Lecture Note-Taking Guide

Transcription

1 Lecture Note-Taking Guide Oral Roberts University School of Business Tulsa, Oklahoma

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3 Name Lecture Note-Taking Guide Oral Roberts University School of Business Tulsa, Oklahoma

4 Correlates with the 8 th edition of Wiley s Accounting Principles Copyright 2002, 2005, 2010 by M. Ray Gregg. All rights reserved.

5 Many educators agree lecture is the least effective way to convey information to students. Yet the lecture class is one of many important components in the Principles of Accounting classes at Oral Roberts University. The lecture class provides students opportunities to combine seeing, hearing, and writing in order to introduce the lessons presented in each chapter. The purpose of this note-taking guide is to allow students to write less while listening, seeing, and leaving the room with more. Hopefully, the guide will allow students to think more in class and, therefore, better understand the concepts and principles being presented. Students should consider these suggestions intended to help them maximize their learning opportunities with the use of this note-taking guide: 1. Read and experience the first few pages of the textbook and information on the CD to determine your individual learning style. Follow the authors suggestions of ways in which you could approach the course materials considering your learning style. 2. Glance through the chapter (and perhaps the first homework assignment) BEFORE attending lecture on Monday. Come to class prepared. 3. Attend class. Be on time. 4. Be attentive. Stay alert. Don t distract your neighbors or yourself by talking or listening to those around you; refrain from text messaging or inappropriate use of your laptop. Stay focused on the lesson being presented in class. 5. Take the note-taking guide to each lecture session. Write in the blanks as the information becomes apparent in class. Listen to other explanations. Write other important information in the margins. Have questions? Write them in the margins as well; ask the questions in lecture, discussion, or lab as you desire. The objective of the note-taking guide is NOT to just fill in all the blanks, but to master the overall lesson. Attempt to learn in class. 6. Use the note-taking guide during the week as you solve homework assignments. Review the information in the guide before the discussion groups to anticipate some of the information which may be covered there. Use the guide to review for quizzes and exams as well. 7. Seek help when you do not understand a concept. Other students who are enrolled in the course or who have completed the course, lab assistants, and your professors are eager to help you master the material. Ask! Hopefully, you find this note-taking guide to be a useful tool, and you will have a successful experience in accounting this semester!

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7 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Partnerships Overview (major topics today and this week): 1. Characteristics Division of Income and Loss Withdrawal 6. Characteristics 1. responsible for acts of other partners agreement is a contract capital and drawing accounts reward is share of profits not an employee Investments Partnerships page 1 of 3

8 Division of Income and Loss 1. when there is no 2. agreement sometimes provides for: original time (ratio or interest ) ( salary ) Admitting a New Partner 1. when transaction is outside the partnership, the partnership accounts are NOT affected 2. capital account could be equal to amount invested, there could be a to the OLD partners, or there could be a to the new partner Withdrawal of a Partner Liquidation 1. when the partner takes than the capital account balance 2. when the partner takes than the capital account balance 1. a. Convert non-cash assets. b. Distribute any to partners according to their Distribute to partners according to their (evidenced by their balances). Partnerships page 2 of 3

9 Exercise -- Division of Income Chip and Dale have capital balances of $60,000 and $40,000, respectively. The partnership income sharing agreement provides for (1) interest at 10% on their capital balances, (2) salaries of $15,000 and $20,000, (3) and the remainder divided in a 2:1 ratio. (a) Prepare a schedule showing the division of net income, assuming net income is $60,000. Interest Salary Totals $60,000 Based on this information the closing entry would be: (b) Prepare a schedule showing the division of net income, assuming net income is $18,000. Chip Dale Total Interest $10,000 Salary 15,000 20,000 Remainder Total $ 3,000 $15,000 $18,000 Partnerships page 3 of 3

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11 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II 1. differences rights of preferred stock accounting for Corporations (paid in) Overview Comparing Capital Section of Proprietorship, Partnership, Corporation New name for capital = Two major sections of Stockholders Equity for corporation: Principal Basic Rights of Stock 3. (maintain fractional share of ownership) 4. Corporations Paid In page 1 of 4

