Principles of Accounting, Volume 2: Managerial Accounting

Chapter 1

Accounting as a Tool for Managers

Summary

The purpose of managerial accounting is to supply financial and nonfinancial information to the organization’s management and other internal decision makers Most of the job responsibilities of a manager fit into one of three categories: planning, controlling, and evaluating Planning involves setting goals and forming the plans to achieve those goals Evaluation determines whether plans are being followed and whether progress is being made as planned toward the fulfillment of organizational goals and objectives.

Key terms

managerial accounting: process that allows decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate…
controlling: monitoring of the planning objectives that were put into place
objective: target that needs to be met in order to meet company goals
evaluating: comparing actual results against the planned results
goal: what a company expects to accomplish over time
planning: process of setting goals and objectives

Chapter 2

Building Blocks of Managerial Accounting

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Summary

For manufacturing firms, it is essential that they differentiate among direct materials, direct labor, and manufacturing overhead in order to identify and manage their total product costs For planning purposes, managers must be careful to consider the relevant range because it is only within this relevant range that total fixed costs remain constant Costs can be broadly classified as either fixed or variable costs. However, in order for managers to manage effectively, these two cost classifications are often further expanded to include mixed, step, prime, and conversion costs

Key terms

manufacturing overhead: costs incurred in the production process that are not economically feasible to measure as direct material or direct labor costs; examples include indirect material, indirect…
relevant range: quantitative range of units that can be produced based on the company’s current productive assets; for example, if a company has sufficient fixed assets to produce up to 10,000…
conversion costs: total of labor and overhead for a product; the costs that “convert” the direct material into the finished product
product costs: all expenses required to manufacture the product: direct materials, direct labor, and manufacturing overhead
fixed cost: unavoidable operating expense that does not change in total, regardless of the level of activity
direct labor: labor directly related to the manufacturing of the product or the production of a service
direct materials: materials used in the manufacturing process that can be traced directly to the product
variable cost: one that varies in direct proportion to the level of activity within the business

Chapter 3

Cost-Volume-Profit Analysis

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Summary

A break-even point can be found on a per-unit basis or as a dollar amount, depending upon whether a per-unit contribution margin or a contribution margin ratio is applied A specialized income statement, the Contribution Margin Income Statement, can be useful in looking at total sales and total contribution margin at varying levels of activity Contribution margin can be used to calculate how much of every dollar in sales is available to cover fixed expenses and contribute to profit Contribution margin can be expressed on a per-unit basis, as a ratio, or in total

Key terms

break-even point: dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs; it can also be expressed as that…
sensitivity analysis: what will happen if sales price, units sold, variable cost per unit, or fixed costs change
contribution margin: amount by which a product’s selling price exceeds its total variable cost per unit
contribution margin ratio: percentage of a unit’s selling price that exceeds total unit variable costs
total contribution margin: amount by which total sales exceed total variable costs
target pricing: process in which a company uses market analysis and production information to determine the maximum price customers are willing to pay for a good or service in addition to the…
operating leverage: measurement of how sensitive net operating income is to a percentage change in sales dollars

Chapter 4

Job Order Costing

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Summary

The cost of goods manufactured includes the beginning work in process inventory, the materials used in production, the direct labor assigned to each job, and the manufacturing overhead costs assigned, less the costs… Direct materials are requested on a materials requisition form and recorded on the job cost sheet when transferred from raw materials inventory to the work in process inventory Manufacturing overhead costs are accumulated in the manufacturing overhead account and assigned to the individual jobs using the predetermined overhead rate Job order costing (JOC) is the optimal costing method for producing custom goods or when it is easy to identify the cost directly with the product

Key terms

job order costing: information system that traces the individual costs directly to the final product and not to production departments
manufacturing overhead: costs incurred in the production process that are not economically feasible to measure as direct material or direct labor costs; examples include indirect material, indirect…
materials requisition form: form showing which specific raw materials and costs are transferred from raw materials inventory to work in process inventory
costs: incurred, so that at all points in the manufacturing process, the costs assigned to that particular job are known
job cost sheet: document created for each job that includes all material, labor, and overhead costs for that job
direct labor: labor directly related to the manufacturing of the product or the production of a service
direct materials: materials used in the manufacturing process that can be traced directly to the product
cost of goods manufactured: manufacturing costs incurred less the ending work in process inventory

Chapter 5

Process Costing

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Summary

Process costing often groups direct labor and manufacturing overhead as conversion costs Selling and administrative costs are period costs related to the sales of products and management of the company and are not directly tied to a specific product Process costing determines the cost per unit through the use of equivalent units, or the number of units that would have been produced if production was sequential instead of in batches The three categories of costs incurred in producing an item are direct material, direct labor, and manufacturing overhead

