Accounting Financial deals with external use which is when you get into GAAP and FASB. GAAP is how things should run generally, FASB deals more with details. Management or Managerial Accounting is information for internal use (ex: break even analysis). Cost Accounting is more detailed. The main focus is what the cost of product or service is. A goal is a way to achieve your mission. Goals have more details then missions. The goal is how you achieve your mission. Cost Leadership Make thousands of the items. If they run out don't worry there will be more (Timex watches). Product Differentiation they want demand so they can't make it for everyone. They make a limited amount so people will run to get it once it comes out (Cartier watches). Value Chain the processes in an organization that converts inputs into a product or service. Examples 1. 2. 3. 4. 5. 6. 7. Research and Development (R&D) try to make products better. Design new ideas & products. Supply Marketing Customer Service Production Distribution
Balanced Scorecard tries to determine how a company is doing. Provides a means by which actual business outcomes can be evaluated against performance targets. Lag indicator (Lagging because you're looking at history) Outcomes that resulted from past actons Lead indicator (Leading into the future) where the balance scorecard comes into play. This indicator reflects future outcomes. Important things for companies to look for on a balance scorecard are 1. Employees you can't journalize employees because they are not property and you do not legally own them. Many companies have nothing on their books if it wasn't for their employees. 2. Internal Business they look at what you need to do to meet customer needs and expectations. 3. Customer Value how a company is doing relative to customer and criteria. Some criteria is quality, service, and price. 4. Financial Scorecard you deal with stockholders regarding profitability, growth, etc.
a. On last exam Polameni asked when dealing with stockholders regarding profitability and growth you are dealing with what part of the balance scorecard answer is financial scorecard. Authority and Responsibility Authority is the right to do something Responsibility is the obligation to do something Organizational Structure Line have direct authority and responsibility to achieve specific goals (deans of school). Staff provide advice and assistance to line management (kind of like consultants for the line) (ex: advisors of deans) Institute of Management Accounting Four areas of ethical conduct (CMA Certified Managerial Accountant) 1. Competence develop and maintain skills [can maintain by CPE courses (40 hours per year to keep your license in NYS)] 2. Confidentiality do not disclose company information to unauthorized individuals 3. Integrity you are not suppose to do anything that could discredit the company, you also cannot accept gifts (cannot own stock in the company that you are auditing) 4. Objectivity provide full and fair disclosure (accounts have a lot of flexibility with #'s like cooking the books but they should never do this) Cost what is the value you are willing to give up to acquire goods or services FMV given up to acquire goods or services. Unexpired Cost is an asset because it has not been used up yet and is on the balance sheet and is a debit. (Assets are debits on the balance sheet. Ex: inventory, prepaid insurance) Expired Cost RIP it is history, used up asset. This goes on the income statement and is a debit to the expense account which reduces your balance. (income statement revenue is a credit) a) Expense cost given benefits and is now expired (sold inventory benefit is the $ you get) b) Loss cost becomes valueless without giving benefits Revenue will always be a credit Expense or Loss will always be a debit Net Income will always be a credit Net Loss will always be a debit
Different Classification of Cost Direct cost costs that can be easily (conveniently) and economically traced to a product or service. Indirect cost doesn't meet the above definition costs cannot be easily traced to a product or service. Per unit cost remains the same increase volume by 20% you should have no change in the unit cost. If you are within a relevant range a supplier may give you a discount prices/costs per unit remain constant over this range of output. Beginning WIP Beginning Raw Materials + Raw Materials purchased = Raw Materials available - Ending Raw Materials = Raw Materials Used - Indirect Materials = Direct Materials used Direct Labor Overhead Various Accounts + Indirect Materials + Indirect Labor = Total Overhead Total Cost - Ending WIP COGM X X X X X =X X =X X X X X X x X x X X
Beginning Finished Inventory + Cost of Goods Manufactured = Goods Available for Sale - Ending Finished Inventory = Cost of Goods Sold
X X X X X
M.O. is all manufacturing costs other than and DM DL. Levels (activity) can project: Theoretical highest possible output (100%) disregards realty (100,000 cars in tunnel) Practical redo's theoretical by holidays, sick days, etc. (60,000 cars) Normal customer demand long run (5-10 years) (50,000 cars) Expected next period customer demand (0 60,000 cars) Highest correlation measure of degree of relationship between two variables If the dots in a graph are in a line then it is perfect correlation (positive correlation). 1) Determine predetermined MO rate before production begins 2) In year of production a. Actual MO as incurred (Debit) b. Estimated as production takes place (Credit) Actual Manufacturing Overhead Various Credits MO indirect materials Raw material inventory MO indirect labor Salaries Payable MO Utilities Utilities Payable
General Ledger Cash A/R Inventory M.O. Etc.
