Managerial Accounting - John Newcome
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Books - Textbook requirements for this course |
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Calendar - Estimated quarter progress |
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Chapter Outlines - Chapter outlines |
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Class Competencies - Link to class competencies. |
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Class Description - Brief class description |
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Exams - Planned exam dates |
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Grading - Grading scale and weight |
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Homework - Specific due dates |
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Syllabus - Course syllabus detail |
Select the desired chapter
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Quarter: Spring 2003
Instructor: John Newcome
Class Schedule: M, W, F (12:50 - 2:30)
Telephone: 425-235-7869
E-mail: jnewcome@rtc.ctc.edu
Web Page: http://www.rtc.edu/instruction/Accounting/welcome_page.htm
Office Hours: Room H307 (7:30A-8:00A; 2:30P-3:00P)
Text: Financial and Management Accounting, 7th Edition Southwestern Publishing, Warren, Reeve, Fess
Other Materials: None
OBJECTIVE: This course focuses on internal accounting and the use of managerial accounting techniques in making business decisions. Topics covered include capital budgeting, responsibility accounting, cost allocation, job costing systems, overhead application, and quantitative techniques.
This course emphasizes using accounting information for management and decision making purposes. This class builds upon many of the concepts learned in Cost Accounting. Successful completion of a cost accounting course is highly recommended. This is an advanced course and assumes prior accounting knowledge
MAKEUP POLICY:
Missed Assignments - cannot makeup missed assignments
Missed Exams - yes under special circumstances
10% late fee (score reduction before you begin)
Make-up Exams - cannot makeup
Missing Time - no
MISSING TIME: It is a student's responsibility to find out from other students what information or assignments were "missed" and if necessary to create a "catch up" plan. Missed time, for attendance purposes, cannot be made up.
TIMELINESS: Being on time is important on the job and in this class. Not only is tardiness disruptive to the classroom, the skills and habits you develop now will directly affect your future employability. The two most commonly asked questions by potential employers concern attendance and attitude!
CLASSROOM BEHAVIOR: As much as possible, you will be treated as though you are an employee; therefore, our expectations are that you conduct yourself in a professional manner. Examples of inappropriate (unprofessional) and unacceptable behavior include: talking during presentations, tardiness, putting your head down on the desk, putting your feet up on tables, sleeping, working on non-class assignments, e-mailing, surfing the internet, and not being attentive.
OTHER: Food or drink not allowed per campus policy
Cell phones and beepers turn off please
Classroom phones for official campus employee business
Copier Use for official campus employee business
Emergencies use campus pay phones
1. Prepare a master budget and supporting schedules both manually and using electronic spreadsheet software to instructor standards.
2. Apply cost-volume-Profit analysis to determine the breakeven point and the required number of units to be sold to earn a desired profit in accordance with GAAP.
3. Explain fixed, variable and semivariable cost behavior and determine fixed and variable components of mixed cost data in accordance with GAAP.
4. Prepare a flexible budget and computer related cost variances in accordance with instructor standards.
5. Prepare a Performance Report for responsibility accounting in accordance with instructor standards.
6. Apply cost analysis relating to a series of special business decisions in accordance with instructor standards.
7. Apply capital budgeting models and present-value techniques to business investment decisions in accordance with instructor standards.
The following standards are used for this class:
Grading Standards |
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Description |
Percent of Grade |
| Chapter Exams (3) | 80% |
| Homework | 10% |
| Other Assignments/Activities | 10% |
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Grades |
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Percentage Range |
Letter |
| 94% and over | A |
| 90% but less than 94% | A- |
| 87% but less than 90% | B+ |
| 84% but less than 87% | B |
| 80% but less than 84% | B- |
| 77% but less than 80% | C+ |
| 74% but less than 77% | C |
| 70% but less than 74% | C- |
| 67% but less than 70% | D+ |
| 64% but less than 67% | D |
| 60% but less than 64% | D- |
| Less than 60% | F |
The following calendar is an approximation of the progress I expect from this class. However, each class seems to have its own characteristics - some move more quickly than others. Therefore, the actual schedule will adjust based on the class progress.