12 Characteristics of Preferred Stock 1. Co A (non) Co B (part) 2. Co A (non) Co B (cumulative) 3. preference to assets at may not have the right to Issuing Stock at Par *could also be Common Stock or Preferred Stock * Issuing Stock at More Than Par (premium) Cash Preferred Stock Paid-in Capital total excess Issuing Stock at Less than Par (discount) Corporations Paid In page 2 of 4

13 Cash total Common Stock par Issuing No Par Stock Cash total Issuing No Par Stock With Stated Value total Cash Common Stock Paid-in Capital in Excess of total excess Treasury Stock What it is. 1. Stock of, 2. that has been as fully paid, 3. which is subsequently, and 4. not or. What is isn t Corporations Paid In page 3 of 4

14 What is REALLY is. 1. return of to from whom the Treasury Stock was 2. Account for Treasury Stock at. Purchase of Treasury Stock Cash Sale of Treasury Stock for More Than Cost Cash received Paid-in Capital from difference Corporations Paid In page 4 of 4

15 Overview PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Corporations (retained) 1. What is (are) Retained Earnings? 2. How is it changed? Review from Last Week Two major sections of Stockholders Equity for corporation: What is Retained Earnings? Synonyms: Retained = Earnings = How is Retained Earnings Changed? Retained Earnings * * * * * * * Corporations Retained Earnings page 1 of 6

16 Components of Net Income Requirements for Cash Dividends Misconceptions About Retained Earnings Net Income = Retained Earnings = Important Dates for Cash Dividends Date of Declaration = Recording Cash Dividends (real life) Date of Record Corporations Retained Earnings page 2 of 6

17 Date of Payment Step 4 of Closing Entries Recording Cash Dividends (per textbook) 1. Cash Dividends xx Dividends Payable xx Dividends Payable xx Cash xx Stock Dividends With CASH dividends stockholders receive. With STOCK dividends stockholders receive. Characteristics shareholder must keep to Dates for STOCK Dividends maintain proportionate share of 1. Declaration 2. Record 3. Corporations Retained Earnings page 3 of 6

18 Recording Stock Dividends (real life) Date of Declaration Date of Record Date of Distribution Step 4 of Closing Entries Recording Stock Dividends (per textbook) 1. Stock Dividends mkt val Stock Dividends Distributable PIC in Excess of Par or SV CS par or sv excess Stock Dividends Distributable par Common Stock par Corporations Retained Earnings page 4 of 6

19 Comparing Cash and Stock Dividends Consider this illustration of two identical corporations: same total assets, same liabilities, etc. The first corporation (on the left) declares and pays a cash dividend while the second (on the right) declares and distributes a stock dividend. Consider the position of the individual stockholder in each situation. Reconsider later in the week after you have worked homework and exercises in class. Before the Dividends After the Dividends Corporations Retained Earnings page 5 of 6

20 Stock Splits Characteristics of Stock Splits 1. reduction in 2. entry required (memo only) 3. no change in paid-in, retained, or total stockholders equity Corporations Retained Earnings page 6 of 6

21 Objectives: PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Long-Term Liabilities 1. Determine and record the selling price of bonds payable. 2. Determine and record amortization of premium and discount on bonds payable using the straight-line method and the interest method. Obligations incurred when issuing bonds: Bonds Payable I. I promise I will pay you at maturity. II. I promise that, between now and then, I will pay you periodic at the rate on the amount. These two obligations can be envisioned on time lines as follows: The rate is sometimes called: (specified) (reflected in sales price of the bond) When is GREATER than, the bonds are unattractive and will sell at a. When is LESS than, the bonds are attractive and will sell at a. Long-Term Liabilities page 1 of 6

22 Issuing Bonds at Face The journal entry necessary to record the sale of the bonds at face would be: face face Issuing Bonds at More Than Face The journal entry necessary to record the sale of the bonds for more than face would be: Cash received difference Bonds Payable face Long-Term Liabilities page 2 of 6

