Q3: Accounting Flashcards
(155 cards)
1
Q
Revenues
A
Value of resources obtained from customers in exchange of products and/or services of the organisation
2
Q
Contribution margin = gross margin
A
Money left over from sales after paying all variable expenses associated with producing a product.
Price per unit -minus- Variable cost per unit.
3
Q
Cost behaviour
A
How a specific cost changes when the quantity of something related to it changes. Ex. you’re making shirts, the cost of fabric (it’s a cost driver) might increase as you make more shirts.
A
4
Q
Discretionary costs
A
Avoidable costs
5
Q
Committed costs
A
Costs that cannot be altered in the short run.
6
Q
What does total contribution margin tell you
A
What the company generates before having to pay the fixed costs
Tai skirtumas tarp pajamų, gautų pardavus prekę, ir tiesioginių kaštų, susijusių su šios prekės gamyba ar pardavimu.
7
Q
What does total contribution margin tell you on a per unit basis
A
How much money a company adds to its profits each time it sells a unit
8
Q
What is the dream of every business person (but it’s rare)
A
High CM and low fixed costs
9
Q
What companies generaly are high contibution margin industries?
A
PVZ: movie theaters, hotels, utilities, airlines
10
Q
What do high fixed costs force the companies to do?
A
Look for high volume
11
Q
Higher fixed costs are associated with what kind of business models?
A
Riskier
12
Q
Operating leverage shows
A
how much a company’s profits change when its sales change.
A measure of the extent that an organization’s costs are fixed.
* An indicator of various risks.
* Higher operating leverage signals the existence of high fixed costs
A
13
Q
what does high operating leverage mean?
A
A company has high fixed costs, so when sales go up, profits rise fast. But if sales drop, losses can be big.
14
Q
what does low operating leverage mean?
A
A company has more variable costs, so profits grow more slowly with sales, but losses are smaller when sales fall.
15
Q
Break even point
A
Number of units that need to be sold to have 0 profit
or
how much revenues to generate to have no loses
16
Q
How to calculate break even point
A
1)Number of units that need to be sold to have 0 profit
VADINASI: break even point in number of units sold = fixed costs / CM per unit
or
2) how much revenues to generate to have no loses
2 VARIANTAI:
2.1) number of units at the break even point * sales price per unit
2.2) use CM ration:
break even point in euros sold= fixed costs / CM ratio (%)
17
Q
Break even point chart
A
Vertical axis - money
Horizontal - number of units
Costs line starts on the vertical axis at the level of fixed costs and goes up at the number of units because of the variable costs.
Sales line starts at the origin and goes up at the number of units
Intersection - break even point (no profits, no loses)
18
Q
How to assess how difficult reaching break even point is?
A
1) Compare this target with the production capacity of the business or the size of the market:
–> If the break even occurs at or near the capacity ORRRR if a large market share needs to be captured –> the strategy is called into question
2) Changing the values of the equation variables aka “sensitivity analysis” or “what if analysis”
It looks at the change in the break even point when fixed costs, variable costs and prices change (neelaboratino daugiau)
19
Q
What did Charlie Munger say
A
“You have to know accounting. It’s the language of practical business life.”
20
Q
What did Peter Krueger say
A
“Companies run by engineers don’t make money, but companies run by accountants don’t make anything at all.”
21
Q
What is strategy?
A
A series of actions that help achieve one or more goals.
22
Q
What does Managerial Accounting inform?
A
Managers’ decisions to select strategies that are most
effective and efficient to reach goals.
23
Q
What is Financial Accounting
A
An information-processing system that generates general-purpose financial reports:
» The main focus is on external users (investors, lenders, analysts, regulators)
» Highly aggregated reports
» Governed by law and generally accepted accounting principles
» Typically prepared once a quarter or year
» Mostly based on historical cost (recording past transactions)
A
24
Q
What is Managerial Accounting?