All listed assignments (Exercises and Problems) are due at the end of each chapter.
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Wk# |
Ch. |
Topic |
Assignments |
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Exercises |
Problems |
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| 1-2 | M3 |
Cost Behavior, Cost-Volume-Profit Analysis |
1-23 | 1A, 2A, 3A, 5A, 6A |
| 3-4 | M4 |
Profit Reporting for Management Analysis |
1-15 | 1A,
3A*, 6A* (*use Excel) |
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Exam 1, Chapters 3-4 |
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| 5-6 | M5 |
Budgeting |
1-15 | 1A, 3A*, 4A* (*use Excel) |
| 7-8 | M6 |
Performance Evaluation using Variances and Standard Costs |
1-10, 16, 17 | 3A*,
4A* (*use Excel) |
| 8-9 | M7 |
Performance Evaluation for Decentralized Operations |
1-15 | 3A*,
4A* (*use Excel) |
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Exam 2, Chapters 5-7 |
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| 10 | M8 |
Differential Analysis and Product Pricing |
1-14 | 3A*,
5A* (*use Excel) |
| 11 | M9 |
Capital Investment Analysis |
1-16 | 1A*,
5A* (*use Excel) |
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Exam 3, Chapters 8-9 |
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First - Please refer to the class Syllabus. All problems and exercises are due by the end of each chapter.
Second - See the calendar below for specific due dates. REMEMBER - even though a problem may not be specifically noted on the following calendar, it is still due by the end of the chapter.
Week# Monday Wednesday Friday
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Orientation, Syllabus
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I will do my best to load lecture outlines a day or two after the lecture.
Chapter
M3
COST BEHAVIOR AND C-V-P ANALYSIS
OBJECTIVES:
1. Classify costs as Fixed, Variable or Mixed
2. Compute the contribution margin and understand its meaning and how it is used.
3. Apply C-V-P analysis to determine the breakeven point and the required sales volume to earn a target profit.
4. Apply C-V-P analysis to a business selling more than one product. Sales Mix
5. Compute the margin of safety of a business
Cost Driver
Any activity that directly affects the amount of costs incurred
Activity
Cost Driver
Types of Cost Behavior
VARIABLE
$
FIXED
$
MIXED
$
VARIABLE COST PER UNIT
TOTAL COST COMPUTATION
CONTRIBUTION MARGIN
CONTRIBUTION MARGIN INCOME STATEMENT
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Total |
Ratio (Percentage) |
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Sales |
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Variable Expenses |
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Contribution Margin |
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Fixed Expenses |
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Net Income |
UNIT CONTRIBUTION MARGIN
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Selling Price Per unit |
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Variable Cost Per unit |
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Contribution Margin per unit |
COST-VOLUME-PROFIT ANALYSIS
BREAKEVEN POINT
1) The level of sales where net income is zero.
2) Total Costs = Sales
CONTRIBUTION MARGIN APPROACH
EQUATION APPROACH
MARGIN OF SAFETY
SALES MIX
Applying Cost-Volume-Profit Analysis to multiple products.
Sales Mix Computation of Breakeven Point
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Total |
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Contribution Margin Income Statement
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B |
Total |
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Sales |
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Variable Expenses |
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Contribution Margin |
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Fixed Expenses |
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Operating Income |
PROFIT REPORTING
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Understand the difference between Absorption Costing and Variable Costing relating to the income reported on the Income Statement.·
Prepare an income statement for a manufacturing company using Absorption Costing·
Prepare an income statement for a manufacturing company using Variable Costing·
Apply Variable and Absorption Costing to various business decisions, such as controlling costs, pricing, business planning.
THE INCOME STATEMENT UNDER VARIABLE COSTING AND ABSORPTION COSTING
Product Cost:
Period Cost:
Absorption Costing
All manufacturing costs are treated as a Product Cost
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Absorption Costing Income Statement
Units Manufactured equals Units Sold
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Number of Units Manufactured: |
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Number of Units Sold: |
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Sales |
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Cost of Goods Sold: |
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Gross Profit |
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Selling and Administrative Expenses |
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Income from Operations |
Variable Costing
Only variable manufacturing costs are treated as a Product Cost. Fixed manufacturing costs are treated as a Period Cost.