23 Issuing Bonds at Less Than Face The journal entry necessary to record the sale of the bonds for less than face would be: Cash received difference Bonds Payable face Referring to the advertisement from The Wall Street Journal, at 10 3/8% interest, the bonds must have been because the 99.82% advertised price meant the bonds were selling at a. The market rate of interest must have been than 10 3/8%. Determining the Selling Price of Bonds The selling price of the bonds is the sum of the present values of the two future promises made at the time the bonds are sold (refer to page 1): I. Present Value of Face (using factor from table) II. + Present Value of Interest Payments (using factor from annuity table) = Proceeds from Sale of Bonds Long-Term Liabilities page 3 of 6

24 Exercise Bound Corporation issued $260,000, 9%, 10-year bonds on January 1, 2008, for $243,799. This price resulted in an effective interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Bound uses the effective-interest method to amortize bond premium or discount. Interest is not accrued on June 30. Instructions: Prepare the journal entries to record (to the nearest dollar) the following: a) the issuance of the bonds, b) the payment of interest and the discount amortization on July 1, 2008, and c) the accrual of interest and the discount amortization on December 31, (The amount of one interest payment is determined used the traditional interest formula, P x R x T: $260,000 x x 6/12 is.) The following present value tables are useful in the calculations: Table 15A-1 is on page 653, and Table 15A-2 is on page 654 in the Appendix 15A at the end of the chapter. Present Value of 10% semiannually is 260,000 x = + Present Value of Interest (one interest pmt x factor) is x = = Proceeds from the Sale of Bonds (Compare this result to the amount given in the exercise above.) (Note: For Problem15-6A, present calculations (similar to those demonstrated here) to support determination of the selling price of the bonds. Allow the amount given in the textbook to serve as a check figure. Use lined notebook paper or pages from an unassigned problem in the Working Papers.) a) The journal entry to record the sale (issuance) of the bonds would be: This exercise will be completed later. If not in lecture, please take this handout to your first discussion group this week. Objectives: Amortization of PREMIUM or DISCOUNT on Bonds 1. to match the correct expense with the correct year (income statement benefit) 2. to (gradually, systematically) eliminate the related Premium or Discount account OR to change (raise or lower) the BCA to face by the time the bond matures (two ways to state the same balance sheet benefit) Long-Term Liabilities page 4 of 6

25 Related Definition: Review: New: Equipment Bonds Payable - Accumulated Depreciation + (unamortized) Premium - (unamortized) Discount = Book Value = Bond Carrying Amount Journal Entries to Record Amortization Amortization of Premium amount amount Amortization of Discount amount amount Straight-Line Method (presented in chapter) Determining Amount of Amortization Premium or Discount periods = same amount each period (Effective) Interest Method (presented in Appendix at end of chapter) Long-Term Liabilities page 5 of 6

26 Exercise (continued from page 4) (b) (1) Record the journal entry for the payment of the first semiannual interest on July 1 (amortization is to be recorded in a separate entry). (b) (2) Record the journal entry for the amortization of the discount (using the effective interest method) at the time of the first semiannual interest payment on July 1. * * (c) (1) Record the journal entry for the accrual of interest at December 31. (c) (2) Record the journal entry for the amortization of the discount (using the effective interest method) at the time of the accrual of interest on December 31. * * * Determine the amount of amortization (effective interest method) following the textbook examples on pages 658 and 659 and the chart below: A B C D E Interest Interest Discount Unamort. B.C.A. Paid Expense Amort. Discount (face - D) Pmt (face x contract) (E x mkt) (B - A) (D - C) (E + C) , , ,700 12, , , ,700 12, , , ,700 12, , ,506 Long-Term Liabilities page 6 of 6

27 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II I. History of Statement of Cash Flows A. Prior to 1971 Statement of Cash Flows studied "funds flow" and "cash flow" but not required to be reported B through July 8, 1988 Statement of Changes in Financial Position required for all published financial statements 1. working capital concept (most popular) 2. cash concept C. July 31, 1988 to present Statement of Cash Flows 1. considered a principal financial statement 2. to be included whenever Balance Sheet and Income Statement information is presented II. Questions the financial statements attempt to answer (according to ALEX #1 illustration of Horatio Algie's Tree Trimming Service in first semester) A. Balance Sheet Where does my business stand today? B. Income Statement How well did my business do this month (this year, etc.)? C. Statement of Cash Flows From where did cash come, and where did it go? (also mentioned in Chapter 1, pp. 4, 21, 22, 24) Statement of Cash Flows page 1 of 7

