Managerial Accounting Key Topics

Posted on Mar 29, 2025 in Modern Languages and Management

Cost-Volume-Profit & Break-Even Analysis

  • Committed Costs: Long-term costs that cannot be easily changed (e.g., lease payments, depreciation).
  • Break-Even Point:
    • Formula (Units): Fixed Costs / Contribution Margin per Unit
    • Formula (Dollars): Fixed Costs / Contribution Margin Ratio
  • Margin of Safety:
    • Formula (Dollars): Actual Sales − Break-Even Sales
    • Formula (Ratio): Margin of Safety in Dollars / Actual Sales
  • Degree of Operating Leverage:
    • Formula: Contribution Margin / Operating Income

Budgeting Concepts and Processes

  • Types of Budgets:
    • Operating Budget: Includes sales, production, direct materials, direct labor, overhead, and selling/administrative expenses.
    • Capital Expenditures Budget: Plans for purchasing long-term assets.
    • Financial Budget: Includes cash budget, budgeted balance sheet, and budgeted statement of cash flows.
    • Production Budget: Determines how many units to produce.
    • Flexible Budget: Adjusts for different levels of activity.
    • Sales Budget: Estimates revenue based on expected sales volume.
    • Direct Materials Purchases Budget: Plans for raw material purchases.
    • Direct Labor Budget: Estimates labor costs and hours required.
    • Cash Budget: Forecasts cash inflows and outflows.
  • Budgeting Approaches:
    • Participative Budgeting: Employees at all levels help prepare budgets.
    • Zero-Based Budgeting: Requires justification for every budgeted expense.
    • Incremental Budgeting: Adjusts the previous period’s budget for new changes.
    • Continuous Budgeting: Rolling budget that updates monthly or quarterly.
  • Advantages & Disadvantages of Budgeting: Helps with planning and control but can be rigid and time-consuming.

Cost Concepts for Decision Making

  • Product Costs vs. Period Costs:
    • Product Costs (Inventoriable Costs): Direct materials, direct labor, manufacturing overhead.
    • Period Costs: Selling, general, and administrative expenses.
  • Direct Costs vs. Indirect Costs:
    • Direct Costs: Traceable to a product or department (e.g., direct materials, direct labor).
    • Indirect Costs: Cannot be traced to a specific product (e.g., factory rent, supervisor salaries).
  • Fixed Costs vs. Variable Costs:
    • Fixed Costs: Stay the same regardless of production (e.g., rent, salaries).
    • Variable Costs: Change with production levels (e.g., raw materials).
    • Behavior: Fixed costs per unit decrease as production increases; variable costs per unit stay the same.
  • Tactical Decision Making: Short-term decision making to optimize profits.
  • Opportunity Cost: The benefit of the next best alternative forgone.
  • Sunk Cost: A cost that has already been incurred and cannot be recovered.
  • Discretionary Cost: A cost that management can adjust (e.g., advertising).
  • Relevant vs. Irrelevant Costs:
    • Relevant Costs: Affect a decision (e.g., additional costs for a new project).
    • Irrelevant Costs: Do not affect a decision (e.g., past expenses).
  • Make-or-Buy Decisions: Compare costs of in-house production vs. outsourcing.
  • Special Order Decisions:
    • Consider whether the order covers variable costs and contributes to fixed costs.
  • Closing a Segment:
    • Analyze if the segment’s lost contribution margin outweighs saved fixed costs.

Costing Methods and Variance Analysis

  • Job-Order Costing Journal Entries:
    • Raw Materials Inventory → Work-in-Process → Finished Goods → Cost of Goods Sold.
  • Manufacturing Overhead: Includes indirect materials, indirect labor, depreciation, rent, utilities, etc.
  • Under & Over Applied Overhead:
    • Underapplied: Actual overhead > Applied overhead → Adjust by increasing COGS.
    • Overapplied: Applied overhead > Actual overhead → Adjust by decreasing COGS.
  • Prime Costs vs. Conversion Costs:
    • Prime Costs: Direct materials + Direct labor.
    • Conversion Costs: Direct labor + Manufacturing overhead.
  • Variance Analysis:
    • Direct Material Price Variance: (Actual Price − Standard Price) × Actual Quantity
    • Direct Material Quantity Variance: (Actual Quantity − Standard Quantity) × Standard Price
    • Direct Labor Rate Variance: (Actual Rate − Standard Rate) × Actual Hours
    • Direct Labor Efficiency Variance: (Actual Hours − Standard Hours) × Standard Rate
  • Standard Cost Per Unit: Budgeted cost per unit of production.
  • Full Costs & Mixed Costs:
    • Full Cost: Includes both fixed and variable costs.
    • Mixed Costs: Have both fixed and variable components (e.g., utility bills).

Key Cost Accounting Formulas and Concepts

  • Contribution Margin & Operating Income:
    • Contribution Margin: Sales − Variable Costs
    • Operating Income: Contribution Margin − Fixed Costs
  • Cost-Volume-Profit (CVP) Analysis:
    • Helps determine how changes in costs, sales volume, and price affect profit.
    • Key formulas:
      • Contribution Margin Ratio: Contribution Margin / Sales
      • Profit Equation: Sales − Variable Costs − Fixed Costs = Operating Income