Accounting – Crash course
Year: 2015-2016
1
Crash Course
Accounting concepts
2
Understand the difference
Financial Accounting
External
Management Accounting
Internal
Obligatory
Facultative
For Stakeholders
For Managers
Limited data
Full data
3
Exam time!
Question
Which of the following users is the most likely to use management accounting to get information
about ABC ?
Answers
A.
B.
C.
D.
ABC’s prospective shareholder
Banker testing a ABC financial strengh
ABC’s manager
ABC’s current shareholder
Answer: C
4
The different types of firms
Sole Proprietorships
•
•
Ownership: One owner
Liability: Owners has unlimited personal
liability
Most common form
Partnerships
•
•
Ownership: Divided among the partners
Liability: All partner have unlimited
personal liability
Special case: Limited Partnerships
• General Partners has unlimited personal
liability; Limited partners‘ liability is
limited to their investment
Corporations
•
•
Ownership: Stockholders
Liability: Corporations are separate legal entities; Owners are not liable
Generate the largest percentage of revenue and least common form
5
Exam time!
Question
Which of the following statements is true?
Answers
A.
B.
C.
D.
A partner always have unlimited liability
The government cannot be a shareholder of company
Corporation is the most common form of company
Sole proprietorships generate the least revenue on an aggregate level
Answer: D
6
Do you speak Accounting?
Income statement
Cash flows statement
Balance sheet
Statement of change in equity
7
Exam time!
Question
Which one of the following statements regarding the balance sheet and the income statement is
true?
Answers
A. There is a section regarding current liabilities on the income statement
B. The balance sheet is a like a picture of the company on a certain date while the income
statement represents what happened over the whole period
C. The income statement helps you understanding how the company finance itself
D. The balance sheet helps you understanding how much revenues and costs the company had
Answer: B
8
The balance sheet equation
Left side
Right side
Liabilities
Assets
Equity
9
Basic Structure of the Balance Sheet
Assets
Current assets (less than a year)
1. Cash and cash equivalents
2. Receivables (accounts, notes, other)
3. Inventory
4. Prepaid expenses
Other
Long term assets (equal or more than 1 year)
5. Net Property, Plant, and Equipment (PPE)
•
Accumulated Depreciation (contra)
6. Net intangibles*
•
Accumulated Amortization (contra)
Other
Liabilities
Current liabilities (less than a year)
7. Payable (accounts, notes, other)
8. Short-term debt
9. Unearned revenue
Other
Long term liabilities (equal or more than 1
year)
10. Long term debt
Other
Stockholders’ Equity
11. Share capital
12. Retained earnings
•
•
•
Revenue
Expenses (contra)
Dividends (contra)
“Other” is indicated to show it is not the FULL balance sheet. However it is sufficient for Accounting 102.
The numbers are used for defining the terms on the next pages.
10
Term definition (1/2)
1. All the cash available to the company (in cash or on bank accounts) as well as any short term
investment that can be turned into cash in a matter of hours (stocks and bonds)
2. Money that will be received in the foreseeable future; two main categories for this course
A. Accounts: from your clients
B. Notes: from your debtors (people you gave money to)
C. Other: interest, tax, …
3. All the items you plan on reselling or that you plan on using in the manufacturing process (raw
materials)
4. Prepayment you made for services you will receive in the future (can be for rent, for utilities,
insurance, …)
5. All the buildings, land, machines, and equipment (tangibles) you use to run your business
(manufacturing or not). Compared to inventory, you do not plan on reselling (at least in the
short term)
•
Accumulated depreciation (contra account): the book value your PPE lost over time
6. All the non-tangibles you use to run your business (logo, brand name, customer list, …). You
also do not plan on reselling those.
•
Accumulated amortization (contra account!): exact same mechanism as depreciation but for
intangibles
11
Term definition (2/2)
7. Money that will be paid in the foreseeable future; two main categories for this course
A. Accounts: to your supplies
B. Notes: to your creditors (people you received money from)
C. Other: interest, tax, dividend …
8. Money that you will pay back in the foreseeable future to the bank
9. Money you received in advanced from your client for future service or product
10. Money you will pay back in the long run (more than 1 year) to the bank
11. Money invested by the company owners in the company (also called common stock if company
has shareholders)
12. Profit kept over the year (not paid as dividend)
–
Calculated as: new retained earnings = old retained earnings + revenue – expense – dividends
• Revenue (temporary account): amount recognized in exchange of service or product given
• Expenses (temporary and contra account): amount recognized in exchange of service or product
received
• Dividends (temporary and contra account): amount recognized as dividend (paid from profit) to the
owners
12
Crash Course
Transaction reporting
13
Important concepts
It’s all about balance
Left side
Right side
Liabilities
Assets
Right and left side
In accounting and in particular transaction
recording:
• Debit = left side
• Credit = right side
Debit must be equal to credit for each
transactions
Equity
General rule
• Debit increases assets and decreases
liability and equity
• Credit increases liability and equity and
decreases assets
Pay attention: expenses and dividends (which
is part of equity) is treated as a debit account
(because it is technically decrease equity).
Depreciation and amortization is a credit
account.
14
Examples
Purchasing land with cash
Purchasing on margin
Your company buys a new land that costs
1,000,000€. How do you record it within your
books?