28 III. Categories of sources ("inflows") and applications/uses ("outflows") of cash Cash Sources ("inflows"): Applications/Uses ("outflows"): IV. Grouping sources/applications for Statement presentation I. II. III. V. Operating Activities A. Preparer assumed to understand these underlying concepts: 1. Balance Sheet/income Statement interrelated a. Chapter 1, Exercise E1-10, we found net income from balance sheet data b. Chapters 3, 4, 5, and others every AJE effected the BS and the IS 2. Net Income Cash a. Chapter 14, appropriations of retained earnings Cash Cash = Cash b. Income Statement prepared under accrual basis c. Results of operations reported on the income statement may result in many balance sheet changes -- not limited to changes in cash. Statement of Cash Flows page 2 of 7

29 BALANCE SHEET Current Assets Cash x Receivables x Inventory x PrePd Exp x xxxx LT Assets PP&E xxx Acc Depr x xx TOTAL ASSETS xxxxxx Current Liabilities Accts Pay x Sal Pay x xx LT Liabilities Bonds Payable xx Capital Stock x Retained Earnings x xx TOTAL LIAB & SE xxxxxx INCOME STATEMENT Sales xxxxxxxxxx Cost of Goods Sold xx Gross Profit xxxxxxxx Expenses: Advertising x Depreciation x Salaries x Rent x Insurance x Interest x Utilities x Total Expenses xxxxxxx NET INCOME x d. If these positions are true for one current asset and one current liability, we can assume they would be the same for all current assets and all current liabilities, and, therefore, summarize as follows: Statement of Cash Flows page 3 of 7

30 B. "Cash Provided by Operations" can be determined in three phases by changing Net Income as follows: 1. add and deduct (best example: ) 2. add and deduct (exceptions: dividends payable, marketable securities) 3. to avoid duplication, negate effect of loss (add) or gain (deduct) from sale of LT investing and financing activities (already in NI). VI. Investing Activities A. Determine in/outflows (referring to list of 4 sources/uses) by examining "non-current" accounts. B. Current and "noncurrent" accounts 1. Current "Non-Current" Current Assets Long-Term Assets Current Liabilities Long-Term Liabilities Capital Stock Retained Earnings Revenue Expenses 2. since significant cash transactions have one current and one "non-current" effect, easier to find them by examining non-current accounts VII. Financing Activities As for investing activities, determine in/outflows (referring to list of 4 sources/uses) by examining "noncurrent" accounts. VIII. Summary A. "Tools" needed 1. Comparative Balance Sheet (provided in textbook) 2. Four categories of sources and uses of cash 3. Cash Provided By Operations (CPBO) "Window" 4. Data from "non-current" accounts (provided) 5. "Pattern" to follow (textbook or other example) B. "Know-How" needed (steps in preparing statement) 1. from comparative balance sheet, prepare an "increase/decrease" column (this becomes a "check-list" for making sure all changes were considered) 2. using "4 sources/4 uses" list, consider items of in/outflow a. convert NI to CPBO (three phases) b. use information from "noncurrent" accounts to find investing and financing in/outflows. Statement of Cash Flows page 4 of 7

31 IX. Sample Problem The comparative balance sheet for Resurrection Company at April 30 of the current and preceding year is presented at the top of the next page. Selected "non-current" accounts are provided for additional information. Prepare a statement of cash flows. Statement of Cash Flows page 5 of 7

