WGU UFC1 Exam Study Guide

Managerial Accounting - provides financial and nonfinancial information to managers and other internal decision makers Purpose of managerial accounting - provide useful information to decision makers Differences between financial accounting and managerial accounting - 1. managerial accounting also reports non-financial information. 2. financial accounting information is generally used by external users, whereas managerial accounting information is used by internal decision makers. 3. managerial accounting is not constrained by GAAP. 4. managerial accounting information is provided quickly, whereas financial accounting usually needs an audit. Planning - the process of setting goals and making plans to achieve them Control - the process of monitoring planning decisions and evaluating an organization's activities and employees Characteristics of fraud: - 1. provides direct or indirect benefit to the employee. 2. violates the employee's obligations to his employer. 3. costs the employer money or loss of other assets. 4. is hidden from the employer. Characteristics of an internal control system: - 1. urge adherence to company policies. 2. promote efficient operations. 3. ensure reliable accounting. 4. protect assets. Ethics - beliefs that distinguish from right and wrong. The Institute of Management Accountants (IMA) - the professional association for management accountants. Issued a code of ethics to help accountants involved in solving ethical dilemmas. IMA's Statement of Ethical Professional Practice requirements - Management accountants must be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner. Fixed Costs - do not change with changes in volume of activity. Ex) straight-line depreciation Variable Costs - change in proportion to changes in the volume of activity. Ex) sales commissions Mixed Costs - both fixed and variable. Ex) standard wages for employees (fixed) plus any overtime worked (variable) Cost Object - a product, process, department or customer to which costs are assigned. Direct Costs - traceable to a single cost object. Ex) salaries of maintenance dept employees, equipment purchased by maintenance dept, materials purchased by maintenance dept, maintenance dept equipment depreciation Indirect Costs - cannot be easily traced to a single cost object. Ex) factory accounting, factory administration, factory rent, factory manager's salary, factory light and heat, insurance on factory Controllability of costs - depends on the employee's responsibilities. Ex) a senior manager controls costs of investments in land, buildings and equipment, whereas a supervisor controls daily expenses such as supplies, maintenance and overtime. Sunk Costs - costs that have already been incurred and cannot be avoided or changed (irrelevant to future decisions). Ex) the cost of already-purchased office equipment. Out-of-pocket Costs - require a future outlay of cash (relevant for decision making). Ex) future purchases of equipment. Opportunity Costs - the potential benefit lost by choosing a specific action from two or more alternatives. Ex) a student giving up wages from a job to attend evening classes Product Costs - costs capitalized as inventory; expenditures that are necessary and integral to finished products. Includes direct materials, direct labor, and indirect manufacturing costs (overhead). These costs pertain to activities carried out to manufacture the product. Period Costs - costs expensed; expenditures identified more with a time period than with finished products. Includes general administrative expenses, selling expenses. These costs pertain to activities that are not part of the manufacturing process. Difference between product costs and period costs - Product costs: assigned to inventory on the balance sheet (until that inventory is sold). Period costs: expensed on the income statement (flow directly). Service industries always have _____ costs. - Period costs; services are not inventoried. Instead, costs incurred are expensed in the reporting period when incurred. Examples of service industry costs: - 1. Beverages and snacks 2. Cleaning fees 3. Pilot and copilot salaries 4. Attendant salaries 5. Fuel/oil costs 6. Travel agent fees 7. Ground crew salaries 3 types of industries: - 1. Manufacturing 2. Merchandising 3. Service Main difference between manufacturing and merchandising industries: - Merchandisers buy goods that are ready for sale, whereas manufactures produce goods from materials and labor. Three inventories of a manufacturer: - 1. Raw materials 2. Goods in process 3. Finished goods Raw materials inventory - the goods a company acquires to use in making products. Used directly and indirectly. Direct materials - Raw materials that are used directly in a product. Indirect materials - Raw materials that are used to support production processes, but are not as clearly identified with specific units or batches of a product. Often appear on balance sheet as factory supplies. Goods in Process inventory - aka Work in Process inventory. Consists of products in the process of being manufactured, but are not yet complete. Finished Goods inventory - consists of completed products ready for sale. Difference between COGS for a manufacturer versus a merchandiser - Manufacturer: beginning finished goods inventory + cost of goods manufactured (COGM) - ending finished goods inventory Merchandiser: beginning merchandise inventory + cost of goods purchased - ending merchandise inventory Cost of goods manufactured (COGM) - = beginning goods in process inventory + production costs - ending goods in process inventory Production costs - direct labor, direct materials, overhead Direct material costs - the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods. Direct labor costs - the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods. Factory overhead costs - consists of all manufacturing costs that are not direct materials or labor. Cannot be separately or readily traced to finished goods. Includes: overtime, maintenance of factory, supervision of employees, equipment repairs, utilities, production manager's salary, factory rent, depreciation, insurance, property taxes, and accounting/legal services. Does NOT include: selling and administrative expenses (these are period costs). Prime costs - direct materials costs and direct labor costs. Expenditures directly associated with the manufacture of finished goods. Conversion costs - direct labor costs and overhead costs. Expenditures incurred in the process of converting raw materials to finished goods. Direct labor is considered both a prime cost and conversion cost. Operating expenses - do not include manufacturing costs such as factory workers' wages and depreciation of production equipment and factory buildings. Includes sales salaries, office salaries, depreciation of delivery and office equipment. Materials activity - the flow of raw materials. Production activity - beginning goods in