Your company purchases 10,000€ worth of raw
materials. However, it only pays 4,000€ right
away
You prepaid your rent for 6 months
Paying dividends
Your monthly rent is 500€.
Your company decides to pay out a cash
dividend of 10,000€
15
Exam time!
Question
A company retained earning starting balance is 10,000€ while its ending is 10,000€. Which of the
following comments is always valid?
Answers
A.
B.
C.
D.
The
The
The
The
company’s
company’s
company’s
company’s
Answer: C
net
net
net
net
income
income
income
income
was
was
was
was
positive
negative
positive only if it pays a dividend equal to the net income
zero
16
Exam time!
Question
Debiting the dividend account …
Answers
A.
B.
C.
D.
Decreases the account and decreases liability
Increases the account and decreases equity
Increase the account and increases liability
Decreases the account and increases equity
Answer: B
17
Exam time!
Question
Company ABC has total assets equivalent to 100,000€, no accounts receivable or payable. The
following timeline applies. What is the total assets value at the end of the year
1.
2.
3.
4.
5.
It
It
It
It
It
purchases 50,000€ worth of supply on account
provides a service worth 20,000€ to its customer which pays ABC right away
buys a plant for 150,000€ by taking up a short term loan
provides a service worth 10,000€ but will get paid next year
pays its supplier 50,000€ for the supplies purchased in step 1
Answers
A.
B.
C.
D.
220,000€
250,000€
280,000€
300,000€
Answer: C
18
Crash Course
Revenue and expense recognition
19
Understanding the two concepts
Accrual
accounting
Cash basis
accounting
20
• e.g.
• Prepaid
expense
• Unearned
revenue
• Recognize
first
• Money later
• e.g.
• Accounts
Receivable
• Accounts
payable
Depreciation
• Money first
• Recognized
later
Accruals
Deferrals
Adjusting entries
• Special kind
of deferral
• Paid first
• Recognized
over time
• e.g. plant
purchase and
spreading the
cost over 3
years
21
Exam time!
Question
Under accrual accounting, which of the following statement is true?
Answers
A.
B.
C.
D.
The transaction is recorded when the risks and rewards of the good are transferred to the buyer
The transaction is recorded when the cash is received or paid
Transactions are recorded only when auditors deemed them valid
Using cash base accounting instead of accrual accounting leads to the same result
Answer: A
22
Understand the difference
Capitalized cost (capital expenditure)
First: added as an asset
Revenue cost (operating expense)
One-off cost
Later: depreciated to
account for cost
Directly fully
accounted as cost
Cost with long term
value
No long term value
Usually for larger cost
Usually for smaller
amounts
23
Exam time!
Question
On 1st of January, Success Formula bought the house you sit in. However, the accountants do not
remember well the difference between capitalized cost and revenue cost. The house was bought
for 1,000,000€ and we assume straight line depreciation on 10 years. Fabian, the head of Finance
at Success Formula, argues that capitalizing the cost (compared to making it an operating expense)
will increase the profit in the first year but decrease it for the 10 following years. What is the
accumulated depreciation after 7 years?
Answers
A.
B.
C.
D.
0
100,000
300,000
700,000
Answer: D
24
Exam time!
What is the net book value of a machine knowing you bought it for 90,000 € and has accumulated
depreciation of 54,000€?
A.
B.
C.
D.
36,000€
54,000€
90,000€
144,000€
Answer: A
25
When should you recognize revenue or expense
Revenue recognition principle
Matching principle
Five rules to know when to recognize revenue
1. The seller has transferred the risks and
rewards of the ownership of the good to
the buyer
2. The seller does not have control of the
goods sold anymore
3. The amount of revenue is reliably
measurable
4. The cost is reliably measurable
5. It is likely that the seller will transfer the
benefits of the transactions to the buyer
Once benefits are recognized the matching
principle says that the expenses in relation to
those benefits must be recognized.
In few words: recognize revenue when good is sold or
service provided.
Forget about cash.
In few words: recognize expense when you receive the
benefits or revenue from a good or service.
Forget about cash.
26
Application of principles
Example I
Example II
You run a large company and just paid 12,000€
for a marketing campaign starting next month
(November) and finishing in exactly after a
year.
What are the entries you have to do right now
to record this transaction?
In May, you purchased 1,000,000€ (with cash)
worth of inventory that you will resell for a
total of 2,000,000€.
What are the entries you have to do right now
to record this transaction?
What entries do you need to make in
December?
Knowing you had cash sales totaling 400,000€
and that the predicted gross margin held, what
entries do you need to make in December?
27
Exam time!
Question
In November, you were prepaid rent for 1 year for a total of 12,000€. At the end of December,
which of the following journal entries would be correct?
Answers
A.
B.
C.
D.
Debit prepaid rent by 2,000
Credit unearned revenue by 2,000
Debit expense by 2,000
Credit revenue by 2,000
Answer: D
28
Types of accounts and treatment
Temporary
accounts vs.
Permanent
accounts
Temporary accounts (know R-E-D)
• Need to be closed at the end of year to close the book
• Closing entries set the balance of those temporary accounts to 0 by
reallocating their balance to permanent accounts
• E.g. Revenue, expenses, and dividends accounts
Permanent accounts
• Can stay open
Contra
accounts vs.
