Professional Documents
Culture Documents
Controllable cost A cost over which a manager has control. Controllable costs
are those over which the company has full authority. Such expenses include marketing
budgets and labor costs. By contrast, non-controllable costs are those that a company cannot
change, such as rent and insurance.
HISTORICAL COST PRINCIPLE
The historical cost principle (or cost principle) dictates that companies record assets at their cost. This is
true not only at the time the asset is purchased, but also over the time the asset is held. For example, if
Gazprom (RUS) purchases land for P300,000, the company initially reports it in its accounting records at
P300,000. But what does Gazprom do if, by the end of the next year, the fair value of the land has
increased to P 400,000? Under the historical cost principle, it con tinues to report the land at P300,000.
The fair value principle states that assets and liabilities should be reported at fair value (the price
received to sell an asset or settle a liability). Fair value infor mation may be more useful than historical
cost for certain types of assets and liabilities. For example, certain investment securities are reported at
fair value because market value information is usually readily available for these types of assets. In
determining which measurement principle to use, companies weigh the factual nature of cost fi gures
versus the relevance of fair value. In general, even though IFRS allows companies to revalue property,
plant, and equipment and other long-lived assets to fair value, most companies choose to use cost. Only
in situations where assets are actively traded, such as investment securities, do companies apply the fair
value principle extensively.
Bookkeeping is a foundation/base of accounting. Accounting uses the
information provided by bookkeeping to prepare financial reports and
statements. Bookkeeping is one segment of the whole accounting system.
Accounting starts where the bookkeeping ends and has a broader scope than
bookkeeping.
1. SCGM and Income Statement 2. Job order cost 3. CVP analysis 4. Incremental analysis
Assets are economic resources that are owned or controlled by the business and
are expected to benefit future operations.
Liabilities are debts owed to creditors that represent negative future cash flows
for the business.
Owners’ equity represents the owners’ claims on the assets of the business.
Owners Capital → Investment in business by owners. Each owner has an owner capital account to
track which owner invest what amount of capital.
Revenues are inflows of assets resulting from the sale of products or the rendering of services to
customers.
Expenses are the costs of assets and services used up in the process of earning revenue.
Owner’s withdrawal (opposite of owners capital)→The amount of money owner withdraws from the
equity. Profit theke withdraw kore mainly.
"Received cash from customers when service was performed" increases assets and
increases stockholder's equity. There is no effect on liability. Collection from customer for
services performed will result in increase in revenue, therefore same will increase
stockholder's equity. As cash is received, therefore assets will increase.
[1] Explain the distinguishing features of managerial accounting. The primary users of managerial
accounting reports are internal users, who are offi cers, department heads, managers, and supervisors
in the company. Managerial accounting issues internal reports as frequently as the need arises. The
purpose of these reports is to provide special-purpose information for a particular user for a specifi c
decision. The content of managerial accounting reports pertains to subunits of the business, may be very
detailed, and may extend beyond the double-entry accounting system. The reporting standard is
relevance to the decision being made. No independent audits are required in managerial accounting.
[2]Identify the three broad functions of management. The three functions are planning, directing, and
controlling. Planning requires management to look ahead and to establish objectives. Directing involves
coordinating the diverse activities and human resources of a company to produce a smooth-running
operation. Controlling is the process of keeping the activities on track. [3] Defi ne the three classes of
manufacturing costs. Manufacturing costs are typically classifi ed as either (1) direct materials, (2) direct
labor, or (3) manufacturing overhead. Raw materials that can be physically and directly associated with
the fi nished product during the manufacturing process are called direct materials. The work of factory
employees that can be physically and directly associated with converting raw materials into fi nished
goods is considered direct labor. Manufacturing overhead consists of costs that are indirectly associated
with the manufacture of the fi nished product. [4] Distinguish between product and period costs.