A
An information-processing system that provides managers and other employees with financial reporting information and control to assist in the formulation and implementation of an organization’s strategy.
- The main focus is on internal users (managers, employees)
- Reports are based on information demand of information users
- Not constrained by external reporting rules
- Typically prepared frequently (daily, weekly, monthly, quarterly)
- Mostly based on estimated cost (oriented at the current or future decisions)
A
25
Vieneto kintamieji kaštai
Tai kaštai, kurie tenka vienam pagamintam vienetui ir keičiasi tiesiogiai priklausomai nuo pagamintų vienetų skaičiaus.
Pavyzdys: Jei gaminant vieną papildomą prekę kaštai siekia 5 USD, tai vieneto kintamieji kaštai bus 5 USD.
26
Nuo ko pagrinde priklauso revenues?
Nuo maqrket conditions
27
3 būdai kaip pateikiama contribution margin
1. Absolute amount of money
2. CM per unit
3. % of revenues (CM ratio)
28
What is one way to assess how difficult reaching break-even point is.
Comparing break even point target with the size of the market or the production capacity of the business
29
What if annalysis or sensitivity annalysis
Looks at change in the break even point when the variable values change - fixed, variable and prices change
30
high low method
The high-low method is a simple way to estimate fixed and variable costs by using the highest and lowest activity levels within a given period.
31
depresiasion part of erxpense or cost?
expense
32
death spiral
dividing fixed costs by volume leads to a costs per unit that's too high. this huihger ciost iwll lead to higher prices ancd they will lead to lower volume, raising costs again will lead to pricing products out of the market. TO AVOID: divide fixed costs by the capacity that these fixed costs provide and NOT BY VOLUME
33
TRACE = ASSIGN = ALLOCATE
same meanign in management
34
1st component of the costs system
variable cost of unit
35
2. compoennt of cost system
fixed cost per unit, estimated as the division manaufacturing fixed cots by volume
36
adding variable and fixed costs (both per unit) =
full cost of a unit
37
how to avoid the risk of a death spiral
the volume used as the denominator shpould equal the practical cvapacity of the fixed recourced. A constand denomiantor leads to a constant fixed cots per unit.
38
Practical capacity
maximum output or production level that an organization, machine, or system can achieve under normal operating conditions, taking into account realistic constraints like maintenance, downtime, employee breaks, and other operational inefficiencies.
39
if volume produced is lower than the practical capacity, then you have a cost of
excess capacity
40
decrlining balance method is best for?
companies that experience a quicker asset value decrease in early life stages
41
To expense equipment means
treat the cost of the equipment as an expense in the financial statements, rather than capitalizing it as an asset.
42
Capitalizing vs. Expensing:
Capitalizing an asset means recording its cost as an asset on the balance sheet, and then gradually allocating that cost as depreciation over time.
Expensing the equipment means treating the full purchase price as an immediate expense on the income statement for the period in which it was purchased.
43
residual value
also known as salvage value, is the estimated amount that an asset is expected to be worth at the end of its useful life, after accounting for depreciation.
44
If the employee is evaluated based solely on the variable cost per unit, their incentive to increase production might
decrease because variable costs typically do not decrease as dramatically as fixed costs. The more units they produce, the less the impact on variable costs, so they might not see as much benefit from producing more units from a cost perspective alone.
45
How to set product price
The selling price should cover at least the total manufacturing cost and ideally include a profit margin. So, the minimum selling price should be €440 per jacket.
46
revenue producing activities of organisations
servise, merchandising, manufacturing
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costs are clasified based on what
whether or not they are related to the production process
48
COGS
Cost of Goods Sold
49
gross profit
profit before period costs
50
operating income (profit from operations) =
gross profit - period costs
51
net income = net profit, yes or no?
yes
52
Accounts receivable
money that a company is owed by its customers for goods or services that have been delivered or provided but not yet paid for.