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Variable Costing Income Statement
Units Manufactured equals Units Sold
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Number of Units Manufactured |
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Number of Units Sold: |
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Sales |
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Variable Cost of Goods Sold: |
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Manufacturing Margin |
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Variable Selling and Administrative |
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Contribution Margin |
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Fixed Costs: |
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Fixed Manufacturing: |
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Fixed Selling and Admin. |
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Income from Operations |
Absorption Costing
All manufacturing costs are treated as a Product Cost
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Absorption Costing Income Statement
Units Manufactured exceed Units Sold
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Number of Units Manufactured: |
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Number of Units Sold: |
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Sales |
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Cost of Goods Sold: |
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Gross Profit |
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Selling and Administrative Expenses |
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Income from Operations |
Variable Costing
Only variable manufacturing costs are treated as a Product Cost. Fixed manufacturing costs are treated as a Period Cost.
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Variable Costing Income Statement
Units Manufactured Exceed Units Sold
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Number of Units Manufactured |
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Number of Units Sold: |
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Sales |
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Variable Cost of Goods Sold: |
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Manufacturing Margin |
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Variable Selling and Administrative |
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Contribution Margin |
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Fixed Costs: |
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Fixed Manufacturing: |
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Fixed Selling and Admin. |
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Income from Operations |
Absorption Costing
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Absorption Costing Income Statement
Units Sold Exceed Units Manufactured
(Beginning Inventory)|
Number of Units Manufactured: |
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Number of Units Sold: |
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Sales |
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Cost of Goods Sold: |
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Gross Profit |
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Selling and Administrative Expenses |
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Income from Operations |
Variable Costing
Manufacturing Costs:
Direct Materials .
Direct Labor .
Factory Overhead Variable .
Factory Overhead Fixed .
Not here yet!
M6 PERFORMANCE EVALUATION USING VARIANCES
Standards
Ideal Standards
Currently Attainable Standards
Flexible Budget
Static Budget
Budgetary Performance Evaluation
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Manufacturing Cost |
Standard Price |
Standard Quantity |
Total Standard Cost per unit |
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Direct Materials |
$5.00 per yd. |
1.5 yds. per unit |
$ |
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Direct Labor |
$9.00 per hour |
.80 hours per unit |
$ |
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Factory Overhead |
$6.00 per hour |
.80 hours per unit |
$ |
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Total Standard Cost per unit |
$ |
Budget Performance Report
Number of units Produced: 5,000
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Manufacturing Cost |
Actual Costs for period |
Standard Costs @ actual volume |
Variance (favorable)or unfavorable |
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Direct Material |
$40,150 |
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Direct Labor |
$38,500 |
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Factory Overhead |
$22,400 |
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Total |
$101,050 |
Analysis of Variances
Direct Materials Variances
Actual Material Used: 7,300 yds.
Actual Price per Yd. $5.50
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Actual Cost |
Standard Quantity for Actual Units Produced |
Standard Cost: |
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Direct Labor Variances
Actual Hours Worked: 3,850
Actual Labor Rate: $10.00 per hour
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Actual Cost |
Standard for Actual Hours Worked |
Standard Cost: |
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Factory Overhead Cost Budget
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Percent of Normal Capacity |
80% |
90% |
100% |
110% |
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Units Produced |
5,000 |
5,625 |
6,250 |
6,875 |
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DL Hours |
4,000 |
4,500 |
5,000 |
5,500 |
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Budgeted Overhead |
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Variable: |
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8,000 |
9,000 |
10,000 |
11,000 |
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4,000 |
4,500 |
5,000 |
5,500 |
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2,400 |
2,700 |
3,000 |
3,300 |
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$14,400 |
$16,200 |
$18,000 |
$19,800 |
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Fixed Costs: |
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$5,500 |
$5,500 |
$5,500 |
$5,500 |
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4,500 |
4,500 |
4,500 |
4,500 |
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2,000 |
2,000 |
2,000 |
2,000 |
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$12,000 |
$12,000 |
$12,000 |
$12,000 |
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Total Factory Overhead |
$26,400 |
$28,200 |
$30,000 |
$31,800 |
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Variable Overhead Rate |
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Fixed Overhead Rate |
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Total |
Actual Units Produced: 5,000
Standard Hours per unit: .80
Actual Hours worked: 4,000
Standard Overhead Rate:
Variable $
Fixed $
Total $
Factory Overhead Variances
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Actual Overhead |
Budgeted for Actual Hours Worked |
Applied Overhead: |
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Not here yet!