32 RESURRECTION COMPANY COMPARATIVE BALANCE SHEET Increase ASSETS 4/30/x2 4/30/x1 (Decrease) U Cash $ 30,000 $ 4,000 $ 26,000 Accounts Receivable 21,000 10,000 11,000 Merchandise Inventory 30,000 36,000 (6,000) Equipment 180, ,000 30,000 Accumulated Depreciation (36,000) (30,000) (6,000) Land -0-30,000 (30,000) Total Assets $225,000 $200,000 $ 25,000 LIABILITIES AND STOCKHOLDERS EQUITY Accounts Payable $ 33,000 $ 40,000 $ (7,000) Salaries Payable 3,000 2,000 1,000 Dividends Payable 3,000 3, Bonds Payable 20,000 60,000 (40,000) Common Stock 80,000 50,000 30,000 Paid in Cap. in Excess of Par--C. S. 39,000 15,000 24,000 Retained Earnings 47,000 30,000 17,000 Total Liab. and Stockholders' Equity $225,000 $200,000 $ 25,000 Equipment 5/1/x1 Balance 150,000 Purchased for cash 30,000 Accumulated Depreciation 5/1/x1 Balance 30,000 4/30/x2 Depreciation Expense 6,000 Land 5/1/x1 Balance 30,000 Sold for $28,000 30,000 Bonds Payable retired at maturity 40,000 5/1/x1 Balance 60,000 Common Stock 5/1/x1 Balance 50,000 Issued for cash 30,000 Paid in Capital in Excess of Par Common Stock 5/1/x1 Balance 150,000 Issued for cash 24,000 Retained Earnings Dividends declared 5,000 5/1/x1 Balance 30,000 Net Income per I. Stmt. 22,000 Statement of Cash Flows page 6 of 7

33 Cash flows from operating activities: RESURRECTION COMPANY Statement of Cash Flows For the Year Ended April 30, xxxx Net income, per income statement Add: $ $ Deduct: $ $ Net cash flow operating activities $ Cash flows from investing activities: $ Less: Net cash flow investing activities Cash flows from financing activities: $ Less: $ Net cash flow financing activities in cash Cash at the beginning of the year $ Cash at the end of the year $ Statement of Cash Flows page 7 of 7

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35 Principles of Financial and Managerial Accounting II Introduction to Manufacturing The next lecture introduces accounting students to a topic that will be covered for the remainder of the semester. The lecture assumes students have had certain common experiences. In order to prepare for the upcoming material, before Monday s lecture, students are urged to accomplish the activities described below. I. Please note in the syllabus that there is homework assigned for Monday. The problem is from Chapter 19 and also serves as an introduction to the material that will be covered for the remainder of the semester. II. Assuming it is true that a picture is worth a thousand words, students are urged to complete a virtual field trip of an introduction to manufacturing operations available on the class web site at the following address: Monday s lecture assumes students have experienced the virtual field trip on the Internet. The note-taking guide on the next page should assist in recognizing some of the major lessons from the presentation. The object of the lesson is not to fill in every blank on the note-taking guide, but rather to see and learn from the presentation. Please make an effort to be prepared for the presentation during next Monday s lecture by investing some time in preparation before class. Introduction to Manufacturing page 1 of 2

36 Principles of Financial and Managerial Accounting II Introduction to Manufacturing List the three stages of production: 1. the purchase and storage of storing and caring for the Name the three inventory accounts which parallel the three stages of production: Name the three elements of cost : 1. Direct 2. Direct 3. Name the three sub-parts of manufacturing (factory) overhead: 1. Indirect 2. Indirect 3. Other Introduction to Manufacturing page 2 of 2

37 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Manufacturing: Job Order, Flow of Costs Entries, Manufacturing Overhead Major change from first semester and previous topics: Service ( Merchandise ( Another major change as we enter this topic: Financial Accounting Recommendations for self-study: Chapter 19 # great introduction # many new terms (vocabulary) # study Chapter 19 with any of next three chapters # good Questions recommended in syllabus # good exercises recommended in syllabus Chapters 20 and 21 # assume perpetual inventory # Job Order: Examples: # Process: Examples: From Virtual Field Trip... Stages of Production: Job Order and Manufacturing Overhead page 1 of 5

38 Inventory Accounts (parallel to "stages of production"): FLOW OF COSTS THROUGH MANUFACTURING T-ACCOUNTS In the space below, complete the diagram of T-accounts and other information depicting the FLOW OF COSTS through manufacturing accounts. Take care to draw it EXACTLY as it is illustrated on the screen. Use the diagram to assist in solving homework problems and in understanding the flow of costs through the accounts. Job Order and Manufacturing Overhead page 2 of 5