53
Retained earnings represent what?
accumulated profits that a company has earned over time but has not distributed to shareholders as dividends.
54
cost of materials is generally variable or fixed?
variable
55
types of inventory
1) raw materials
2) work in progress
3) finished good (when these are sold they become expenses as cost of goods sold)
56
inventory definition
the goods and materials that a business holds for the purpose of resale or use in the production of goods to be sold. It is considered a current asset on the balance sheet because it is expected to be sold or used up within a year or during the normal course of business.
57
gross profit or gross margin =
revenues - cost of goods sold (often reported as % of revenues)
58
current assets are
assets that do not stayi n the company for long, include that become cash through day to day activities or are already cash - pvz dalykai kaip accoutns receivable, iunpaid bills for services or goods sold and inventories and cah itself
59
non-current or fixed assets are
those that stay in the company for ore than a year such as equipment, computer or facilities (they typically loose value though depreciation)
60
what does income statement say
if company captures a good share of the value it creats and amkes a profit
61
what doe sincome statement describe
hwo profits are generated over a period
62
cash flow statement is calculated how?
cash flowing in - cash flowing out
63
divestment
meaning
pardavimas
64
BALANCE SHEET MEANING
1) describes what your company own (assets)
2) how it financed what it own (liabilities and shareholder equity)
the difference between both is called equity -> the net worth to owners
65
assets are categorised into
current and fixed
66
types of liabilities
1) short term (due in less than 1 year)
2) long term (more than 1 year)
67
return on assets
profit before interest expenses over total assests
68
return on equity
net profit divided by equity
69
roi is
return on investment defined as profit / investment (%)
70
ROA
return on assets = profit before taxes / assets. indivaces whether company provides a good return on its assets
71
ROE =
= net profit / equity. evaluates financial performance from oweners perspective
72
residual income
profit - (investment * cost of capital) is absolute number
73
cost of capital is
the rate of return an investor foregoes or the opportunity cost when investing in the company
74
gross profit rate
(net sales - COGS) / NET SALES
75
net sales are
total revenue a company generates from selling goods or services after accounting for returns, allowances, and discounts.
76
accounting for inventories two parts:
perpetual inventory system and periodic
77
perpetual inventory system
continuous, detailed recording of quantities purchased and associated costs sold
78
periodic inventory system
not detailed, inventory is counted and priced periodically (at the end of the financial year)
79
periodic method
a system used in inventory management and accounting to track the inventory and calculate the cost of goods sold (COGS) over a specific period, rather than on a continual basis.
80
fifo method
(First-In, First-Out) The first units purchased or produced are assumed to be the first units sold. This means that the oldest inventory items are sold or used first, while the newer inventory items remain in stock.
81
performance object is
specific aspect of the company that managers need to focus their attention on to meet their business goals. ex. products and services
82
DIRECT COSTS
DIRECTLY ALLOCATED TO A PERFORMANCE OBJECT. EXCLUSIVELY - MATERIALS AND DIRECT LABOUR
83
INDIRECT COSTS
CANNOT BE ALLOCATED DIRECTLY. REST OF RECOURCES THAT ARE SHARED
84
PROFITABILITY =
REVENUES OF OBJECT- COSTS OF OBJECT
85
OVERHEAD COSTS
costs of resources other than material and
direct labor. They are often indirect costs.
86
KA PIRMA SORTINAM INDIRECT AR DIRECT I COST POOLS
INDIRECT
87
cost pool
is a combination of various indirect costs that have a similar cost behavior.
88
Allocation bases
trace the indirect costs accumulated in cost pools
to performance objects. include cost of directmaretials or labour, number of hours of direct labour, number of machine hours, sq meters of manufacturing space.