Companion
accounts
Contra accounts (know D-E-A-D)
• Accounts that is always attached to a companion account
• The contra account always behaves in the opposite way then the
companion account (its balance is a negative balance for the companion
account)
• E.g. Accumulated depreciation (contra) and PPE (companion)
Companion accounts
• Accounts that have a contra account which sole purpose is to decrease the
value of the companion account
29
Exam time!
Question
In case of a regular business (with revenues and expenses), adjusting entries are
Answers
A.
B.
C.
D.
not always needed
needed to close the balance of the temporary accounts at the end of the year
needed to close the balance of the temporary accounts at the start of the year
needed only if accounting errors happened during the year
Answer: B
30
Exam time!
Question
In January, your company had 200,000€ in accounts receivable. During the year, you had cash sales
for 100,000€ and sales on account for 50,000€. Your ending accounts receivable is 75,000€. How
much cash did you collect during the year?
Answers
A.
B.
C.
D.
100,000€
150,000€
200,000€
275,000€
Answer: D
31
Crash Course
Understanding costs
32
Type of costs (for building a computer)
Direct
Variable
(on the
production)
Fixed
Indirect (overhead)
A cost needed for the
A cost incurred due to the
construction of a product which construction of products which is
is variable on the total
variable on the total production
production
e.g. the electricity used in the
e.g. the motherboard
factory
A cost needed for the
construction of a product but
which is not variable on the
total production
e.g. salary of the computer
builder
A cost incurred due to the
construction of products but which is
not variable on the total production
e.g. rent of the factory
33
Cost behavior – Understanding relevant range
Total fixed cost
600
500
Total fixed costs
400
300
200
100
0
0
100
200
300
400
500
Units
600
700
800
900
1000
34
Cost assignment
Cost
tracing
Direct cost
Total cost
(related to a cost object)
Cost
allocation
Indirect cost
35
Understanding the big picture
Type of process
Job-costing
(distinct
product/service)
Process costing
(identical
product/service)
Which cost to use (for any methods)
Actual costing
Normal costing
Standard costing
Direct
Actual
Actual
Budgeted
Indirect
Actual
Budgeted
Budgeted
36
Applying the methods
Information
•
•
•
•
•
In 2013, Success Formula taught for 1000h
The labor cost per hour is 18€
The sum of all indirect costs is 15,000€
The budgeted teaching time for 2013 was 800h
The estimated indirect costs were 16,000€
Calculate the total cost with the actual costing and normal costing methods for this course knowing
we used 80h for it
Actual costing
Normal costing
•
Total direct cost: 18 * 80 = 1,440
•
Total direct cost: 18 * 80 = 1,440
•
•
Indirect cost per unit = 15,000/1,000 = 15
Total indirect cost = 15 * 80 = 1,200
•
•
Indirect cost per unit = 16,000/800 = 20
Total indirect cost = 20 * 80 = 1,600
•
Total cost = 1,440 + 1,200 = 2,640
•
Total cost = 1,440 + 1,600 = 3,040
37
Crash Course
Process costing
38
Manufacturing and non manufacturing cost
Direct
material
Manufacturing
Direct Labor
Manufacturing
overhead
Total cost
Selling
Non
Manufacturing
Administrative
Prime cost
Conversion
cost
39
Guidelines for process costing
General idea
Assign a cost per unit to identical units
Assign both the material cost and the conversion costs to every units
To assign it you must know the state of the unit (completed or not)
Completed units bear 100% of material and conversion costs
Non-completed (work in progress) units bear X% of material cost and Y% of conversion costs
•
•
•
•
•
•
Where X and Y depends on how far those units are completed
The steps to assign cost
1. Understand and represent the flow of units
2. Calculate the equivalent units (if there is work in progress)
3. Calculate the total cost
1. For Weighted Average: both period and starting WIP cost
2. For FIFO: only period cost
4. Find the cost per unit by dividing total cost by equivalent units (material and conversion)
5. Assign the total cost to the different units (in term of stage of production)
40
Weighted average
Data
Units
Starting WIP: 400
Production: 800
Completed: 1000
Ending WIP: ???
Material rate: 100%
conversion rate: 70%
Equivalent units
Period costs
Material: 44,000
Conversion: 29,000
WIP costs
Material: 20,000
Conversion: 4,211
Cost per unit
Type
Units
Material
Conversion
Completed
1000
1000
1000
Ending WIP
200
200
140
1,200
1,140
Equivalent
Assign costs to units
Type
Material
Conversion
Type
Material
Conversion
Total
WIP cost
20,000
4,211
Completed
53,330
29,130
82,460
Period Cost
44,000
29,000
Ending WIP 10,666
4,078
14,744
Total cost
64,000
33,211
Equivalent
1,200
1,140
Unit cost
53.33
29.13
41
Weighted average unit flow
Previous period
Opening WIP
Current period
New Production
400
800
400 + 800 = 1200
“Inflow”
Next period
Completed
Ending WIP
X
X=200
1000
1400 + X = 1600
“outflow”
42
FIFO (Part I)
Data
Units
Starting WIP: 400
Starting WIP material rate: 100%
Starting WIP conversion rate: 40%
Production: 800
Completed: 1000
Ending WIP: ???
