding what that information is telling

5. For cost accounting purposes: Product Cost Period Cost Relationship to product or activity: Direct Cost Indirect Cost Relationship between total cost and volume of activity Variable cost Fixed Cost

6. Time-Frame perspective Controllable cost Non-controllable cost For other analytical purposes Differential cost Allocated cost Sunk Cost Opportunity cost

7. Owner Equity = Assets - Liabilities

13. Mixed costs are a function of fixed & variable costs Cost-Volume formula Y = a + bx whereY = mixed cost to break up x = a measure of activity (machine hrs) a = fixed cost component b = variable rate per unit x

14. Suppose we have the following:

15. X Y High2802480 Low1902330 Difference 90 150 Variable rate = 150/90 = $1.67 per DLH

16. Fixed Cost Portion Total Mixed - Variable = $2,480 - 1.67(280) = $2,012

17. Fixed Cost Portion Total Mixed - Variable = $2,480 - 1.67(280) = $2,012 Total Mixed Cost = $2,012 + 1.67 X

19. Y = $1,900.27 + 3.054 x

20. Geared towards a range of activities Dynamic rather than static

21. Geared towards a range of activities Dynamic rather than static Need to understand rudiments of cost accounting Job order costing Process costing Activity based costing

22. K-Corp collects its cost data by the job order cost system. For each job, they know the amount and material costs. Direct labor costs are $9.50 per hour. Factory overhead rate is computed at $4.50 per hour.

24. A Company produces and sells a chemical product. During a given month the company purchases 15,000 gallons of chemicals at a cost of $30,000. 10,000 gallons are completed and transferred to the next department. 5,000 gallons are 20% complete as to conversion. Factory overhead for the month is $20,000.

26. Historically direct labor & material constitute significant elements of cost of goods sold Current overhead costs dominate the cost of production Activity-based costing is designed to meet the challenge of a changing cost mix by associating manufacturing costs with activities which drive them

27. Define Cost Pools (usually support functions) Identify Cost Drivers (trace costs to the cost pools)

28. A multinational firm uses traditional accounting to allocate manufacturing and management support costs. However, travel is typically allocated on the basis of employees at plants in France, Germany, Italy, and Greece. Consequently, some plants are likely generating much more management travel than others. The ABC system is chosen to more precisely allocate travel costs to major product lines.

30. 1. Determine Cost Pool

31. 2. Determine Cost Driver

32. Driver Distribution

33. Allocation of Costs

34. Examines the difference between the net operating profit (after tax) and the cost of capital Four ways to create value for shareholder increase profit margins without increasing capital invest in projects that earn more than cost of capital free-up capital than earns less than cost of capital use debt to reduce the cost of capital

35. Which is the better firm from a shareholder’s point of view?

36. Firm B has largest Economic Value Added (EVA)

37. Maximizing ROI is not the right objective !

38. Product Pricing is different than Product Cost! Cost-based pricing Competitive-based pricing Demand-based pricing

39. Recognizes a relation ship between pricing and the costs of running a business The higher your costs…. The higher your prices must be Pricing = COS * mark-up factor = price Example $10 * 2 = $20 or 100/50 = 2 For 50% COS

40. Recognizes that some products are more price – sensitive to consumers than others, therefore competition is a concern. Groceries Milk, bread, butter Can of Artichokes

41. Recognizes the viability of charging as much as the market will bear. The greater demand, the more you can charge The fewer providers, the more you can charge The greater the perceived value, the more you can charge!

42. Home Studios 30% cost of goods 30% general expenses 40% owner’s compensation + net profit Different per industry

43. Marshall and McManus, Accounting What The Numbers Mean 3 rd Edition, Irwin, 1994. Page 12-13 Business Breakthroughs Workshop, Studio Management Services