89
allocation rates =
amount of costs in a cost pool / by the amount of allocation base (the actual volume for variable costs and the normal capacity for fixed costs)
90
if indirect costs are fixed
the volume to estimate the allocation rates has to be normal capacity so that it doesnt lead to a death spiral
91
job order costing system
each order has very different features and costs
92
process costing system assumes that
all units produced are the same in terms of features, recources consumed and costs or if there is a variation it's very small. USED WHEN PRODUCTS ARE PRODUCED IN A CONTINUOUS MANUFACTORING ENVIRONMENT
93
equivalent units
used to take into account units that are work in progress at the end of a period.
If a unit is half way through a process, it is counted as half an equivalent unit.
94
cvp
cost-volume-product analysis for a time period
95
Strategic Cost Management
Making decisions concerning specific cost drivers within the context of an organization's business strategy and value chain:
*
Ensures that you plan for competitive and efficient production from the start.
Value chain stretches from the development and use of resources to final customers.
96
Profit =
otal revenues -Total costs
97
Total costs =
Total costs = Fixed cost+ unit variable cost x
97
Total revenues =
unit selling price x Unit sales = px
98
sensitivity analysis can be used for and means
forcasting and means how does profit change when one or more parameterschange
99
Cost-Volume-Profit Analysis
CVP assumptions (5)
1. All costs are classified as fixed or variable.
2. The total cost function is linear within the relevant range.
3. The total revenue function is linear within the relevant range. 4. The analysis is for a single product.
5. There is only one activity cost driver: unit or euro sales volume.
100
Using the profit formula
Steps:
1. Separate all costs into variable and fixed components
2. Determine the nature of costs: direct or indirect
In order to calculate the profitability of a performance object, we need to trace costs to that performance object!
101
Selecting a Cost Driver
Cost drivers should pick up movements in manufacturing costs:
*
Cost drivers are used to assign overhead costs.
For instance, direct labor hours
Potential flaws:
Units requiring extensive manufacturing (but little direct labor) activity have too little cost assigned -> robotic manufacturing. Units requiring little manufacturing activity (but much direct labor) have too much cost assigned
Solution
Use a predetermined manufacturing overhead rate.
102
Using Predetermined Overhead Rates
Management can use different commonly used cost drivers:
* Predicted total direct labor hours
* Predicted total machine hours
Calculating the predetermined rate using direct labor hours:
Predicted total manufacturing overhead cost for the year Predicted total direct labor hours for the year
The predetermined overhead rate uses predicted amounts as actual amounts are unknown.
103
Overhead rates
are used to allocate indirect costs (also known as overhead) to specific products, services, or departments within a company. These rates help businesses assign a portion of the total overhead costs to individual units of output, based on certain cost drivers, allowing for more accurate cost estimation and pricing.
Overhead costs typically include things like:
Rent
Utilities
Salaries of non-direct employees (e.g., administrative staff)
Depreciation of equipment
Maintenance costs
Insurance
104
Production scheduling depends on
which production method is used.
105
Job Order Production
* Products are manufactured in single units or in batches of identical units
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Process Manufacturing
* Identical units are produced on a continuous basis. Can be one product or a set of closely related products
107
IN PROCESS COSTING: Determining the cost of a sinale unit:
Equal to total product costs assigned to a "process" or "department" during a period divided by the number of units produced during the period
108
relevant costs
future cash flows that differ between alternatives
109
sunk costs
jau isleisti pinigai, ne in the future
110
discretionary costs
training, marketing, krc easy to adjust, nera kad prirista prie kazko
111
engineered costs
certain cost comes with automatic decision. It is a result of an output decision. You cannot make that decision about increasing that output without incurring these costs.
* For example, if Larry needs 10 minutes to
produce a chair and you want to produce more
chairs, your labor time (and cost) will increase.