Product costs are costs that are a necessary and integral part of producing the fi nished product. Product
costs are also called inventoriable costs. Under the matching principle, these costs do not become
expenses until the company sells the fi nished goods inventory. Period costs are costs that are identifi ed
with a specifi c time period rather than with a salable product. These costs relate to nonmanufacturing
costs and therefore are not inventoriable costs. [5] Explain the difference between a merchandising
and a manufacturing income statement. The difference between a merchandising and a manufacturing
income statement is in the cost of goods sold section. A manufacturing cost of goods sold section shows
beginning and ending fi nished goods inventories and the cost of goods manufactured. [6] Indicate how
cost of goods manufactured is determined. Companies add the cost of the beginning work in process to
the total manufacturing costs for the current year to arrive at the total cost of work in process for the
year. They then subtract the ending work in process from the total cost of work in process to arrive at
the cost of goods manufactured. [7] Explain the difference between a merchandising and a
manufacturing balance sheet. The difference between a merchandising and a manufacturing balance
sheet is in the current assets section. The current assets section of a manufacturing company’s balance
sheet presents three inventory accounts: fi nished goods inventory, work in process inventory, and raw
materials inventory. [8] Identify trends in managerial accounting. Managerial accounting has
experienced many changes in recent years. Among these are a shift toward addressing the needs of
service companies and improving practices to better meet the needs of managers. Improved practices
include a focus on managing the value chain through techniques such as just-in-time inventory and
technological applications such as enterprise resource management, computer-integrated
manufacturing, and B2B e-commerce. In addition, techniques such as just-intime inventory, total quality
management, activity-based costing, and theory of constraints are improving decision making. Finally,
the balanced scorecard is now used by many companies in order to attain a more comprehensive view
of the company’s operations.
Job order costing pg 945
[1] Explain the characteristics and purposes of cost accounting. Cost accounting involves the
procedures for measuring, recording, and reporting product costs. From the data accumulated,
companies determine the total cost and the unit cost of each product. The two basic types of cost
accounting systems are job order cost and process cost. [2] Describe the fl ow of costs in a job order
costing system. In job order costing, manufacturing costs are fi rst accumulated in three accounts: Raw
Materials Inventory, Factory Labor, and Manufacturing Overhead. The accumulated costs are then
assigned to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods
Sold. [3] Explain the nature and importance of a job cost sheet. A job cost sheet is a form used to
record the costs chargeable to a specifi c job and to determine the total and unit costs of the completed
job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account.
[4] Indicate how the predetermined overhead rate is determined and used. The predetermined
overhead rate is based on the relationship between estimated annual overhead costs and expected
annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost.
The rate is used in assigning overhead costs to work in process and to specifi c jobs. [5] Prepare entries
for jobs completed and sold. When jobs are completed, the cost is debited to Finished Goods Inventory
and credited to Work in Process Inventory. When a job is sold the entries are: (a) Debit Cash or Accounts
Receivable and credit Sales for the selling price. And (b) debit Cost of Goods Sold and credit Finished
Goods Inventory for the cost of the goods. [6] Distinguish between under- and overapplied
manufacturing overhead. Underapplied manufacturing overhead means that the overhead assigned to
work in process is less than the overhead incurred. Overapplied overhead means that the overhead
assigned to work in process is greater than the overhead incurred.
[1] Distinguish between variable and fi xed costs. Variable costs are costs that vary in total directly and
proportionately with changes in the activity index. Fixed costs are costs that remain the same in total
regardless of changes in the activity index. [2] Explain the signifi cance of the relevant range. The
relevant range is the range of activity in which a company expects to operate during a year. It is
important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant
range. [3] Explain the concept of mixed costs. Mixed costs increase in total but not proportionately with
changes in the activity level. For purposes of CVP analysis, mixed costs must be classifi ed into their fi
xed and variable elements. One method that management may use to classify these costs is the highlow
method. [4] List the fi ve components of cost-volume-profi t analysis. The fi ve components of CVP
analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fi xed
costs, and (e) sales mix. [5] Indicate what contribution margin is and how it can be expressed.
Contribution margin is the amount of revenue remaining after deducting variable costs. It is identifi ed in
a CVP income statement, which classifi es costs as variable or fi xed. It can be expressed as a per unit
amount or as a ratio. [6] Identify the three ways to determine the breakeven point. The break-even
point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin
technique, and (c) derived from a CVP graph. [7] Give the formulas for determining sales required to
earn target net income. The general formula is: Required sales 5 Variable costs 1 Fixed costs 1 Target
net income. Two other formulas are: Required sales in units 5 (Fixed costs 1 Target net income) 4
Contribution margin per unit, and Required sales in dollars 5 (Fixed costs 1 Target net income) 4
Contribution margin ratio. [8] Define margin of safety, and give the formulas for computing it. Margin
of safety is the difference between actual or expected sales and sales at the break-even point. The
formulas for margin of safety are: Actual (expected) sales 2 Break-even sales 5 Margin of safety in
dollars; Margin of safety in dollars 4 Actual (expected) sales 5 Margin of safety ratio. [9] Describe the
essential features of a cost-volume profit income statement. The CVP income statement classifi es
costs and expenses as variable or fi xed and reports contribution margin in the body of the statement