Ending WIP Material rate: 100%
Ending WIP conversion rate: 70%
Equivalent units
Period costs
Material: 44,000
Conversion: 29,000
WIP costs
Material: 20,000
Conversion: 4,211
Type
Units
Material
Conversion
Starting WIP completed
400
0
240
Newly Completed
600
600
600
Ending WIP
200
200
140
800
980
Equivalent
43
FIFO unit flow
Previous period
Opening WIP
Current period
New Production
400
Completed
800
“Inflow”
Ending WIP
X
X=200
1000
400
400 + 800 = 1200
Next period
600
1400 + X = 1600
“outflow”
44
FIFO (Part II)
Cost per unit
Type
Material
Conversion
WIP cost
Not included in unit cost
Not included in unit cost
Period Cost
44,000
29,000
Total cost
44,000
29,000
Equivalent
800
980
Unit cost
55
29.59
Units cost
Type
Material
Conversion
Total
Starting WIP completed
0 + 20,000* =
20,000
7,102 + 4,211* =
11,313
31,313
Newly Completed
33,000
17,754
50,754
Ending WIP
11,000
4,143
15,143
* The WIP cost is added back
45
Effect of price fluctuation for inventory calculation
Price
Rising price
COGS
FIFO
Inventory
Time
Price
Decreasing price
COGS
Inventory
Time
Weighted average would be in the middle (e.g. higher than COGS and lower than inventory in time of increasing price)
FIFO
46
Exam time!
Question
In times of decreasing prices, which of the following sentences is correct?
Answers
A.
B.
C.
D.
Under First In First Out (FIFO), the gross profit is the highest
Under FIFO, the Cost Of Goods sold (COGS) is the lowest
Under the weighted average method, the ending inventory is the lowest
None of them is correct
Answer: D
47
Crash Course
Support department cost allocation
48
Data
Support
Operating
School
maintenance
Content creation
department
15,000€
50,000€
Information
Technology
Teaching department
110,000€
6,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
200
800
1,500
IT
100
0
600
2,000
49
Data (direct allocation)
Support
Operating
School
maintenance
Content creation
department
15,000€
50,000€
Information
Technology
Teaching department
110,000€
6,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
200
800
1,500
IT
100
0
600
2,000
50
Data (direct allocation)
Support
Operating
34.78%*15,000=
5,217
School
maintenance
15,000€
Information
Technology
Content creation
department
65.22%*15,000=
9,783
56,602€
23.08%*6,000=
1,385
Teaching department
76.92%*6,000=
4,615
6,000€
124,398€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
0
34.78%
65.22%
IT
0
0
23.08%
76.92%
51
Results (direct allocation)
Maintenance Information
Content
Teaching
Initial cost
15,000
6,000
50,000
110,000
Allocation of
maintenance
(15,000)
0
5,217
9,783
Sub totals
0
6,000
55,217
119,783
Allocation of
information
0
(6,000)
1,385
4,615
Sub totals
0
0
56,602
124,398
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
0
34.78%
65.22%
IT
0
0
23.08%
76.92%
52
Data
Support
Operating
School
maintenance
Content creation
department
15,000€
50,000€
Information
Technology
Teaching department
110,000€
6,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
200
800
1,500
IT
100
0
600
2,000
53
Which department should be allocated first?
Method I (percentage of service)
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
8%
32%
60%
IT
3.70%
0
22.22%
74.07%
The allocation in percentage is higher from maintenance to IT then the reversed. Therefore,
maintenance should be allocated first.
Method II (absolute amounts)
•
•
Maintenance allocation to IT: 8% * 15,000 = 1,200
IT allocation to maintenance: 3.7% * 6,000 = 222
Using this method, maintenance should be allocated first
54
Data (step down allocation)
Support
Operating
School
maintenance
Content creation
department
15,000€
50,000€
Information
Technology
Teaching department
110,000€
6,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
200
800
1,500
IT
100
0
600
2,000
55
Graphical results (step down allocation)
Support
Operating
School
maintenance
15,000€
8%*15,000=
1,200
32%*15,000=
4,800
Content creation
department
56,462€
60%*15,000=
9,000
23.08%*7,200=
1,662
Information
Technology
Teaching department
76.92%*7,200=
5,538
7,200€
124,538€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
8%
32%
60%
IT
0
0
23.08%
76.92%
56
Results (step down allocation)
Maintenance Information
Content
Teaching
Initial cost
15,000
6,000
50,000
110,000
Allocation of
maintenance
(15,000)
1,200
4,800
9,000
Sub totals
0
7,200
54,800
119,000
Allocation of
information
0
(7,200)
1,662
5,538
Sub totals
0
0
56,462
124,538
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
8%
32%
60%
IT
0
0
23.08%
76.92%
57
Data (reciprocal allocation)
Support
Operating
School
maintenance
Content creation
department
15,000€
50,000€
Information
Technology
Teaching department
110,000€
6,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
200
800
1,500
IT
100
0
600
2,000
58
Cross allocation of cost
Equation
•
•
100
M* = 15,000 +
I*
2700
200
I* = 6,000 +
M*
2500
Resolutions
M* = 15,000 + 0.037 (6,000 + 0.08 M*)
M* = 15,000 + 222 + 0.00296 M*
0.99704 M* = 15,222
M* = 15,267.19
Rounded to 15,267
I* = 6,000 + 0.08 * 15,267 = 7,221.36
