2014 Accounting Notes - Second Half of Term

  1. Considerations when interpreting ratios
    Trends over time (big/small/up/down/good bad)

    Comparison to industry averages or competitor ratios or predetermined targets

    Remember both the numerator and denominator affect the ratio
  2. When interpreting ratios, we hope for...
    INcreasing rates of profit on shareholders equity, capital employed and sales

    Adequate liquidity ( assets to liabilities of not less than 100%) to ensure debts can be paid

    Satisfactory return on the investment made by shareholders VS the risk and other opportunities

    A level of debt commensurate with the business risk taken (depends on industry)

    High efficiency
  3. When are control systems used?
    Generally in strategic planning.

    They are considered part of the broader process of the strategic  planning process

    Involves measuring financial and non financial performances
  4. What  are the elements of a control system?
    • A detector or sensor that measures what is happening
    • An assessor that determines the significance of what is happening by comparing it with a standard or expectation

    An effector (feedback) that alters behaviour if the assessor indicates the need to do so

    A communication network that transmits information between the other elements (to report out)
  5. What are Balanced scorecards?
    • Looks at four perspectives:
    • 1. Financial perspective
    • 2. Customer perspective
    • 3. Internal Processes
    • 4. Learning and Growth
  6. What are period costs?
    Period costs relate to the accounting period (year, month) in which it was incurred (operating expenses)
  7. What are product costs?
    Product costs relate to the cost of goods sold or services produced
  8. what is another term for period costs?
    Operating expenses
  9. What happens to this years profits if a cost ends up in inventory and that inventory isn't sold this year?
    Inventory is on balance sheet; so it  reduces profits because it is part of the inventory... not in this years expenses
  10. What are the two types of production costs?
    • Direct
    • Indirect
  11. What are direct costs?
    Traceable to product/services - direct materials or labour, other direct costs
  12. What are indirect costs?
    - necessary to make the product/service, but not readily traceable to particular product/services... indirect materials, indirect labour
  13. What is prime cost?
    Refers to the total of all direct costs ... includes the total of direct materials and direct labour
  14. What is manufacturing over head?
    All production costs other than direct costs (the total of all indirect material, indirect labour, and all other indirect costs)
  15. What are conversion costs?
    The production costs, other than direct materials, used to make a product or provide a service.  This includes labour and manufacturing overhead
  16. Cost do convert direct material is also known as...
    conversion cost
  17. What is absorption costing?
    says that all manufacturing overhead should be allocated to the units produced (GAAP requirement).

    Fixed overhead rate = estimated fixed overhead expenditure for the period/estimated activity for the period
  18. Traditional costing is a type of
    absorption costing
  19. What are examples of overhead costs?
    ANYTHING that is not direct labour or material.

    • Electricity
    • Maintenance
    • Plant manager
    • Rent/property tax/interest expense
    • Depreciation
  20. What is divisional based overhead rate?
    An overhead rate calculated using the total overhead costs for the company, divided by the total of the allocation base for the overhead
  21. Activity based costing steps
    • 1. accumulate the indirect costs of significant business activities into separate cost pools
    • 2. Identify what activity (driver) causes cost pool to change
    • 3. calculate overhead cost per driver for that pool
    • 4. identify how much of that driver the product consumes
    • 5. assign the costs from the cost pools to products based on cost drivers consumed
  22. Cost pools...
    accumulate the indirect costs of business process.
  23. What is a driver for purchasing?
    number of purchase orders
  24. What is a driver for equipment maintenance?
    number of machine hours
  25. what is a driver for scheduling?
    number of production orders
  26. Purchasing, material handling, scheduling, equipment maintenance are all examples of....
    overhead costs; cost pools
  27. In order to identify a cost driver... categorize costs as follows
    • unit level
    • batch related
    • product sustaining (distribution system)
    • Customer sustaining system (return of system/warranty)
    • facility sustaining activities (for the entire plant)
  28. What happens when over/underallocation of overhead occurs?
    The overhead rate is normally established prior to the production year.

    At the end of the year when actual cost and actual activity volumes are known, there is going to be a difference between actual and budgeted overhead
  29. Adjusting records of a company... using two approaches
    • 1. Assign allocation or underallocation to COGS
    • 2. prorate overallocation or underallocation to COGS, work in progress inventory, and finished goods inventory.  We can do this because all three of these items have overhead in them already.
  30. Why is estimated vs actual overhead important?
    If it's we've overestimated, we could have issues with pricing (too high).