39 FLOW OF COSTS THROUGH MANUFACTURING ACCOUNTS (journal entries) As much as possible, refer to the previous diagram as you consider the following transactions in general journal form: Raw materials acquired on account. Accounts Payable Materials requisitioned for use. Raw Materials (Inventory) Factory labor costs paid. Cash Applied labor costs to jobs based on time tickets. Factory Labor Depreciation on factory, store, and office equipment. Depreciation Expense Selling Depreciation Expense Admin Application of manufacturing overhead to production. cost paid store office applied cost total paid total total applied Goods completed and transferred to next stage of production. Goods sold on account. Accounts Receivable Sales total retail cost total retail cost Job Order and Manufacturing Overhead page 3 of 5

40 Control Accounts Subsidary Ledgers MANUFACTURING OVERHEAD (a.k.a. Factory Overhead) Easier to associate and with the finished product than to associate with the finished product. Most Reliable Method: Allocate total costs to units produced at year end when all ACTUAL costs are known. Weakness: Alternative Method: Allocate ACTUAL costs incurred on a month-to-month basis. Consider examples of manufacturing plants in Bismark and Brownsville. Weakness: differences in costs incurred (some seasonal) would of the product produced. Job Order and Manufacturing Overhead page 4 of 5

41 Best Alternative: Use of predetermined Not precise -- but reliable... Manufacturing (Factory) Overhead Rate estimated estimated * *Common activity bases/drivers: 1. direct labor costs (dollars) machine hours Application of Manufacturing (Factory) Overhead actual activity for month x = estimate (applied amount) The journal entry necessary to assign (apply) overhead would be: applied applied Job Order and Manufacturing Overhead page 5 of 5

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43 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Manufacturing Process Costing Overview 1. Contrasting Job Order and Process methods a. Which method for which industry? b. Similarities and differences 2. Allocation of Process Costs a. Equivalent Units of Production b. FIFO vs. Weighted Average c. Steps in cost allocation 3. Cost of Goods a. Finished b. Not Finished Job Order vs. Process Manufacturing Process Costing (Weighted-Average Method) page 1 of 4

44 Conversion Costs plus are conversion costs. All costs entering production other than direct materials are considered conversion costs. Equivalent Units of Production - a measure of productive effort measured in - Becomes the basis for allocation of costs Illustration X Company has several processing departments. Costs charged to Department 1 for February totaled $258,600 as follows: Work in Process, 2/1 Materials $12,000 Conversion Costs 9,000 $21,000 Materials added 72,000 Labor 103,500 Overhead 62,100 Records indicate that 3,000 units were in beginning Work in Process 30% complete as to conversion costs, 18,000 units were started into production, and 4,000 units were in ending work in process 60% complete as to conversion costs. Materials are entered at the beginning of each process. Instructions: (a) Determine the equivalent units of production and the unit costs for Department 1. (b) Determine the assignment of costs to goods transferred out and in process. Manufacturing Process Costing (Weighted-Average Method) page 2 of 4

45 Step 1 Determine physical flow in units Step 2 Determine EUP for Materials and for Conversion Costs Step 3 Determine unit costs for materials, conversion costs, and total Manufacturing Process Costing (Weighted-Average Method) page 3 of 4

46 Step 4 Allocate costs incurred to 1) goods finished (and journalize and post) and 2) not finished General Journal Step 4 part 2) Manufacturing Process Costing (Weighted-Average Method) page 4 of 4

47 Overview PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Standard Costs 1. Importance of standards 2. Variances from standards 3. Standards in the accounts 4. Variances on the financial statements Advantages of Standard Costs (from textbook page 1089) 1. Helps plan 2. become more cost conscious 3. Helps set selling prices 4. Management more able to control 5. Management deals with 6. Simplify costing and reduce clerical costs Variances from Standards Standard Costs page 1 of 4

