Chapter 1 & 2 Managerial Accounting

Managerial Accounting
The phase of accounting concerned with providing information to managers for use WITHIN the organization.
A part or activity of an organization where managers would like cost, revenue or profit data.
Financial Accounting
The phase of accounting that is concerned with reporting historical financial information to external parties.
Managerial Accountants perfrom three vital activities…
Planning, Controlling, Decision Making
Involves establishing goals and specifiying how to achieve them
Involves gathering feedback to ensure that the plan is being properly executed or motified as circumstances change
Decision Making
Involves selecting a course of action from competing alternatives.
A detailed plan for the future that is usually expressed in formal quanitative terms
Performance Reports
Compares budgeted data to actual data in an effort to identify and learn from excellent perfromance and to identify and eliminate sources of unsatisfactory performance
Institue of Management Accountants (IMA)
A network of more than 60,000 accounting and finance professionals from over 120 countries
Strategic Management Skills
Understand that the plans they set forth, the variables they seek to control, and the decisions they make are all influenced by their company’s strategy.
Enterprise Risk Management Skills
A process used by a company to identify those risks and develop responses to them that enable it to be reasonably assured of meeting its goals.
Process Management Skills
Continually improve the business processes that serve customers
Business Process
a series of steps that are followed in order to carry out some task in a business
Value Chain
Describes how an organization’s functional departments interact with one another to form business processes.
Two Process Management methods
Lean Productions and Theory Constraints
Lean Productions/ Just-in-Time Production
Organizes resources such as people and machines around the flow of business processes and that only produces units in reponse to customer orders
Theory Constraints
Based on the insight that effectively managing the constraints is a key to success
Measurement Skills
Understand that the question you are trying to answer defines what you’ll measure and how you’ll analyze it.
Leadership Skills
Managers must posses strong leadership skills is they wish to channel their co-workers’ efforts toward achieving organizational goals.
Statement of Ethical Professional Practice
Ethical code adopted by the Institute of Management Accountants (IMA)
Corporate Social Responsibility (CSR)
A concept where organizations consider the needs of all stakeholders when making decisions
Raw Materials
Any materials that go into the final product.
Direct Materials
Those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.
Indirect Materials
Materials such as solder and glue that are included as part of manufacturing overhead
Direct Labor
Consists of labor costs that can be easily traced to individual units of product
Indirect Labor
Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience.
Manufacturing Overhead
Includes all manufacturing costs except direct materials and direct labor
Selling Costs
Non-manufacturing costs that include all costs that are incurred to secure customer orders and get the finished product to the customer
Administrative Costs
Non-manufacturing costs that include all costs associated with the general management of an organization rather than with manfucturing or selling.
Product Costs
Include all costs involved in acquiring or making a product
Period Costs
All costs that are not product costs
Prime Costs
The sum of direct materials and direct labor costs
Conversion Cost
The sum of direct labor costs and manufacturing overhead cost
Cost Behavior
How a cost reacts to changes in the level of activity
Cost Structure
The relative proportion of each type of cost in an organization.
Types of Cost Behavior
Variable Cost, Fixed Cost, and Mixed Cost
Variable Cost
Varies, in total, in direct proportion to changes in the level of activity. Per unit they remain constant
Fixed Cost
A cost that remains constant, in total, regardless of changes in the level of activity. Per unit decrease as the activity level rises and increase as the activity level falls
Mixed Cost
Contains both variable and fixed cost elements
Mixed Cost Equation
Y=a+bX where: Y-total mixed cost, a-total fixed cost, b-variable cost per unit, and X-level of activity.
Account Analysis
An account is classified as either variable or fixed based on the analyst’ prior knowledge of how the cost in the account behaves
Engineering Approach
Involves a detailed analysis of what cost behavior should be, based on industrial engineer’s evaluation of certain criteria
High-Low Method
Based on the rise-over-run formula for the slope of a straight line.
High-Low Method Equation
Variable Cost=(Cost at High Level-Cost at Low Level)/(High Level-Low Level)
Fixed Cost Equation
Fixed Cost Element=Total Cost-Variable Cost Element
Least-Square Regression Analysis
Uses all of the data to separate a mixed cost into its fixed and variable components
Traditional Format Income statement
Prepared primarily for external reporting purposes with two categories; cost of goods sold and selling/administrative expenses
Contribution Format Income Statement
Provides managers with an income statement that clearly distinguishes between fixed and variable costs
Contribution Margin
The amount remaining from sales revenue after variable expenses have been deducted. (with cost of goods sold)
Direct Cost
A cost that can be easily and conveniently traced to a specified cost object
Indirect Cost
A cost that cannot be easily and conveniently traced to a specified cost object
Differential Cost and Revenue
A difference in costs/revenues between any two alternatives
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another
Sunk Cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
Cost of Quality
Refers to all of the costs that are incurred to prevent, detect and deal with defects or that result from defects in products
Prevention Costs
Support activities whose purpose is to reduce the number of defects
Appraisal Costs
Incurred to identify defective products before the products are shipped to customers
Internal Failure Costs
Result from identifying defects before they are shipped to customers
External Failure Costs
Result when a defective product is delivered to a customer
Quality Cost Report
Details the prevention costs, appraisal costs, and costs of interanl and external failures that arise from the company’s quality control efforts.