Chapter 18. Managerial Accounting Concepts and Principles Dates Flashcards Preview

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Flashcards in Chapter 18. Managerial Accounting Concepts and Principles Dates Deck (56):

What is managerial accounting?

An activity that provides financial and non-financial information to an organization's managers and other internal decision makers.


What is the main purpose of the financial accounting system?

To prepare general-purpose financial statements.


What is the main purpose of both managerial and financial accounting?

To provide useful information to decision makers.


How is information provided to decision makers?

By collecting, managing, and reporting information in demand by their users.


What practice do both areas of accounting share?

Reporting monetary information.


What practice does managerial accounting usually report?



What seven characteristics differ in financial and managerial accounting?

Users and decision makers, purpose of information, flexibility of practice, timeliness of information, time dimension, focus of information and nature of information.


What are the seven characteristics of financial accounting?

1. Investors, creditors, and other external to the organization.
2. Assist external users in making investment, credit, and other decisions.
3. Structured and often controlled by GAAP
4. Often available only after an audit is complete
5.Focus on historical information with some predictions
6. Emphasis on whole organization
7. Monetary information


What are the seven characteristics of managerial accounting?

1. Managers, employees, and decision makers internal to the organization.
2. Assist managers in making planning and control decisions
3. Relatively flexible (no GAAP constraints)
4. Available quickly without the need to wait for an audit
5. Emphasis on an organization's projects, processes, and subdivisions
6. Mostly monetary; but also nonmonetary information


Who primarily receives managerial accounting information?

Internal users who are responsible for making and implementing decisions about a company's business activities.


Can managers decide what information they want and how they want it reported?



Can managers quickly obtain
accounting information?



Who needs managerial accounting reports and what needs to be included?

Middle-level and lower-level managers need specific activities, projects, and subdivisions for which they are responsible.


How is a cost classified at a basic level

Fixed or variable.


What is a fixed cost?

Does not change with changes in the volume of activity (within a range of activity known as an activity's relevant range).

Example: straight-line depreciation on equipment


What is a variable cost?

Changes in proportion to changes in the volume of activity.

Sales commissions computed as a percent of sales revenue are variable costs.


What is a cost object?

A cost is often traced, which is a product, process, department, or customer to which costs are assigned.


What are direct costs?

Those traceable to a single cost object. For example, if a product is a cost object, its material and labor costs are usually directly traceable. Direct costs for a bicycle, when it is the cost object, include raw materials such as sheels, brakes, chains, and wages and benefits of employees who work directly on making bikes

Example: cost of shoes and shoe department manager's salary.


What is an indirect cost?

Those that cannot be easily and cost-beneficially traced to a single cost object,

Example: plant manager's salary, rent on the manufacturing facility, and electricity cost for the plant.


How can a cost be classified?

By relevance by identifying it as either a sunk cost or an out-of-pocket cost.


What is a sunk cost?

It has already been incurred and cannot be avoided or changed. It is irrelevant to future decisions.

Example: the cost of a company's office equipment previously purchased.


What is an out-of-pocket cost?

Requires a future outlay of cash and is relevant for decision making. Future purchases of equipment involve out-of-pocket costs. A discussion of relevant costs must also consider opportunity costs.


What is an opportunity cost?

The potential benefit lost by choosing a specific action from two or more alternatives.

Example: a student giving up wages from a job to attend evening classes.


What's another cost classification (for manufacturers)?

Capitalization as inventory or to expense as incurred.


What are product costs?

Costs capitalized as inventory, which refer to expenditures necessary and integral to finished products.

Example: direct materials, direct labor, and indirect manufacturing costs called overhead costs.

Product costs pertain to activities carried out to manufacture the product.


What are period costs?

Costs expensed which refer to expenditures identified more with a time period than with finished products. They include selling and general administrative expenses. Period costs pertain to activities that are not part of the manufacturing process. A distinction between product and period costs is important because period costs are expense in the income statement and product costs are assigned to inventory on the balance sheet until that inventory is sold

Examples: sales commissions,, rent on the office building, and wages for administrative staff


What the five different classifications for a cost?

activity for behavior, cost object for traceability, management hierarchical level for controllability, opportunity cost for relevance, and benefit period for function.


What must managers in service companies understand and apply?

Cost concepts.


What are cost concepts?

They seek and rely on accurate cost estimates for many decisions.

Example: an airline manager must often decide between canceling or rerouting flights. The manager must also be able to estimate costs saved y canceling a flight versus rerouting.


What are direct material costs?

The expenditure for direct materials that are separately and readily traced through the manufacturing process to finished goods.

Examples: tires, seats, frame, pedals, brakes, cables, gears, and handlebars.


What are direct materials?

Tangible components of a finished product.


What is direct labor?

Refers to the efforts of employees who physically convert materials to finished product.


What are direct labor costs?

The wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods.

Examples: operators directly involved in converting raw materials in finished products (welding, painting, forming) and assembly works who attach materials such as tires, seats, pedals, and brakes to the bike frames.


What is factory overhead?

All manufacturing costs that are not direct materials or direct labor.


What are factory overhead costs?

Cannot be separately or readily traced to finished goods. These costs include indirect materials and indirect labor, costs, not directly traceable to the product.


What are direct material costs and direct labor costs also called?

Prime costs.


What are prime costs?

Expenditures directly associated with the manufacture of finished goods.


What are direct labor costs and overhead costs called?

Conversion costs.


What are conversion costs?

Expenditures incurred in the process of converting raw materials to finished goods.


What are direct labor costs considered?

Prime and conversion costs?


What are the three inventories that manufacturers usually carry?

Raw materials, goods in process, and finished goods.


What are raw materials inventory?

Goods a company acquires to use in making products. It uses raw materials in two ways: directly and indirectly.


Classify the cost of the factory maintenance manger's salary.

Fixed, indirect and product.


Direct materials cost for an automobile would include:

tires, bumpers and steering wheels


Classify the cost of the hourly workers who clean carpets for customers.

Direct, product, and variable.


Calculate COGS for manufacturing company?

Beg, +COGS- Ending


Classify cost of processor chips?

Variable, direct, and product.


Classify cost of depreciation on the carpet cleaning machines.

Fixed and indirect.


DM + DL +FO +BB -Ending



What's customer orientation?

Survey customers to better align operating practices with their expectations.


What's e-commerce?

Updating the company's website to promote online sales transactions.


What is JIT manufacturing?

Establishing better relationships with vendors to ensure on-time delivery of quality raw materials.


What is TQM?

Evaluating business activities with a focus on improving quality.


Raw materials inventory turnovers?

Raw materials used/average raw materials inventory


What are the characteristics of fraud?

Is done to provide direct or indirect benefit to the employee, violates the employee's obligations to the employer, costs the employer money or loss of other assets, and is hidden from the employer.


Inventory records do not match the actual inventory count. To prevent this type of situation?

review the inventory handling procedures, verify inventory records and adopt a code of ethics.