Accounting Exam ch1&2

Introduction

Information designed to help obtain resources to use to achieve an organization’s goals

Information designed to help determine how those resources are used to achieve those goals

• Decision facilitating (planning)
• Decision influencing (control)

Trying to make a decision on the basis of financial information

Using accounting information to direct actions such as hiring/firing/selling/creating incentives, etc

• Among parties within the org
• Among uses

Everyone's actions and jobs effect eachothers within an org

Financial info (especially with forecasting) is influenced by different incentives b/c it is used in different, varying, and conflicting ways

One system for each function (decision making, performance evaluation, external reporting)

• Additional processing cost
• Confusion cost

Additional costs of writing and maintaining contracts based on accounting numbers, book-keeping costs arise from the extra system

Running two different systems in order to achieve different ends - systems report different numbers for the same concept

• •Concept
• explains persistence of use of accounting practices that may not be optimal or seem logical
• –A system that currently “works” will usually not be changed
• –Cost of changing system may outweigh benefits derived from change
• –Because the organization does not know why the system works,
• the existing system may not be optimal
• •Because the organization does not know why the system works, it may be unsure how to change the system when conditions change so that it no longer works

Sales people get a bonus if they exceed the forecast. This may cause salespeopl to low-ball the forecast. This unsureness and the differences in used of forecasting info causes conflict

Tell the insurance company you need money. Show the company the costs they incurred with the old system. You submit a diagnosis related group to the government (a report that became required) and this has costs. Each DRG shows where your costs are coming from. You can make decisions on budget based on this report to make budgeting more effective. They had to change their accounting practices.

The Nature of Costs

Manufacturer versus Merchandise

• 1) Merch- Merchandise inventories
• 2) Manufacturing Inventories - finished goods, raw materials, work in process

determination of cost of goods sold

• Finished Goods
• Raw Materials Inventory
• Work in Process

Ready to sell

Used to manufacture your product

What you're currently manufacturing- when you get them done, then they're finished goods

Cost of Goods Manufactured

• –Direct Material
• •Versus Indirect Material
• –Direct Labor
• •Versus Indirect Labor
• –Manufacturing Overhead

Becomes physically part of the product (paper and ink for a textbook)

Essential in the making of the product (oil for the printing press machine) but is not physically part of the product

People who are physically making the product (people running the printing press)

Part of the production process but not physically making the product (inventory handlers)

Tends to be capacity related (depreciation, property taxes, etc)

1) non-manufacturing costs-administrative 2)product/period costs 3)Variable Costs 4)Fixed Cost- discretionary and committed 5)Total cost per unit 6)Cost-volume profit analysis-BTNI, ATNI 7)opportunity cost 8) historical cost

–Selling and Administrative

• •Product Costs
• –All Manufacturing Costs
• –Become Expense Only When Units Are Sold
• •Period Costs
• –All Non-manufacturing Costs
• –Become Expense When Incurred

• •Variable Cost
• •Fixed Cost
• •Total Cost and Per Unit Cost
• •Implications for Predicting--Example

Refer to whats going on with total costs

Change directly with volume - double what you produce, double the labor

Don't change/changes very little in total $ compared to activity. Don't change in total amount in response to changes in volume.Can change on the basis of mgmt decisions (discretionary fixed costs). An example of committed fixed costs is deciding to advertise

• •Representation of Before Tax Net Income based
• on Unit Volume
• •Adjusting After Tax Net Income to Before Tax
• Net Income
• •Representation of Before Tax Net Income based
• on Dollar Sales Volume

• =PQ-VQ-F
• P= Price per unit
• V=Variable cost per unit
• F=Total fixed costs

= BTNI (1-TR)

Price per unit - Variable cost per unit

When BTNI = 0

• •Figure one wishes to use for decision
• facilitating
• –Unknown Amount
• –Unknown Transaction

• •Figure available for decision facilitating
• –Known Transaction
• –Known Amount
• * Use this for opportunity cost when predicting b/c you'll never know the opportunity cost

• •In decision facilitating applications, sometimes historical cost is a good approximation of opportunity cost; sometimes it isn’t
• •Historical cost is appropriate for decision
• influencing uses because one wishes to evaluate performance based on what did happen

• 1) manufacturing (product costs: expense only when units are sold)
• 2) non-manufacturing (non-manufacturing: expense when incurred)

• Direct labor
• direct materials
• overhead

= Revenue - commission - direct materials - direct labor - variable manufacturing overhead

Product Cost - It is overhead because it was the company's choice