M8 DIFFERENTIAL ANALYSIS
Objectives:
1. Apply differential analysis to special business decisions:
a) Leasing or Selling Equipment
b) Discontinue a Segment (department) or Product
c) Make or Buy
d) Replacement of Equipment
e) Sell now or Process Further
f) Accept a Special Order at a Special Price
2. Determine the required selling price of a product based upon:
a) Total Cost
b) Product Cost
c) Variable Cost
DIFFERENTIAL ANALYSIS
ITS ABOUT CHOICES!
How does a business choose between two or more alternatives?
Some Definitions
Relevant Costs:
Sunk Costs:
Differential Revenue:
Differential Costs:
Differential income or loss:
LEASE OR SELL
Sell Old Equipment: Keep and Lease:
Original Cost: $ Annual Lease: $
Accumulated Depreciation: $ Annual Expenses: $
Selling Price: $
Selling Expenses: $
Should the company sell the old equipment or lease it to someone else.?
DISCONTINUE A SEGMENT OR PRODUCT
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Corn Flakes |
Toasted Oats |
Bran Flakes |
Total |
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Sales |
$500,000 |
$400,000 |
$100,000 |
1,000,000 |
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Cost of Goods Sold: |
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220,000 |
200,000 |
60,000 |
480,000 |
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120,000 |
80,000 |
20,000 |
220,000 |
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$340,000 |
$280,000 |
$80,000 |
$700,000 |
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Gross Profit |
$160,000 |
$120,000 |
$20,000 |
$300,000 |
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Operating Expenses: |
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95,000 |
60,000 |
25,000 |
180,000 |
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25,000 |
20,000 |
6,000 |
51,000 |
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$120,000 |
$80,000 |
$31,000 |
$231,000 |
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Net Income (Loss) |
$40,000 |
$40,000 |
$(11,000) |
$69,000 |
Contribution Margin Format
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Corn Flakes |
Toasted Oats |
Bran Flakes |
Total |
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Sales |
$500,000 |
$400,000 |
$100,000 |
1,000,000 |
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Variable Costs: |
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Contribution Margin |
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Fixed Expenses: |
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Net Income (Loss) |
MAKE OR BUY
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Make |
Buy |
Difference |
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REPLACEMENT OF EQUIPMENT
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Keep Old Equipment |
Buy New Equipment |
Difference |
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SELL NOW OR PROCESS FURTHER
ACCEPT BUSINESS AT A SPECIAL PRICE (SPECIAL ORDER)
Variable Cost per Unit $
Fixed Cost per Unit $
Total Cost per unit $
Normal Selling Price $
Special Order Price $
Decision: Should the company accept the special order?
General Rule: The company should accept the special order if income increases.
If income decreases, is there any reason why the company should accept the special order?
SETTING NORMAL SELLING PRICES FOR GOODS
Digital Solutions, Inc.
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Variable Costs: |
Amount per unit |
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$3.00 |
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10.00 |
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1.50 |
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1.50 |
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$16.00 |
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Fixed Costs: |
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$50,000 |
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$20,000 |
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Other Information: |
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$800,000 |
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20% |
Total Cost Concept
Product Cost Concept.
Variable Cost Concept.
M9 - CAPITAL BUDGETING
Capital budgeting refers to the process of evaluating a companys investment in assets.
For a company to be profitable, a companys asset investments must provide an adequate return on investment.