48 Example of Standard Cost Variances Standard costs and actual costs for direct materials, direct labor, and manufacturing overhead incurred for Titan Company in the manufacture of 5,000 units of product during February were as follows: Standard Costs Actual Costs Direct Materials 7,000 pounds at $12 7,200 pounds at $11.50 Direct Labor 2,000 hours at $15 1,850 hours at $15.50 Mfg Overhead Rates per direct labor, based on 100% of capacity of 2,500 labor hours: Variable costs, $13.20 $28,000 variable cost Fixed cost, $8.00 $20,000 fixed costs Instructions: Determine (a) the total direct materials cost variance, the price variance, and the quantity variance; (b) the total direct labor cost variance, the price (rate) variance, and the quantity (time) variance; and (c) the total manufacturing overhead cost variance, the controllable variance, and the volume variance. Total Materials Variance DIRECT MATERIALS COST VARIANCE Materials Price Variance Materials Quantity Variance Standard Costs page 2 of 4

49 DIRECT LABOR COST VARIANCE Total Labor Variance Labor Price (Rate) Variance Labor Quantity (Time) Variance Total Overhead Variance MANUFACTURING OVERHEAD COST VARIANCE (How Costs Behave) In Total Per Unit Variable Costs Fixed Costs Standard Costs page 3 of 4

50 Overhead Controllable Variance Overhead Volume Variance Standard Costs in the Accounts You are strongly urged to learn more about recording standard costs in the accounts by completing the lesson available on the class web page ( It is a FL W I P continuation of the exercise above. The next sheet in the Note-Taking Guide should assist you in following along. It would be best to complete it before you do your homework assignment on this topic. MO FG COGS Standard Costs page 4 of 4

51 Principles of Financial and Managerial Accounting II Standard Costs Recording Variances in the Accounts Introduction The lecture presentation explained the importance of using standard costs in manufacturing operations. The calculation of variances from standards and reporting these variances to management provides useful information for decision making purposes. Journal entries are needed to accumulate and report actual and standard costs in the accounting system. A presentation is available on the class web site ( which tells the rest of the story by illustrating the necessary entries. Things You Will Need Since this presentation is a continuation of the exercise used in lecture, you will need the data from the exercise from the note taking guide. Having the notes you took in lecture of the calculations of the variances would also be helpful and necessary. This handout should help you take notes as you read through the information presented. However, remember the main objective is not to fill in all the blanks, but rather to understand the material being presented. When you see the calculator in the presentation, be sure to take the time to refer to the calculations you made previously and mentally connect them to the entries being made. Standard Costs: Recording Variances in the Accounts page 1 of 3

52 Materials Price Variance FL Standard costs are introduced into the accounting system when goods are acquired. The actual quantity acquired is recorded at the standard price. MO The difference between the price paid and the price that should have been paid is the Materials Price Variance. MPV u f A x S RM WIP FG COGS Materials Quantity Variance FL Actual direct materials used are credited to RM while WIP is debited with the standard amount which should have been used. The difference between the standard quantity that should have been used and the actual quantity used is the Materials Quantity Variance. MO MPV u MQV u f f A x S RM WIP S x S FG COGS A x S Copyright 2002 by M. Ray Gregg. All rights reserved. 8 Copyright 2002 by M. Ray Gregg. All rights reserved. 11 Labor Price Variance u LPV f FL A x S Factory Labor is debited for the actual hours worked at the standard price established. Wages Payable is credited with actual hours worked at the actual rate of pay. MO MPV u MQV The difference between the actual price paid and the standard rate which should have been paid is the Labor Price Variance. u f f A x S RM WIP S x S FG COGS A x S Copyright 2002 by M. Ray Gregg. All rights reserved. 14 Labor Quantity Variance u LPV f Standard hours are used to assign Factory Labor costs to production yet Factory Labor is credited for actual hours employees worked. MO MPV MQV FL u f A x S A x S LQV The Labor Quantity Variance is the difference between the actual hours worked and the standard hours which should have been worked. u f u f A x S RM WIP S x S S x S FG COGS A x S Copyright 2002 by M. Ray Gregg. All rights reserved. 17 u Overhead Variances LPV f MO MPV MQV FL u f A x S A x S LQV O C V u O V V u Once calculated, the overhead controllable and volume variances are reflected in the accounts. f f u f actual f u f std u A x S RM WIP S x S S x S S x S FG COGS A x S Copyright 2002 by M. Ray Gregg. All rights reserved. 23 Standards in the Accounts u LPV f MO MPV MQV FL u f A x S A x S LQV O C V u O V V u Standard amounts continue to be used to record the flow of costs through the remaining accounts. f f u f actual f u f std u A x S RM WIP S x S std S x S S x S FG std COGS std A x S std Copyright 2002 by M. Ray Gregg. All rights reserved. 28 1

