...Chapter 18 Comparison of Management and Financial Accounting The role of management accounting Management accounting differs from financial accounting in many respects: * Primary users * Management accounting information: managers, employees, supply chain partners * Financial accounting information: owners or stockholders, lenders, customers, government agencies * Report format * Management accounting: flexible format, driven by user’s needs * Financial accounting: based on generally accepted accounting principles * Purpose of reports * Management accounting: to provide information for planning, control, performance measurement, and decision making * Financial accounting: to report on past performance * Nature of information * Management accounting: objective and verifiable for decision making; more subjective for planning (relies on estimates) * Financial accounting: historical, objective, and verifiable * Units of measure * Management accounting: dollars at historical, current market, or projected values; physical measures of time or number of objects * Financial accounting: dollars at historical and current market values * Frequency of reports * Management accounting: prepared as needed; may or may not be on a periodic basis * Financial accounting: prepared on a periodic basis (minimum of once a year) Management accounting provides relevant information at each stage...
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...stage with unsatisfied demand and price sensitivity seems low in this market. d. The design for valves is unique and it can be produced to tolerances that are better than any in the industry. e. Wilkerson established a loyal customer base because of the high quality of their valves. f. Wilkerson’s existing labor skills and machining equipment can be used to produce pumps and flow controllers. 2. Given the problems Wilkerson is having allocating overhead to products, should it consider abandoning overhead allocation altogether and switching to a direct costing or contribution margin approach (measuring product profitability as price less direct materials and direct labor costs only) with its products? They should have both. Net income under variable costing and absorption costing won’t be different because Just-In-Time system minimizes inventory, which is the root of the difference between the two reporting statements. Analysis of the contribution margin of each product line could help to identify the product with highest and lowest profitability and determine accordingly which product line to promote and which to contract. Even with the contribution margin approach, they still have to allocate variable manufacturing overhead to each product so as to compute...
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...7 days a week). This also prevented them from fully realizing its economies of scale. Furthermore, Adapconn Technologies invested heavily in facility expansion such as the one in Ireland and one in Slovenia, which ramped up the Expected OH Budget on top of their 7 other facilities, while the Expected MH decreased due to decreasing orders. These economic factors contributed to the increasing OH Rates. 3) Motorola Droid Board Bid Analysis Bid Analysis Report (June 2009) Client: Motorola Mobile Devices Product: Droid Quantity: 220,000 Location/Line: Sunnyvale / Line 6 Special Technical: Prototype Throughput Estimates: 100 boards/hour 2,200.00 total hours 0.010000 hours/board Cost analysis Direct materials per unit: Board: $1.420 Total SMDs: 0.110 Direct labor per unit: 1.100 OH per unit: OH Rate Sunnyvale Line 6 $531.000 MHs/board 0.010000 5.310 Cost per unit: $ 7.940 Quantity 220,000 Order cost $1,746,800 Desired markup 9% 157,212 Bid $1,904,012 Bid...
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...Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 2) Manufacturing companies usually have three types of inventory. Answer: TRUE Diff: 1 LO: 2-1 EOC: E2-1 AACSB: Reflective Thinking Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 3) Retailers sell their products to consumers. Answer: TRUE Diff: 1 LO: 2-1 EOC: E2-1 AACSB: Reflective Thinking Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 4) Merchandising companies include both wholesalers and retailers. Answer: TRUE Diff: 1 LO: 2-1 EOC: S2-1 AACSB: Reflective Thinking Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 5) All companies have the same types of inventories. Answer: FALSE Diff: 1 LO: 2-1 EOC: S2-2 AACSB: Reflective Thinking Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 6) Only manufacturing companies have finished goods inventory. Answer: TRUE Diff: 2 LO: 2-1 EOC: S2-2 AACSB: Reflective Thinking Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's...
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...Michaels must report the information to the corporate headquarters of Marco Corporation. Waltham Motors is a subsidiary of Marco Corporation and was acquired in late 2003. This analysis is for the month of May 2004. Accounting Practices: As part of my analysis I started with a review of the company’s account policies. I found that there were no changes in the accounting procedures since Waltham had been acquired. Performance reports were created monthly by the plant accountant. Sharon Michaels would then write a narrative report which was sent to the corporate headquarters for review. These performance reports showed information on what was budgeted, actual, and the variance for a particular month. The article “Diversity In Accounting Principles: A Problem, Strategic Imperative or Strategic Opportunity” discusses the ambiguity in accounting rules, and essentially practices are left up to managers discretion. In this case the internal accounting principles seem to be set in how often they will report financial information, but other rules are missing and not very clear. One example is the fact that this report was created in a single day which was not typical. The performance analysis usually took several days after the end of each month. The plant accountant rushed through analysis and then took a day off. This wouldn’t be considered proper procedures for reporting a company’s financial information. Diversity will always be a challenge in accounting practices...