Basic Capital Budget Methods
Non-discounted cash flow methods
(Ignores the Time Value of Money)
1. Average Rate of Return (Accounting Rate of Return)
2. Payback
Discounted cash flow methods
(Considers the Time Value of Money)
3. Net Present Value
4. Internal Rate of Return
AVERAGE RATE OF RETURN
Average Rate of Return = Estimated Average Annual income
Average Investment
Average Investment = Original Cost + residual value
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PAYBACK
a) Equal Cash Flows
Investment Amount: $
Annual Revenues: $
Annual Expenses: $
Annual Cash Flow $
b) Unequal Cash Flows
Investment Amount $
Annual Net Cash flows
Year 1 $
Year 2 $
Year 3 $
Year 4 $
Year 5 $
Year 6 $
PRESENT VALUE and FUTURE VALUE
Present Value
Determines what an amount to be paid or received in the future is worth today.
PV of $ - Lump sum single amount
PV of an Annuity - Series of payments of the same amount
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2002 |
2003 |
2004 |
2005 |
2006 |
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$ |
$ |
$ |
$ |
$ |
Future Value
Determines what an amount to be paid or received today is worth in the future.
FV of $ - Lump sum single amount
FV of an Annuity - Series of payments of the same amount
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2002 |
2003 |
2004 |
2005 |
2006 |
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$ |
$ |
$ |
$ |
$ |
Discounted Cash Flow Methods
Consider the time value of Money.
NET PRESENT VALUE
Present Value of the Cash Inflows
- Present Value of the Amount Invested
= Net Present Value
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NPV |
Investment is earning |
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Equal to $0 |
Exactly the required rate of return |
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Greater than $0 |
More than required rate of return |
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Less than $0 |
Less than required rate of return. |
Present Value Index
Ranks investments by an indexed comparison of the Net Present
Value to the Amount Invested.
The Highest Net present value in total dollars may not be the most desirable investment when compared to the required amount to be invested.
Present Value Index = Total Present Value of the Net Cash Flows
Amount to be Invested
INTERNAL RATE OF RETURN
The rate of return that will result in net present value of $0
Interpolation
Used when the required present value factor is between two different interest rates.
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Required PV factor |
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PV factor at the upper percentage |
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PV factor at the lower percentage |
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Difference |
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Elite Accessories, Inc. Sales Budget for the Year Ended December 31, 2003 |
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Product and Region |
Unit Sales Volume |
Unit Selling Price |
Total Sales |
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Wallet: |
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East |
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West |
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Total |
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Handbag: |
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East |
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West |
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Total |
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Total Revenue from Sales |
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Elite Accessories, Inc. Production Budget for the Year Ended December 31, 2003 |
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Description |
Number of Wallets |
Number of Handbags |
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Sales |
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Plus: Desired Ending Inventory |
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Total Needs |
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Less: estimated beginning inventory |
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Required Production |
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Elite Accessories, Inc. Direct Materials Purchases Budget for the Year Ended December 31, 2003 |
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Direct Materials |
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Description |
Leather |
Lining |
Total |
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Yds. Required for Production |
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Wallets |
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Handbags |
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Plus: desired ending inventory |
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Total Material Required |
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Less: estimated beginning inventory |
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Total Required Purchases |
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Unit price per square yard |
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Total Direct Material Purchases |
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Elite Accessories, Inc. Direct Labor Cost Budget for the Year Ended December 31, 2003 |
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Departments |
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Description |
Cutting |
Sewing |
Total |
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Hours Required for Production |
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Wallets |
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Handbags |
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Total Direct Labor Hours Required |
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Hourly Rate |
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Total Direct Labor Cost |
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Elite Accessories, Inc. Factory Overhead Cost Budget for the Year Ended December 31, 2003 |
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Description |
Amount |
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Indirect Factory Wages |
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Supervisor Salaries |
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Power and light |
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Depreciation of plant and equipment |
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Indirect materials |
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Maintenance |
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Insurance and property taxes |
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Total factory overhead cost |
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Elite Accessories, Inc. Cost of Goods Sold Budget for the Year Ended December 31, 2003 |
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Finshed Goods Inventory, Beginning |
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Work in Process, Beginning |
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Direct Materials |
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Direct Material Inventory, beginning |
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Direct Material Purchases |
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Direct Materials Available |
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Less: Direct Material Inventory, ending |
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Direct Materials placed in production |
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Direct Labor |
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Factory Overhead |
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Total manufacturing costs |