Rounded to 7,221
59
Graphical results(reciprocal allocation)
Support
Operating
32%*15,267=
4,885
School
maintenance
15,267€
Content creation
department
60%*15,267=
9,160
56,490€
22.22%*7,221=
1,605
Teaching department
3.7%*7,221=
267
8%*15,267=
1,221
Information
Technology
74.07%*7,221=
5,349
7,221€
124,509€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
8%
32%
60%
IT
3.70%
0
22.22%
74.07%
60
Results (reciprocal allocation)
Maintenance Information
Content
Teaching
Initial cost
15,000
6,000
50,000
110,000
Allocation of
M*
(15,267)
1,221
4,885
9,160
Sub totals
(267)
7,221
54,885
119,160
Allocation of
I*
267
(7,221)
1,605
5,349
Sub totals
0
0
56,490
124,509
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
8%
32%
60%
IT
3.70%
0
22.22%
74.07%
61
Crash Course
Activity based costing
62
Refining cost
Traditional cost allocation
Activity based costing allocation
Maintenance cost pool
(15,000€)
Cost driver: 2,300
dishes
Maintenance cost pool
(15,000€)
Cleaning dishes
(8,000€)
Cost driver:
2,300 dishes
Content
Utilization
800
(34.78%)
Teaching
Utilization
1,500
(62.22%)
Cleaning floor
(6,000€)
Cost driver:
100m² of floor
Cleaning windows
(1,000€)
Cost driver:
5 windows
Content
Teaching
Utilizations:
A: 800
B: 20
C: 0
Utilizations:
A: 1,500
B: 80
C: 5
63
Activity based costing
Question
Using the table on the right and
activity based costing, the cost
allocated to the production of
product A is closest to …
Answer
A.
B.
C.
D.
30,000€
35,000€
40,000€
45,000€
Answer: B
Data
Support
hours
Design
hours
Manufacturing
setups
Employees
Prod.
A
900
1850
0
100
Prod.
B
1,500
1400
500
150
Cost
30,000€
40,000€
40,000€
64
Traditional costing
Question
Using the table on the right and
traditional costing (with employees
as cost driver), the cost allocated
to the production of product A is
closest to …
Answer
A.
B.
C.
D.
30,000€
35,000€
40,000€
45,000€
Answer: D
Data
Support
hours
Design
hours
Manufacturing
setups
Employees
Prod.
A
900
1850
0
100
Prod.
B
1,500
1400
500
150
Cost
30,000€
40,000€
40,000€
65
The key difference
Activity
Based
Costing
Traditional
costing
• Many small cost pools
• Many cost allocation
bases
• One large cost pool
• One cost allocation
base
66
Crash Course
Absorption vs variable costing
67
The main differences
Inventory unit cost
Method
Variable manufacturing
cost
Fixed manufacturing cost
Variable costing
Included
Not included
Absorption costing
Included
Included (based on units sold)
Variable costing: operating profit
Revenue
- Total variable cost
= Contribution Margin
- Total fixed cost
= Operating profit
Absorption costing: operating profit
Revenue
- Total manufacturing cost
= Gross profit
- Total non manufacturing cost
-
Total Variable non manufacturing cost
Total fixed non manufacturing cost
= Operating profit
68
Applying the methods
Data
Variable costing
Type
Per unit
Material
2.10
4.40
Labor
1.30
Material
2.10
Manufacturing overhead
0.75
Labor
1.30
Inventory cost
Manufacturing overhead
0.75
4.15
Non-manufacturing
0.25
Fixed (production as cost driver)
1.30
Type
Per unit
Manufacturing
0.75
4.15
Non-manufacturing
0.55
Variable costing
(variable manufacturing cost)
Fixed manufacuring
0.75
Inventory cost
4.90
Type
Per unit
Variable
No opening stock, Production = 500,000 units, sale = 300,000 units at 12€ each
Absorption costing
69
Comparison of methods
Variable costing
Absorption costing
Type
Amount
Type
Amount
Revenue
3,600,000
Revenue
3,600,000
Total variable
1,320,000
COGS
1,470,000
Contribution margin
2,280,000
Gross Margin
2,130,000
Total fixed
650,000
Total variable non manufacturing
75,000
Operating profit
1,630,000
Total fixed non manufacturing
275,000
Operating profit
1,780,000
No opening stock, Production = 500,000 units, sale = 300,000 units at 12€ each
70
Impact of a change in inventory on operating profit
Increasing
inventory
Decreasing
inventory
Difference in operating profit (in favor of abs. costing) =
Change in inventory * fixed manufacturing cost per unit
71
Crash Course
Cost forecasting
72
Linear cost functions
Fixed cost
Variable cost
Mixed cost
73
Estimating the cost equation
Regression
High low
method
74
High low method
Data
Slope estimation
Month
Indirect
cost
Teaching
hours
Students
January
500
120
110
February
1100
250
190
March
1300
320
220
April
1000
200
130
May
1200
220
150
June
1500
350
270
July
600
100
80
August
200
40
50
September
1000
180
120
October
1300
240
190
November
1500
320
230
December
1700
400
260
Teaching hours: H-L = 400 – 40 = 360
Attached costs: H-L = 1700 – 200 = 1500
Slope: 1500/360 = 4.17
Students:
Teaching hours: H-L = 270 – 50 = 220
Attached costs: H-L = 1500 – 200 = 1300
Slope: 1300/220 = 5.91
Intercept estimation
Teaching hours
1700 = a + 4.17 * 400
a = 32
Students
1500 = a + 270 * 5.91
a = - 95.7
75
Crash Course
Breakeven analysis
76
Forecast operating profit and breakeven point
Equation
method
Graph
method
• Revenue – Var. costs – Fix.
costs = Operating profit
• Contribution margin
method
• Total cost line
• Total revenue line
77
Exam time!