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...Lynda AC505/Term Project Direct material cost is known as any material cost that can be identified specifically with a final cost objective. Material costs must not be charged to a contract as a direct cost if other material costs incurred for the same purpose in like circumstances have been charged as an indirect cost to that contract or any other contract. All material costs specifically identified with other contracts are direct costs for those contracts and must not be charged to another contract directly or indirectly. Example of a direct material cost is a radio installed in an automobile. A direct labor cost is any labor cost that can be identified specifically with a final cost objective (e.g., a particular contract). Labor costs identified specifically with a particular contract are direct costs of the contract and must be charged to that contract. Labor costs must not be charged to a contract as a direct cost if other labor costs incurred for the same purpose in like circumstances have been charged as an indirect cost to that contract or any other contract. All labor costs specifically identified with other contracts are direct costs for those contracts and must not be charged to another contract directly or indirectly. Manufacturing overhead, the third element of manufacturing cost, includes all costs of manufacturing except direct material and direct labor. Examples of manufacturing overhead include items such as indirect material...
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...16 Chapter Sixteen Fundamentals of Variance Analysis LEARNING OBJECTIVES After reading this chapter, you should be able to: L.O.1 Use budgets for performance evaluation. L.O.2 Develop and use flexible budgets. L.O.3 Compute and interpret the sales activity variance. L.O.4 Prepare and use a profit variance analysis. L.O.5 Compute and use variable cost variances. L.O.6 Compute and use fixed cost variances. L.O.7 (Appendix) Understand how to record costs in a standard costing system. For the second month in a row, profits at our Bayou Division are down and I don’t know why. We budgeted $190,000 in profit for August, but the actual result was only $114,500. We thought we had developed realistic monthly budgets. I know sales were down some, but I’m not sure that is the only problem there is. I am not one who believes that favorable variances are always “good” and unfavorable variances are always “bad.” [See the In Action item, “When a Favorable Variance Might Not Mean ‘Good’ News.”] I need more information from the analysis if I am going to turn things around. What I need to know is whether we should focus on improving the marketing of the division or if we need to take a look at our manufacturing operations. We don’t have a lot of extra resources here at Corporate, so I have asked Philippe [Broussard, the president of Bayou] to identify the primary cause of the shortfall—revenues or costs—and report back to me next week. If Bayou can’t improve, we may have to dispose of...
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...A Discussion on Cost Behavior in Relation to Financial Statements Name Institution Date SLP Interpreting figures presented on the financial statement has always been a hectic task to the public. A trend analysis assists in the evaluation of the financial presentation of a business over a specific period of time. Periods to be analyzed ranges from months, quarterly, half yearly or between specific years depending on the situation. In accounting, two methods are widely adopted to analyze the income statement and balance sheet trends. The techniques adopted are the horizontal analysis or the vertical analysis. The two analyses help the users of financial information to compare the performance of different companies for specified financial years and evaluate the performance of the companies over a certain period. The two analysis techniques are related in that the reported figures in the balance sheet or income statement are converted into percentages (Fridson, 2002). Horizontal analysis focuses on changes on trends in financial statements variables over a certain period. It compares historical financial data over a number of periods. The application of horizontal analysis helps to present the complex data in the financial statements and judge whether specific components have increased or decreased. In horizontal analysis technique, the base year is extracted from the financial statements and the figure of each component under study is converted to a percentage of the base...
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...overheads, Wilkerson should abandon its existing cost system and move to activity-‐based costing. The profitability analysis indicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted at cost reduction (changes in flow controllers design or in their production and delivery process) or raising the price of flow controllers for customers. Since flow controllers are customized, the company can set different prices for different customers (groups of customers) based on the actual amount of resources spent (e.g. implement activity-‐based pricing). Problem Wilkerson has to estimate the profitability of its products in order to make long-‐term product mix decisions. These decisions should be based on estimation of product costs and might include decisions to continue / stop production of a particular product, pricing decisions, and decisions concerning product and process design, including customer relations. Information Information about direct labor and material costs as well as overhead costs is available. Overheads are recorded by five cost pools (machining, setup labor, receiving ...
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...c,d, T, F) TRUE-FALSE STATEMENTS 1. Incremental analysis identifies the probable effects of management decisions on future earnings. 2. In making decisions, management considers only financial information because accounting is presented in financial context. 3. In incremental analysis, total fixed costs will always remain constant under alternative courses of action. 4. Incremental analysis is also knows as differential analysis. 5. Decision-making involves reviewing the results of a decision once the decision has been made. 6. Decisions made using incremental analysis focus on the amounts which differ among the alternatives. 7. A special one-time order is acceptable if the unit sales price is greater than the unit variable cost. 8. Max Company has excess capacity. A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the item. Max should accept the special order if demand on other products is unaffected. 9. A company should accept an order for its product at less than its regular sales price if the incremental revenue exceeds the incremental costs. 10. A decision whether to continue to buy a product instead of producing it externally depends specifically on the incremental costs and incremental revenues of making the change. 11. An opportunity cost is the potential benefit given up by using resources in...