process inventory, direct materials, direct labor, and overhead. Unfinished products are considered ending goods in process inventory. Sales activity - the cost of finished products sold is reported on the income statement as COGS. the cost of products not sold is reported on the current period's balance sheet as ending finished goods inventory. The Manufacturing Statement - summarizes the types and amounts of costs incurred in a company's manufacturing process. Divided into 4 parts: direct materials, direct labor, overhead, and computation of COGM. Computing direct materials used: - beginning raw materials + raw material purchases - ending raw materials Trends in managerial accounting - 1. Customer orientation 2. Global economy 3. E-commerce 4. Service economy 5. Lean practices 6. Value chain Customer orientation - an increased emphasis on customers being the most important constituent of business. Employees understand the changing needs and wants of their customers and align their management and operating practices accordingly. Global economy - expands competitive boundaries and provides customers more choices. E-commerce - consumers expect to be able to buy items electronically, whenever and wherever they want. Service economy - service businesses typically account for over 60-70% of total economic activity. Lean business model - goal is to eliminate waste while satisfying the customer and providing a positive return to the company. Continuous improvement - rejects the notions of "good enough" or "acceptable" and challenges employees/managers to continuously experiment with new and improved business practices. Total quality management (TQM) - focuses on quality improvement and applies this standard to all aspects of business activities. Just-in-time manufacturing (JIT) - a system that acquires inventory and produces only when needed. A demand-pull system. Value chain - a series of activities that add value to a company's products or services. Cycle time - process time + inspection time + move time + wait time Cycle efficiency - process time / cycle time Cost Accounting System - accumulates costs and assigns them to products and services Uses a perpetual inventory system (continuously updates). Two types of Cost Accounting Systems - 1. Job order cost accounting 2. Process cost accounting Job order production - Manufactured products that are individually designed to meet the needs of a specific customer. Job - the production activities for a customized product Job lot - a job that involves producing more than one unit of a custom product Heterogeneity of job order production - the diversity of the products that are produced. Events in Job Order Costing - 1. Predict the cost to complete the job. 2. Negotiate price and decide whether to pursue the job. 3. Schedule production of the job. Target cost - Expected selling price - desired profit = target cost Job Cost Sheet - a separate record maintained for each job. Identifies: 1. the customer 2. the job number 3. the product 4. key dates 5. costs incurred (direct materials, labor and overhead) Materials ledger cards - perpetual records that are updated each time units are purchased and each time units are issued for use in production. Cost of direct materials flows from the materials ledger card to the ______. - job cost sheet The cost of indirect materials flows from the materials ledger card to the: - Indirect Materials account in the factory overhead ledger (a subsidiary ledger controlled by the Factory Overhead account in the general ledger). Posting to subsidiary records includes a _____ to a job cost sheet and a ______ to a materials ledger card. - debit, credit The flow of costs begin with ____. - clock cards Clock cards - used by employees to record the number of hours worked, and they serve as source documents for entries to record labor costs. Time tickets - used by employees to report how much time they spent on each job. Overhead allocation base - the factor to which overhead costs are linked Predetermined overhead rate - allows managers to estimate overhead in advance. estimated overhead costs / estimated activity base = predetermined OH rate Underapplied overhead - when less overhead is applied than is actually incurred (a debit left in the account). Overapplied overhead - when more overhead is applied than is actually incurred (a credit left in the account). Treat over/underapplied overhead by debiting or crediting the _____ account. - Cost of Goods Sold Process operations - the mass production of products in a continuous flow of steps. Ex) petroleum refining Important characteristic of process operations - a high level of standardization is necessary if the system is to produce large volumes of products. Job order operations versus Process operations - Job order: 1. custom orders 2. heterogeneous products/services 3. low production volume 4. high product flexibility 5. low to medium standardization Process operations: 1. repetitive procedures 2. homogeneous products/services 3. high production volume 4. low product flexibility 5. high standardization The ______ (input/output) of each production department becomes the ______ (input/output) of the next production department. - output; input Process cost accounting system - assigns direct materials, labor and overhead to specific processes. The total costs of each process are then divided by the number of units passing through that process to determine the cost per equivalent unit for that process. Materials consumption report - summarizes the materials used by a department during a reporting period. Replaces materials requisitions. Used when materials are moving continuously from the raw materials inventory through the manufacturing process. If a process has no beginning and no ending goods in process inventory, the unit cost of goods transferred out of a process is computed as: - total cost assigned to the process / total # of units started and finished in the period Equivalent Units of Production (EUP) - the number of units that could have been started AND completed given the cost incurred during a period. Ex) 100 units are in the goods-in-process inventory at the end of the period, and management decides they are 60% completed. Therefore, equivalent units of production for that period total 60 (100 units x 60%). This means that with the resources used to put 100 units 60% of the way through the process, the company could have started and completed 60 entire units. Physical flow reconciliation - a report that reconciles the physical units started in a period and the physical units completed in that period. Weighted-average method - a method used to assign inventory cost to sales. (cost of available-for-sale units / number of units available) x number of units sold = cost of sale Three methods of assigning overhead costs: - 1. Plantwide rate 2. Departmental rate 3. Activity-based costing Plantwide overhead rate method - the cost object is the unit of product.