Question
Which of the following items increase the breakeven point?
Answers
A.
B.
C.
D.
A decrease in fixed costs per unit
An increase in variable costs per unit
An increase in selling price per unit
Both A and C
Answer: B
78
Find the breakeven point
Data I
Selling price 200€
Variable cost per unit: 120€
Fixed cost: 500,000€
Data II
Selling price 200€
Variable cost per unit: 120€
Fixed cost: 500,000€
Find the break event point
Find the target level to reach a profit of
100,000€
Solution I
Solution II
Breakeven point = 500,000/(200-120) = 6,250
units
At this level the company will make no
operating profits (nor net income). Below this
point, it will have looses and above gains
Units to sell to meet target:
(500,000 + 100,000)/(200-120) = 7,500 units
79
Crash Course
Information for decision making
80
Understand the main concepts
Relevant
cost
Irrelevant
cost
81
A worthy choice
Current data
Offer
Type
Total
Teaching
hours
Per hour
Labor cost
(var.)
7000
400
17.5
Marketing
(var.)
600
400
1.5
Booking cost
(Var.)
200
400
0.5
Maastricht University would like to book
Success Formula for extra trainings for its
tutors. In particular, they would book 48 hours
and would like to use Success Formula school.
Due to the large quantity, they are only willing
to spend 960€ for all the hours. Should Success
Formula accept knowing their teaching hours is
far from full capacity.
Rent
(Fixed)
1500
400
3.75
Calculation
Current regular cost per hour:
17.5 + 1.5 + 0.5 + 3.75 = 23.25
Cost to exclude:
Marketing: 1.5
Rent: 3.75
Relevant cost per hour: 23.25 – 1.5 – 3.75 = 18
18 < 20; SF should go for it
This offer is not real and was just made for example purpose
82
Exam time!
Question
An opportunity cost is
Answers
A.
B.
C.
D.
not a real cost
the cost of doing an opportunistic action
the revenue forgone by doing an other action
None of the above
Answer: A
83
Crash Course
Budget variances
84
Understanding the concepts
Static
Flexible
Actual
• Budgeted price * Budgeted quantity
• Budgeted price * Actual quantity
• Actual price * Actual quantity
85
The two levels
Static
budget
variance
Flexible
budget
variance
Sales
volume
variance
86
Updated Success Formula budget information
Marketing data and sales data
Budgets
Forecasted sales
Actual sales
Tutoring DVDs: 20,000 Tutoring DVDs: 25,000
Forecasted selling
value
DVD: 9€
Actual selling value
DVD: 8€
Level I
Static budget variance:
Actual results – static budget =
200,000 – 180,000 = 20,000 = 20,000 F
Favorable because we made more money than
expected
Static = 20,000 * 9 = 180,000
Flexible = 25,000 * 9 = 225,000
Actual = 25,000 * 8 = 200,000
Level II
Flexible budget variance:
Actual results – flexible budget =
200,000 – 225,000 = - 25,000 = 25,000 U
Sales-volume variance:
Flexible budget – static budget =
225,000 – 180,000 = 45,000 = 45,000 F
87
Crash Course
Exam practise
88
Exam time!
Question
Which of the following company forms always have all its owner(s) fully liable?
Answers
A.
B.
C.
D.
Sole proprietorship
Partnership
Corporation
Both A and B
Answer: A
89
Exam time!
Question
Accrual accounting permits …
Answers
A.
B.
C.
D.
Both accruals and deferrals
Only deferrals
Only accruals
None of the above
Answer: A
90
Exam time!
Question
Which of the following accounts is a temporary account?
Answers
A.
B.
C.
D.
Share capital
Accounts receivable
Accounts payable
Dividends
Answer: D
91
Exam time!
Question
Recording the purchase of building as an increase of PPE when incurred and recognizing its cost
later via depreciation is an example of …
Answers
A.
B.
C.
D.
Operating expense
Accruals
Capitalized cost
Both A and B
Answer: C
92
Exam time!
Question
On January 1st you purchase a brand new bike for 200€. You expect its useful life to be 18 months.
On the 31st of December, you would like to do the adjusting entries related to the capitalized cost
you made. Which of the following entries is correct?
Answers
A.
B.
C.
D.
Debit depreciation expense by 200€
Credit accumulated depreciation by 133€
Credit accumulated depreciation by 200€
Both A and C
Answer: B
93
Exam time!
Question
You just bought 500,000€ worth of inventory using cash. However, you did not properly account. In
fact, you forgot the credit entry. Which of the following statements is true
Answers
A.
B.
C.
D.
Assets will be understated
Assets will be overstated
Assets will be correctly stated
None of the above
Answer: B
94
Exam time!
Question
Knowing the following timeline applies, what is net income?