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...the aid of some European funding. It currently has a budgeted turnover of £2.75m with anticipated profit for the year of £0.40m. This first case study focuses on the concept of standard costing, variance analysis and the reconciliation of budget to actual profit through an analysis of the main cost variances. The scenario assumes that you work as an assistant in the SME business services unit of Dunn and Musgrave a firm of accountants and consultants. You have recently introduced, at Coverdrive Ltd a system of standard costing and budgetary control. The objective of the system is to generate a monthly report to show the following: Budget Operating Statement Actual Operating Statement Control Ratios An analysis of variances to show: Direct Labour Variances: Rate Efficiency Direct Material Variances: Price Usage Variable Overhead Variances: Expenditure Efficiency FINANCIAL MANAGEMENT CASE STUDIES Fixed Overhead Variances: Expenditure Volume: Capacity Efficiency Sales Variances: Sales Price Variance Sales Margin Quantity Variance Reconciliation budget to actual profit Break-Even Point: Budget Actual Standard Costing – a definition “A control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improve performance.” (CIMA) The Objectives of Standard Costing and Variance Accounting Terry Lucy in his excellent text “Management...
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...CHAPTER 21 INCREMENTAL ANALYSIS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises B. Ex. 21.1 B. Ex. 21.2 B. Ex. 21.3 B. Ex. 21.4 B. Ex. 21.5 B. Ex. 21.6 B. Ex. 21.7 B. Ex. 21.8 B. Ex. 21.9 B. Ex. 21.10 Learning Objectives 1, 3 2–4 1, 2, 4 2, 4, 5 2 2 4 1, 3, 4 2–4 2–4 Topic Using average unit costs Make or buy Joint cost allocation Outsource a product Opportunity costs Identifying costs Allocating productive capacity Match decision and relevant costs/revenues Sell at split-off or process further Scrap or rebuild Skills Analysis Analysis, judgment Analysis, judgment Analysis, judgment Analysis Analysis, judgment Analysis Analysis Analysis Analysis Exercises 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8 21.9 21.10 Learning Topic Objectives Skills Accounting terminology 1–5 Analysis 1, 2 Analysis, communication, Real World: Home Depot judgment Incremental, sunk, and opportunity costs 1–3 Analysis Incremental analysis: Accepting a special order Scarce resources 1–4 Analysis Special order decisions and opportunity costs 1–4 Analysis Incremental analysis: Make or buy decision Make or buy decision Sunk costs: Scrap or rework decision Scarce resources Joint products 1–4 1–4 1–4 1–4 1–4 Analysis Analysis Analysis Analysis Analysis, communication, judgment Analysis Analysis, judgment Analysis Analysis, judgment Analysis, communication, research 21.11 21.12 21.13 21.14 21.15 Joint processes: Sell or process further Pricing a special...
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...of an organization’s end product minus the operating profit to establish the target cost. c. starts with the selling price of an organization’s end product minus actual manufacturing, overhead, and materials costs to determine operating profit. d. starts with the supplier’s price, and works to determine the supplier’s true cost structure. e. starts with the buyer’s lowest reasonable price target, and works to a negotiated price agreed on by the buyer and the supplier. 2. Activity based costing attempts to: a. correct the distortions built into product costing by the way that direct costs are allocated. b. correct the distortions built into product costing by the way that the learning curve is applied to direct labor costs. c. turn indirect costs into direct costs by tracking the cost drivers behind indirect costs. d. turn direct costs into indirect costs by tracking the cost drivers behind direct costs. e. introduce a new way to allocate direct costs that more accurately captures labor and material usage. 3. An externally focused process of analyzing costs in terms of the overall value chain is called: a. strategic cost management. b. supply chain management. c. total cost management. d. profit leverage effect. e. activity based costing. 4. Target pricing may result in companywide cost reductions in: i. design to cost. ii. manufacture to cost. iii. purchase to cost. iv. a and b. v. a, b, and c. 5. Sources of...
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...use of cost accounting information for decision-making purposes. DEFINITION OF KEY TERMS Marginal cost: This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided Break-even point: This is the volume of sales where there is neither profit nor loss. 1 9 6 COST ACCOUNTING S T U D Y T E X T Margin of safety: This is the excess of sales over the break-even volume in sales. It states the extent to which sales can drop before losses begin to be incurred in a firm Contribution: This is the difference between sales value and the marginal cost of sales. To understand this topic, you need to understand the topic on cost behavior first. Marginal costing is built on cost behavior and terms. Of key importance are product costs, period costs, variable costs and fixed cost. Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing. Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal...
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...Profitability Analysis Using Activity-Based Costing by Priscilla Wisner Executive Summary • • Traditional cost allocation methodologies in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Activity-based costing (ABC) provides more meaningful information about the drivers of costs, the activities performed in a firm, and the relationship between costs and products, customers, markets, and segments. In addition to supplying more detailed and better cost and profitability information, an ABC analysis enables managers to evaluate processes from an activity viewpoint, leading to identification of non value-adding activities and process inefficiencies. ABC does not change overall profitability in a firm; it better aligns cost assignment to the causes of those costs. With better information, better decisions can be made in a firm to improve profitability—this is the power of ABC. • • • Introduction Cost allocation in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Traditional cost allocation practices allocate all manufacturing overhead costs using a single driver such as direct labor hours, direct labor dollars, or machine hours. Sales-related costs are typically ignored. While technically accurate, in most complex organizations a single overhead cost driver is not sufficient to accurately assign the pool of overhead costs to the products...
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