Key terms

process costing: costing system used when a standardized process is used to manufacture identical products and the direct material, direct labor, and manufacturing overhead cannot be traced to a…
equivalent units: number of units that would have been produced if the units were produced sequentially and in their entirety in a particular time period
period costs: typically related to a particular time period instead of attached to the production of an asset; treated as an expense in the period incurred (examples include many sales and…
conversion cost: total of labor and overhead for a product; the costs that “convert” the direct material into the finished product
item: direct material, direct labor, and manufacturing overhead
spoilage: any units that are not fit for sale due to breakage or other imperfections
manufacturing costs: (also, product costs) total of all costs expended in the manufacturing process; generally consists of direct material, direct labor, and manufacturing overhead

Chapter 6

Activity-Based, Variable, and Absorption Costing

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Summary

Overhead is allocated to each product based on the estimated predetermined overhead rate and the number of units in the selected activity base An activity base is selected to allocate overhead. This is traditionally direct labor hours, direct labor cost, or machine hours A predetermined overhead rate is calculated by dividing the estimated overhead by the allocation base

Key terms

absorption costing: (also, full costing) system of accounting where all costs are treated as product costs regardless of whether they are variable or fixed
cost driver: activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units…
activity base: activity that has been considered to be a primary driver of overhead costs and for which, traditionally, direct labor hours or machine hours were used
direct labor: labor directly related to the manufacturing of the product or the production of a service
predetermined overhead rate: calculated by dividing the estimated overhead by the allocation base
common fixed costs: expenses that are shared among all divisions or production units and include such costs as the CEO salary and corporate headquarter costs
variable costing: (also, direct costing or marginal costing ) system of accounting where only variable costs are treated as product costs
cost pool: accumulation of costs that are incurred during the production of the activities included in the activity cost pool

Chapter 7

Budgeting

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Summary

A master budget includes the subcategories of operating budgets and financial budgets The sales budget is the first budget developed, and the estimated sales in turn guide the production budget There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity

Key terms

budget: quantitative plan estimating when and how much cash or other resources will be received and how the cash or other resources will be used
financial budget: category of budgeting that details estimates for cash inflows and outflows through planned operations and changes capital investments of assets, liabilities, and equities
operating budget: category of budgeting that helps managers plan and manage production, order materials, schedule direct labor, and monitor overhead expenses
production budget: budget showing the number of units that need to be produced for each period based on sales estimates and required inventory levels
zero-based budgeting: budget that begins with zero dollars and then includes in the budget only revenue and expenses that can be supported or justified
sales budget: budget showing the expected sales in units and the sales price for the budget period
static budget: budget prepared for a single level of activity for a given period
master budget: overall budget that includes the operating and financial budgets

Chapter 8

Standard Costs and Variances

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Summary

A favorable variance is when the actual price or quantity is less than the standard amount An unfavorable variance is when the actual price or amount is greater than the standard amount There are two components to material variances: the direct materials price variance and the direct materials quantity variance There are two labor variances: the direct labor rate variance and the direct labor time variance

Key terms

standard cost: cost expectation for price paid and amount (quantities) used
variance: difference between standard and actual performance
standard: expectation for a component used in production
direct labor rate variance: difference between the actual rate paid and the standard rate that should have been paid based on the actual hours worked
direct labor time variance: difference between the actual hours worked and the standard hours that should have been worked for the actual units produced
direct materials quantity variance: difference between the actual quantity of materials used and the standard materials that were expected to be used to make the actual units produced
direct materials price variance: difference between the actual price paid per unit for materials and what should have been paid per the standards
favorable variance: difference involving spending less, or using less, than the standard amount

Chapter 9

Responsibility Accounting and Decentralization

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Summary

Management control systems allow managers to develop a reporting structure to help the organization meet its strategic goals Segments are uniquely identifiable components of the business that facilitate the effective and efficient operation of the business Organizational charts are used to graphically represent the authority structure of an organization In centralized organizations, primary decisions are made by the person or persons at the top of the organization

Key terms

decentralization: business structure in which the decision-making is made at various levels of the organization
centralization: business structure in which one individual makes the important decisions and provides the primary strategic direction for the company
responsibility accounting: method of encouraging goal congruence by setting and communicating the financial performance measures by which managers will be evaluated
management control system: structure within an organization that allows managers to establish, implement, and monitor progress toward the strategic goals of the organization
segment: portion of the business that management believes has sufficient similarities in product lines, geographic locations, or customers to warrant reporting that portion of the company…
organizational chart: graphical representations illustrating the authority for decision-making and oversight throughout an organization
allocated costs: costs that are generated by non-revenue generating portions of the business, such as corporate headquarters, that are assigned based on some formula to the revenue generating…
discretionary cost center: organizational segment in which a manager is held responsible only for controllable costs when there is not a well-defined relationship between the center’s costs and its…