1. Equity injection of 10,000€ by the owner
2. Sold and delivered goods on account for 2,000€ (of profit)
3. Received 3,000€ for future services
4. Paid utility for 1,000€
5. Bought inventory on account for 3,000€
6. Paid a dividend for 2,000€
Answers
A.
B.
C.
D.
1,000€
4,000€
5,000€
8,000€
Answer: A
95
Exam time!
Question
Knowing the following timeline applies, what is the change in retained earnings?
1. Equity injection of 10,000€ by the owner
2. Sold and delivered goods on account for 2,000€ (of profit)
3. Received 3,000€ for future services
4. Paid utility for 1,000€
5. Bought inventory on account for 3,000€
6. Paid a dividend for 2,000€
Answers
A.
B.
C.
D.
- 1,000€
3,000€
7,000€
11,000€
Answer: A
96
Exam time!
Question
Which of the following categories are adequate to classify costs?
Answers
A.
B.
C.
D.
Fixed and variable
Indirect and direct
Manufacturing and non manufacturing
All of the above
Answer: D
97
Exam time!
Question
Which of the following sentences is false?
Answers
A.
B.
C.
D.
Actual costing includes both actual direct and indirect cost
Normal costing includes actual material, budgeted labor, and budgeted indirect costs
Standard costing budgets all the manufacturing costs
All of the sentences above are false
Answer: B
98
Exam time!
Question
Completed the following sentence, as production output increases…
Answers
A.
B.
C.
D.
variable cost per unit vary within the relevant range
total variable cost do not vary within the relevant range
fixed cost per unit vary outside of the relevant range
Total fixed cost vary within the relevant range
Answer: C
99
Exam time!
Question
The criterion used to decide which method to use between job costing or process costing is
Answers
A.
B.
C.
D.
the amount of work on the units in work in process
arbitrary and depends on the company
whether the units produced are distinct or not
the cost of the units produced
Answer: C
100
Exam time!
Question
Knowing the following information, calculate the total cost for a session of 4 hours with the actual
costing method using the number of hours as cost driver.
1. The budgeted teaching time was 800h
2. The estimated indirect costs were 16,000€
3. The labor cost per hour is 25€
Answers
A.
B.
C.
D.
100€
180€
220€
Not enough information given to be calculated
Answer: D
101
Exam time!
Question
Conversion cost includes all manufacturing cost except
Answers
A.
B.
C.
D.
direct material cost
labor cost
overhead cost
design cost
Answer: A
102
Exam time!
Data
Units
Starting WIP: 2,000
Started: 900
Completed: 2,500
Question
Completion rates
Starting WIP
Material rate: 80%
Conversion rate: 40%
Costs
Period costs
Material : 44,000
Conversion: 29,000
Ending WIP
Material rate: 30%
Conversion rate: 60%
WIP Costs
Material : 20,000
Conversion: 4,211
Answers
A.
B.
C.
D.
200
400
600
Not enough information available
Answer: B
Using the First In First
Out (FIFO) inventory
costing method, what
is the number ending
WIP units?
103
Exam time!
Data
Units
Starting WIP: 2,000
Started: 900
Completed: 2,500
Answers
A.
B.
C.
D.
600; 600
980; 1,600
1,020; 1,940
1,340; 2,030
Answer: C
Question
Completion rates
Starting WIP
Material rate: 80%
Conversion rate: 40%
Costs
Period costs
Material : 44,000
Conversion: 29,000
Ending WIP
Material rate: 30%
Conversion rate: 60%
WIP Costs
Material : 20,000
Conversion: 4,211
Using the First In First
Out (FIFO) inventory
costing method, what
is the number of
equivalent units for
the direct material
and conversion cost?
104
Exam time!
Data
Units
Starting WIP: 2,000
Started: 900
Completed: 2,500
Answers
A.
B.
C.
D.
40€
45€
50€
55€
Answer: B
Question
Completion rates
Starting WIP
Material rate: 80%
Conversion rate: 40%
Costs
Period costs
Material : 44,000
Conversion: 29,000
Ending WIP
Material rate: 30%
Conversion rate: 60%
WIP Costs
Material : 20,000
Conversion: 4,211
Using the First In First
Out (FIFO) inventory
costing method, the
direct material cost
per equivalent unit is
closest to…
105
Exam time!
Data
Units
Starting WIP: 2,000
Started: 900
Completed: 2,500
Answers
A.
B.
C.
D.
4,500€
5,000€
5,500€
6,000€
Answer: B
Question
Completion rates
Starting WIP
Material rate: 80%
Conversion rate: 40%
Costs
Period costs
Material : 44,000
Conversion: 29,000
Ending WIP
Material rate: 30%
Conversion rate: 60%
WIP Costs
Material : 20,000
Conversion: 4,211
Using the First In First
Out (FIFO) inventory
costing method, the
cost of material for
the ending WIP units
is closest to …
106
Figure 1
Support
Operating
School
maintenance
Content creation
department
17,000€
55,000€
Information
Technology
Teaching department
90,000€
9,000€
Departments
Maintenance
IT
Content
Teaching
Maintenance
0
300
600
1,100
IT
200
0
400
1,400
107
Exam time!
Question
Using figure 1 and the direct allocation method, what amount is allocated from information
technology to the content creation department?
