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!
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