Chapter 10

Short-Term Decision Making

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Summary

Deciding to accept or reject a special order is a choice between alternatives Accepting or rejecting a special order involves comparing the purchase price associated with the special order to the cost to produce the items This decision is highly influenced by whether the firm being offered the special order is operating below or at capacity Decision-making involves choosing between alternatives

Key terms

special order: one-time order that does not typically affect current sales
allocated costs: costs that are generated by non-revenue generating portions of the business, such as corporate headquarters, that are assigned based on some formula to the revenue generating…
split-off point: point at which some products are removed from production and sold while others receive additional processing
differential analysis: type of analysis that considers only the differences between variables that are important to the analysis
irrelevant cost: cost that has no effect on the decision being made because it is the same under either alternative
normal capacity: company’s maximum production level, without adding additional production resources, or within the company’s relevant range
relevant range: quantitative range of units that can be produced based on the company’s current productive assets; for example, if a company has sufficient fixed assets to produce up to 10,000…
segment: portion of the business that management believes has sufficient similarities in product lines, geographic locations, or customers to warrant reporting that portion of the company…

Chapter 11

Capital Budgeting Decisions

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Summary

This process includes determining capital needs, exploring resource limitations, establishing baseline criteria for alternatives, evaluating alternatives using screening and preference decisions, and making the decision Screening decisions help eliminate undesirable alternatives that may waste time and money. Preference decisions rank alternatives emerging from the screening process to help make the final decision. Capital investment decisions select a project for future business development.

Key terms

preference decision: process of comparing potential projects that meet screening decision criteria, and will rank order of importance, feasibility, and desirability to differentiate among alternatives
screening decision: process of removing alternatives from the decision-making process that would be less desirable to pursue given their inability to meet basic standards
capital investment: company’s contribution of funds toward long-term assets for further growth; also called capital budgeting
alternatives: options available for investment
time value of money: assertion that the value of a dollar today is worth more than the value of a dollar in the future
net present value method (NPV): discounts future cash flows to their present value at the expected rate of return, and compares that to the initial investment
compounding: earning interest on previous interest earned, along with the interest earned on the original investment

Chapter 12

Balanced Scorecard and Other Performance Measures

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Summary

Well-designed performance measurement systems help businesses achieve goal congruence between the company and the employees Performance measurement systems should help the company meet its strategic goals while helping the employee meet his or her professional goals A good performance measurement system uses measures over which a manager has control, provides timely and consistent feedback, compares the measures to standards of some form, has both short- and long-term measures… ROI can be broken into two separate measures: sales margin and asset turnover

Key terms

balanced scorecard: tool used to evaluate performance using qualitative and nonqualitative measures
performance measure: metric used to evaluate a specific attribute of a manager’s role
goal congruence: integration of multiple goals, either within an organization or across multiple components or entities; congruence is achieved by aligning goals to achieve an anticipated mission
asset turnover: measure of how efficiently a company is using its capital assets to generate revenues
sales margin: measure of how much profit is generated by each sales dollar
performance measurement system: evaluates management in a way that will link the goals of the corporation with those of the manager
cost center: part of an organization in which management is evaluated based on the ability to contain costs; the manager primarily has control only over costs
investment center: organizational segment in which a manager is accountable for profits (revenues minus expenses) and the invested capital used by the segment

Chapter 13

Sustainability Reporting

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Summary

This management goal is called business sustainability Users of sustainability reporting information are not just primary users such as shareholders and lenders but can also be secondary users such as employees, customers, the community, governments, and regulators Has pulled out of the Paris Climate Agreement, many companies have announced their own commitment to maintain the spirit of the Agreement Early ventures into sustainability practices and reporting often arose in response to negative events and even tragedies as communities demanded more accountability by companies that operated within those communities

Key terms

sustainability: meeting the needs of the present generation without compromising the ability of future generations to meet their own needs by being aware of current economic, social, and…
sustainability report: report that presents the economic, environmental or social impacts that a corporation or organization was responsible for
Paris Climate Agreement: 2015 agreement between 196 nations to strive to limit the increase of global temperatures to 1.5 degrees Celsius
business sustainability: actions taken to sustain the business so that it survives and thrives well into the future
climate change: change in climate patterns due to the increased levels of carbon dioxide in the atmosphere which is attributed mainly to the usage of fossil fuels
P/E ratio: company’s stock price divided by the company’s earnings per share and indicates the amount investors are willing to pay for one dollar of earnings
triple bottom line (TBL): expansion of traditional reporting that is focused on economic performance, to include social and environmental performance
renewable energy: energy that is not depleted once used, for example, tidal energy, wind energy or solar power