112
INVENTORY TYPES
1. RAW MATERIALS
2. wip beggining and ending
2. finished goods
113
standard costs
estimates of actual costs based on opast experience and expectations
114
financial plan is aka and its parts:
budget
1. profit plan
2. investment plan
3. cash plan
115
profit plan
116
planned residual income =
planned profit - (planned investment * cost of capital)
117
cash flow plan
cash in n out during period. neuztenka per metus plano, reikia bent per month o galimai net weeks jei mazai cash - SHORTER PERIODS OF TIME
118
liquidity crisis
no cash and scheduled cash outflow
119
cash cycle pradzia ir pabaiga
nuo pirktu materials delivery iki customers sumokejimo
120
Special Orders
When a customer wants to buy a product or service on a “one-time” basis at a “special” price.
What is relevant?
Sales revenue?
Variable production costs?
Additional costs to be incurred?
121
Over- and Under-Applied Overhead
- Exists because the amount of overhead applied is likely not the same amount as the overhead incurred
* Balance in Manufacturing Overhead at end of period is the over- or under- applied amount
* Must be eliminated at year end
* Transfer to cost of goods sold
122
Equivalent Completed Units
Refers to the number of completed units that is equal, in terms of production effort, to a given number of partially completed units.
Example:
* Assume 90 units in the ending inventory are 40% complete.
* Equivalent units = 90 units in ending inventory x 0.40 = 36
123
Material costs are inccured primarily when
at the beginning
124
Conversion costs are inccured when
throughout the process
125
product costing
links financial and managerial accounting Cost-based valuations are required for financial reporting Product costing provides vital information to managers
* To set prices
* To control costs
* To evaluate management performance
126
absobtion or full costing
Product costs consist of...
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
127
variable costing
Direct materials
Direct labor
Variable manufacturing overhead
128
manufactoring overhead
the sum of all the indirect costs which are incurred while manufacturing a product.
129
inventory costs differ onyl by
FIXED manufactoring overhead
130
budgeting approaches
Output/Input Approach
Activity-Based Approach
Incremental Approach
Minimum Level Approach
131
Output/Input Approach to Budgeting
* Budgets physical inputs and costs as a function of planned input (unit-level) activities
* Starts with planned outputs and works backward to budget inputs
* Often used for service, merchandising, manufacturing, and distribution activities
* Works effectively with activities that have defined relationships between effort and accomplishment
132
Activity-Based Approach to Budgeting
Type of output/input method
* Emphasis placed on the expected costs of the planned activities that will be consumed
* Budgeted costs are computed as the projected use of each activity
multiplied by the cost per unit of the activity.
Startups choice
133
Incremental Approach to Budgeting
Budgets costs for a coming period as a dollar or percentage change from the amount budgeted for a previous period
* Used when relationship between inputs and outputs is weak or nonexistent
* Widely used in government and not-for- profit organizations
134
Minimum Level Approach to Budgeting
Establishes a base amount for budget items and requires explanation or justification for any budgeted amount above the minimum base
Questions the necessity for costs included in the base budget of the incremental approach
* Very time consuming
* Zero-based budgeting
- Every euro of expenditures must be justified
* Breaks total budget into program packages with related costs
135
Purchases Budget
Forecasts the merchandise to be purchased to meet sales needs and ending inventory requirements
* Inputs to consider:
* Budgeted sales
· Desired ending inventory
· Planned beginning inventory
136
Cash Budget
*Summarizes all cash receipts and disbursements expected to occur during the budget period
Because of issues related to the timing of sales and collections on account
*Collections on sales may not equal sales revenue
Because of issues related to the timing of payments for purchases and other expense items
·Disbursements (payments) may not equal expenses
137
static budget is a
financial plan set before a specific period, such as a month or a year, using predicted amounts based on historical data and assumptions about the future.