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Total Work in Process during period |
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Less: Work in Process, ending |
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Cost of Goods Manufactured |
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Finished Goods Available for Sale |
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Less: Finished Goods Inventory, ending |
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Cost of Goods Sold |
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Elite Accessories, Inc. Selling & Administrative Expense Budget for the Year Ended December 31, 2003 |
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Description |
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Selling Expenses |
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Sales Salaries Expense |
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Advertising Expense |
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Travel Expense |
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Total selling expenses |
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Administrative Expenses: |
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Officers' salaries expense |
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Office salaries expense |
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Office rent expense |
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Office supplies expense |
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Miscellaneous administrative expenses |
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Total administrative expenses |
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Total Selling and Administrative Expenses |
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Elite Accessories, Inc. Budgeted Income Statement for the Year Ended December 31, 2003 |
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Revenue from Sales |
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Cost of Goods Sold |
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Gross Profit |
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Selling and administrative expenses |
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Selling expenses |
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Adminisrative expenses |
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Total selling and administrative expenses |
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Income from operations |
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Other income: |
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Interest revenue |
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Other expenses: |
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Interest expense |
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Income before income tax |
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Income tax |
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Net Income |
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Elite Accessories, Inc. Schedule of Collections from Sales for the Year Ended December 31, 2003 |
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Description |
Jan. |
Feb. |
Mar. |
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Receipts from Cash Sales: |
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Cash Sales |
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Receipts from sales on account: |
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From prior month's sales |
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From current month's sales |
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Total receipts from sales on account |
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Total Cash Collections |
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Elite Accessories, Inc. Schedule of Payments for Manufacturing Costs for the Year Ended December 31, 2003 |
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Description |
Jan. |
Feb. |
Mar. |
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Payments of Prior Month Costs: |
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Payments of Current Month Costs: |
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Total Cash Payments |
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Elite Accessories, Inc. Cash Budget for the Year Ended December 31, 2003 |
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Description |
Jan. |
Feb. |
Mar. |
|
Estimated Cash Receipts from: |
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Cash Sales |
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Collections of Accounts Receivable |
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|
Collections of Interest |
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|
Total Cash Receipts |
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Estimated Cash Payments for: |
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|
Manufacturing Costs |
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|
Selling and administrative expenses |
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Capital additions |
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|
Interest expense |
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|
Income taxes |
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|
Total Cash Payments |
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|
Cash increase (decrease) |
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|
Cash balance at beginning of month |
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|
Cash balance at end of month |
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|
Minimum cash balance |
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Excess (deficiency) |
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Elite Accessories, Inc. Capital Expenditures Budget for the Year Ended December 31, 2003 |
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|
Item |
2003 |
2004 |
2005 |
2006 |
2007 |
|
Machinery, Cutting Dept. |
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|
Machinery, Sewing Dept. |
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|
Office Equipment |
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|
Total |
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|
Elite Accessories, Inc. Capital Expenditures Budget for the Year Ended December 31, 2003 |
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|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
|
|
2003 |
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|
Machinery, Cutting Dept. |
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|
Machinery, Sewing Dept. |
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|
Office Equipment |
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|
Total |
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|
2004 |
||||||||||||
|
Machinery, Cutting Dept. |
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|
Machinery, Sewing Dept. |
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|
Office Equipment |
||||||||||||
|
Total |
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|
2005 |
||||||||||||
|
Machinery, Cutting Dept. |
||||||||||||
|
Machinery, Sewing Dept. |
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|
Office Equipment |
||||||||||||
|
Total |
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|
2006 |
||||||||||||
|
Machinery, Cutting Dept. |
||||||||||||
|
Machinery, Sewing Dept. |
||||||||||||
|
Office Equipment |
||||||||||||
|
Total |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
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|
Machinery, Cutting Dept. |
||||||||||||
|
Machinery, Sewing Dept. |
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|
Office Equipment |
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|
Total |