    If underestimated, might not be able to recoup costs.
  31. Marketing and accounting helps us answer...
    What is the volume of products/services that we need to sell to maintain profitability?

    nWhat sales mix will optimize our profitability?

    nWhat alternative approaches to pricing can we adopt?

    nShould we keep or drop product lines that are underperforming?
  32. Fixed costs...
    do not change with increases in business activity
  33. Variable costs...
    increase/decreases in proportion to an increase or decrease in business activity
  34. Step costs (fixed cost with smaller relevant range)...
    Constant within a particular level of activity, but can increase when activity reaches a critical level
  35. Mixed costs
    have both fixed and variable components...

    i.e. cellphone cost (fixed monthly charge plus per minute rate)
  36. Average costs
    total of both fixed and variable costs divided by the total number of units produced

    This is dangerous to use in management accounting because fixed costs remain the same... average cost is not that useful... it's useful at a conceptual level

    Dangerous to use for short run or special order decisions because it may lead you to believe that the fixed costs will change the unit level - they don't!!
  37. Marginal costs
    cost of producing one extra unit.... there are no fixed cost component to marginal cost.  IF I produce one more unit, fixed costs still stay the same.

    Marginal cost = variable costs only
  38. fixed costs...
    don't change.
  39. variable costs
    change based on the activity level (number of units sold)
  40. Cost volume profit analysis...
    • 1. looks at changes in activity and changes in selling prices and costs
    • 2. only over a relevant range in the short term
    • 3. sensitivity analysis is an approach to understanding how changes in one variable (such as price) affect other variables
  41. Operating profit =
    revenue - (fixed costs+variable costs)


    (units sold x selling price) - [fixed costs+(units sold  unit variable costs)]
  42. contribution margin =
    selling price - variable costs

    it's contribution towards fixed costs and profit.
  43. When costs are covered it's called...
    the break even point

    If you have't paid for your fixed costs you are still losing money.  It's not until you've covered all your costs that you are making profit.
  44. contribution margin percentage/ratio
    is the contribution margin divided by the revenues

    CM% = CM/SP
  45. if selling price is 10, and variable costs are 8, what is the contribution margin?  and the ratio?

    2/10 = 20%
  46. What is the break even point and equation?
    the point at which the total costs equal revenue (there is neither a profit or revenue)

    = Fixed costs/contribution margin
  47. Why is relavent range important?
    Because fixed costs don't' change within it; but could move outside of it
  48. Margin of safety
    a measure of the difference between expected sales and breakeven sales

    =(expected sales-breakevensales)/expected sales     TIMES 100
  49. operating leverage
    refers to a mix of variable and fixed costs
  50. what are some cost profit assumptions?
    • costs can be split between fixed and variable
    • the behaviour of costs is linear
    • Changes in costs occur only because of the changes in the number of units sold or the level of service provided
    • a single product/service or product/service mix remains constant
    • only applies to relavent range
    • short-term focus and cannot be used as a long term planning tool
  51. What are some approaches to pricing?
    • cost plus pricing
    • target or rate of return pricing
    • market pricing (whats the competition doing?)
  52. Step cost
    shift work; i.e. server, etc
  53. Cost of goods sold
    • Opening inventory
    • plus purchases
    • INv available for sale
    • less closing inventory
    • COGS
  54. COGS includes...
    Used, damaged, stolen, shrinkage...spoilage
  55. 3 inventory types
    • raw materials
    • work in process
    • finished goods
  56. schedule of COG manufactured ("working schedule")
    •  Raw material (inventory first)
    • Direct labour
    • Manufacturing overhead (rent, depereciation, light and power)
    • WIP at beginning of period, less WIP at end of period
    • COG manufactured
  57. valuation of inventory
    accounting principle, current assets are normally reported at the lower of their original cost or their net realizable value (aka market value)

    individually purchased inventory (called "specific identification)

    Similar/undifferentiated products (bulk) - weighted average cost, FIFO, LIFO (not allowed in canada)
  58. weighted average cost
    average out the cost of all goods purchased and sold; as both can fluctuate
  59. FIFO
    Anything that is sold during the year is sold from the inventory that we already have
Card Set
2014 Accounting Notes - Second Half of Term