137
the learning curve
the unit cost decreases everytime cost per unit doubles
138
ABC SYSTEM
activities and causality of costs. distinguishes:
1. reflect activities, proceses and links indirect costs to activities
* It is a different approach compared to traditional volume-based cost systems
* It takes complexity into account
* Involves determining the cost of activities and tracing their costs to a cost object on the basis of the cost object’s use of the activity
* Underlying premises
* Activities drive costs
* Costs should be assigned to products/services in proportion to the volume ofactivities they consume
TYPES MADE UP OF:
UNIT LEVEL ACTIVITIES,
BATCH LEVEL ACTIVITIES,
PRODUCT AND CUSTOMER LEVEL ACTIVITY
FACILITY SUSTAINING ACTIVITIES - on the decision to be in business
139
Traditional cost systems tend
to underestimate the costs of low-volume products and overestimate the costs of high-volume products.
140
Product Development Process
* Market Research activity: Conducting surveys, focus groups, competitor analysis
* Design and Prototyping activity: Sketching product designs and creating prototypes
* Testing activity: Testing of the prototypes to ensure safety, usability, and quality
141
Two main types of activities: operational and support
* Operational activities transform inputs into outputs that customers value.
Examples: manufacturing, services, sales, logistics, the development of new
products, purchasing inputs, marketing, and providing after-sales services.
* Support activities serve operational activities.
Examples: activities in human resources departments, recruiting, and training.
142
Cost Objects
* A product or service provided to a customer
* A revenue-producing event for which management wants to know the cost
143
In a one-stage system,
indirect resources are assigned to operating activities that
are then allocated through cost drivers to the performance
objects.
144
In a two-stage system,
indirect resources are
allocated to either support or operating activities, much
like in a one-stage system. But then, support activities are
allocated through cost drivers to operating activities. The
last step, as in the one-stage system, allocates operating
activities to performance objects.
145
TARGET COSTING
technique to move cost management to the design stage.
146
Kaizen costing
Kaizen
recognizes that there is constant improvement in costs and
that budgeted costs are not a good benchmark; instead, a
lower one that considers expected improvements is more
appropriate.
147
customer profitability
The only difference is that the performance object is the
customer or customer segment rather than the product.
147
the whale curve
This graph frequently proves that companies have
heterogeneous client portfolios. Often, the distribution
of revenues and profits fits the 80/20 rule, whereby the
company makes 80% of its revenues or profit from 20% of its
customers. Typically, italso reveals that a profitable company
is making money with one group of customers and losing
money with another large group of customers.
148
transfer price
internal value assigned to a product or service that one division provides to another
149
cost of quality
(1) Prevention costs are the costs of producing quality the first time around. They include issues such as training people how to provide a service or assemble a product; designing a product that is easy to manufacture or service; working closely with suppliers to insure a smooth interface; and holding meetings to find new ways to improve quality.
(2) Appraisal costs are the costs of testing whether products and services have the promised quality. While prevention costs are inputs to quality, appraisal costs are incurred at the end of a process. For instance, while training a supplier is a prevention cost, testing the quality of the supplier's products is an appraisal cost. The most common appraisal costs go into quality control procedures such as testing parts and the final product. Testing blocks poor-quality items from reaching the customer and also represents additional costs that companies incur as they strive to deliver quality.
(3) Internal failure costs are the costs of having to rework products and services flagged during quality-control procedures. Rejected products have to be scrapped (at a cost), reworked, re-inspected, or sold at a discount (as damaged goods). High prevention costs often correspond directly with lower internal failure costs because careful production leads to better quality. Internal failure costs can be quite expensive
in complex products such as cars.
(4) External failure costs are the costs incurred when the product or service fails while in the customers’ hands. There are cash costs associated with external failure,
such as having to service a product under warranty. But most external failure costs are opportunity costs that the company does not see: the costs of unsatisfied customers
bad reputation. In the short term, these costs do not affect the company’s or performance, but in the long term, they can drastically reduce sales.
150
Marginal cost is the...
varying increment in total cost of making one more unit.
| A
151
Cost benefit analysis helps to determine
Which option may be more cost effective pagal tuometines varying (market) conditions.
| A
151
Indifference point is based on...
being indifferent between two alternatives, but without the constraint of having zero profit.
| A