Subsidiary Ledger Indirect Materials Indirect Labor Utilities _______ Total
Disposition of under or over applied M.O. 1) Immaterial treat as a period cost. Adjust COGS to wipe out the account. 2) Material prorate to accounts affected. Allocate in ratio of balances in account. Absorption & Variable Costing Absorption (full costing) all manufacturing costs are inventoried according to GAAP. Variable (Direct costing) includes only variable manufacturing overhead in inventory. Not acceptable for GAAP. Not permitted for external financial statements (this is used for internal reporting). Basic Differences Absorption costing adds MO fixed to inventory Variable costing excludes MO fixed costs from inventory Income Statement Absorption Costing o Sales COGS (variable & fixed production costs) = Gross Profit/Margin Selling and Admin Expenses = Income before taxes Variable Costing o Sales Variable COGS (no fixed) = Product contribution Margin Variable Selling Expense = Total Contribution Margin Fixed Expenses (manufacturing & Selling and Admin = Income before taxes. Job Order Costing Heterogeneous (different, unique) Examples: building Bridge, making custom ski boots, Hero sandwich
Process Costing Homogeneous (identical). Example: Bags of Pretzels, Boxes of cookies, cans of paint. Methods of Valuation Actual cost no estimates, book (record) only actual costs. Normal cost actual DM & DL, MO both actual and estimated Standard cost estimated for DM, DL & MO. Also actual for DM, DL & MO. Raw Materials Inventory Accounts Payable WIP Job # M.O. Raw Materials Inventory WIP Job # M.O. Wages Payable M.O. Insurance Payable Accumulated Depreciation Payroll Taxes Payable (or various credits) WIP Job # M.O. Finished Goods Inventory WIP Job # Cost of Goods Sold Finished Goods Inventory Cash Sales
Product & Material Losses Expected errors accountants don't worry about this examples: evaporation, leakage, normal leakage Production errors units don't pass quality control inspection I) Can fix unit a. Can you economically fix unit? Yes rework cost. Sold as if it was originally perfect i. Normal Rework Cost expected from efficient production expect to make 100,000 units, 98,000 will pass inspection, 2,000 won't need rework.
II)
Charge all Jobs a. Add to estimated predetermined MO rate M.O. Various Credits
III)
IV)
Charge to Specific Jobs a. Normal Debit WIP Inv Job # and Credit Various Credits b. Abnormal Debit Loss and Credit Various Credits Cannot Fix a. Example Burnt Bread i. no rework cost because it cannot be fixed ii. try to sell for salvage value aka resale value iii. in all cases the units are removed from production b. Normal Spoilage i. Charge all jobs or specific jobs 1. All jobs remove spoiled units and cost c. Charge to Specific Jobs i. No disposal value under this concept no entry
Machine Hours High Activity Low Activity Difference X X X
Total Hours X X X
Variable Cost =X =X
Variable rate = $ / activity Y = A+ Bx Y = total cost A = fixed cost B = unit change X = activity base
PowerPoint's
Cost management goals reduce costs and improve customer satisfaction Organizational strategy 1. 2. 3. 4. Develop mission statement Implement strategy Measure and control the value chain and managers' performance Set balance scorecard goals, objectives, and targets
Organizational strategies Cost leadership strategy undercut competitor prices Product differentiation strategy superior quality products or unique services sold at a premium Core competency critical function or activity providing a competitive advantage Value Chain set of value-adding functions and processes that convert inputs into products/services (R&D, product design, supply, production, marketing, distribution, customer service) Communicate strategy to all members of the value chain. Balance Scorecard four perspectives are learning and growth, internal business, customer value, and financial performance. Measures short term and long term, internal and external, financial and nonfinancial.