Answers
A.
B.
C.
D.
2,000€
6,000€
7,000€
11,000€
Answer: A
108
Exam time!
Question
Using figure 1 and the step down allocation method, which department should be allocated first
(allocating the department with the highest percentage of interdepartmental support first)
Answers
A.
B.
C.
D.
School Maintenance
Information Technology
Content Creation
Cannot be said
Answer: A
109
Exam time!
Question
Using the table on the right and activity based
costing, the cost alocated to the regular
products is closest to …
Answers
A.
B.
C.
D.
20,000€
25,000€
30,000€
35,000€
Answer: B
Data
Component
A
Component
B
Working
hours
Regular
3
5
4
Premium
5
8
4
Cost
30,000
40,000
110
Exam time!
Question
Using the table on the right and traditional
costing (with working hours as cost allocation
base), the cost alocated to the regular
products is closest to …
Answers
A.
B.
C.
D.
20,000€
25,000€
30,000€
35,000€
Answer: D
Data
Component
A
Component
B
Working
hours
Regular
3
5
4
Premium
5
8
4
Cost
30,000
40,000
111
Exam time!
Question
What is the main difference between valuing the inventory cost using absorption cost and variable
costing?
Answers
A.
B.
C.
D.
The operating profit will always be different
Variable costing does not included fixed non-manufacturing cost in its inventory cost
Absorption costing includes all the manufacturing costs
Inventory cost under variable costing is always lower than under absorption costing
Answer: C
112
Exam time!
Question
What is the inventory cost per unit using
absorption costing?
Answerss
A.
B.
C.
D.
4
4.75
6
7.5
Answer: C
Data
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
113
Exam time!
Question
What is the cost of goods sold using variable
costing?
Answerss
A.
B.
C.
D.
6,000
8,000
9,000
12,000
Answer: B
Data
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
114
Exam time!
Question
What is the cost of goods sold using absorption
costing?
Answerss
A.
B.
C.
D.
6,000
8,000
9,000
12,000
Answer: D
Data
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
115
Exam time!
Question
What is the contribution margin?
Answerss
A.
B.
C.
D.
3,500
5,500
6,000
11,000
Answer: D
Data
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
116
Exam time!
Question
What is the operating profit using absorption
cost?
Answerss
A.
B.
C.
D.
3,500
5,500
6,000
11,000
Answer: B
Data
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
117
Exam time!
Question
Data
What is the difference in profit between
variable and absorption costing?
Answerss
A.
B.
C.
D.
1,000
1,000
2,000
2,000
(in
(in
(in
(in
Answer: D
favor
favor
favor
favor
of
of
of
of
variable costing)
absorption costing)
variable costing)
absorption costing)
Type
Cost
Material (var.)
3.00
Labor (var.)
0.75
Manufacturing overhead (var.)
0.25
Non-manufacturing (var.)
0.5
Manufacturing (fixed)
6,000
Non-manufacturing (fixed)
1,500
Production (in units)
3,000
Sales (in units) (sold at 10 each)
2,000
Starting inventory (in units)
0
Variable costs are per unit
Fixed costs are for the whole production
118
Exam time!
Question
Cost-volume-profit analysis assumes all of the followings except
Answers
A.
B.
C.
D.
All costs are variables or fixed
Units manufactured are sold
Total Variable costs do not fluctuate within the relevant range
Total Fixed costs do not fluctuate within the relevant range
Answer: C
119
Exam time!
Question
Which of the following items increases the breakeven point?
Answers
A.
B.
C.
D.
A decrease in fixed costs per unit
An increase in variable costs per unit
An increase in selling price per unit
Both A and C
Answer: B
120
Exam time!
Data
Slope estimation
Month
Indirect
cost
Students
January
500
110
February
1100
190
March
1300
220
April
1000
130
May
1200
150
June
1500
270
July
600
80
August
200
50
September
1000
120
October
1300
190
November
1500
230
December
1700
260
Knowing the information on the left hand side
and based on the high low method, the slope
coefficient of the mixed function depicted by
the data is the closest to…
Coefficient estimation
A.
B.
C.
D.
4.53
6.92
6.53
5.91
Answer: D
121
Exam time!
Current data
Type
New information
Total
(€)
Teaching
hours
(u)
Per hour
(€/u)
Labor cost
(var)
7000
400
17.5
Marketing
(var)
600
400
1.5
Booking cost
(Var)
200
400
0.5
Rent
(Fixed)
1500
Success Formula received a one time offer
from company ABC. What is the minimum price
per hour Success Formula should charge ABC?
Calculation
400
3.75
A.
B.
C.
D.
0€
17.5€
18€
23.25€
Answer: C
122
Exam time!
Data
Forecasted sales
20,000
Question
Actual sales
18,000
Forecasted cost value Actual cost value
9€
10€
Answers
A.
B.
C.
D.
0€
10,000€ U
18,000€ U
18,000€ F
Answer: D
What is the sales volume variance?
Answers
123
Exam time!
Data
Question
Forecasted sales
20,000
Actual sales
18,000
Forecasted selling
value
9€
Actual selling value
10€
Answers
A.
B.
C.
D.
0€
10,000€ U
18,000€ U
18,000€ F
Answer: D
What is the flexible budget variance?
Answers
We wish you Success!