53 Journal Date Account P.R. Debit Credit 1 Raw Materials 2 3 Accounts Payable 4 5 Work in Process 6 7 Raw Materials Factory Labor 11 Wages Payable Work in Process Factory Labor Manufacturing Overhead 18 Accounts Payable (etc.) Work in Process 21 Manufacturing Overhead Manufacturing Overhead Finished Goods 28 Work in Process Accounts Receivable retail 31 Sales retail Cost of Goods Sold 34 Finished Goods Standard Costs: Recording Variances in the Accounts page 3 of 3

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55 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Cost and Revenue Relationships for Management I. Absorption Costing and Variable Costing A. Chapter 22, pp ; B. New format for C. Excellent decision tool II. Differential Analysis A. Chapter 26, pp ; B. No preferred format C. Emphasizes making decision for reasons Comparison of Costing Methods Absorption 1. ALL costs by the product: DM, DL, and MO become part of finished good. 2. and variable manufacturing costs are included in COGS: S - COGS = GP Variable 1. DM, DL, and V MO become part of the cost of the finished good. 2. Only manufacturing costs are included in COGS: S - = MM - VE = 3. F MO is a cost. 3. F MO is a cost. 4. By placing F MO in product, some are taken to next period in. 5. When inventory net income is. 6. For purposes. Only acceptable method for financial reporting or tax purposes. 7. Better for decisions (need to cover costs in long-run). 4. F MO is with time period and never taken to next period in. 5. When inventory net income is. 6. For purposes. Not acceptable for financial reporting or tax purposes. 7. Better for decision making (concerned with covering costs). Variable and Absorption Costing page 1 of 3

56 Comparison of Absorption Costing and Variable Costing The Rainey Company began operations in January of the current year. During the first year of operations the company manufactured 50,000 units, of which 44,000 were sold at $40 per unit. Variable manufacturing costs were $12 per unit, and fixed manufacturing overhead was $260,000. Variable selling and administrative expenses were $4.50 per unit sold, and fixed selling and administrative expenses were $150,000. Instructions: (1) Prepare an absorption costing income statement, and (2) prepare a variable costing income statement in good form. (3) Calculate and explain the difference, if any, in the two net income amounts. RAINEY COMPANY Income Statement -- ABSORPTION Costing For the Year Ended December 31, xxxx SALES ( units x $ ) $ Cost of Goods Sold: Variable Cost of Goods Manufactured ( x $ ) $ Fixed Manufacturing Overhead 260,000 Cost of Goods Manufactured $ Less: Ending Inventory ( units x $ ) COST OF GOODS SOLD RAINEY COMPANY Income Statement -- VARIABLE Costing For the Year Ended December 31, xxxx SALES ( units x $ ) $ Variable Cost of Goods Sold: Variable Cost of Goods Manufactured ( x $ ) $ Less: Ending Inventory ( units x $ ) VARIABLE COST OF GOODS SOLD $ GROSS PROFIT $ Selling and Administrative Expenses: Variable ($ x units) $ Fixed 150,000 INCOME FROM OPERATIONS $ Variable Selling and Administrative Expenses $ Fixed Costs and Expenses: Manufacturing Overhead $ 260,000 Selling and Administrative 150, ,000 INCOME FROM OPERATIONS $ Note: This example is for instructional purposes only; for homework follow the examples in the textbook. Variable and Absorption Costing page 2 of 3

57 Cost and Revenue Relationships for Management (cont d) (3) Calculate and explain the difference in the two net income amounts. Net Income Absorption $ Net Income Variable Difference Explanation In total: Change in Ending Inventory Absorption (EI - BI) $ Change in Ending Inventory Variable (EI - BI) Difference Per Unit: Ending Inventory Absorption $ Ending Inventory Variable Difference per Unit x Change in Number of Units in Inventory (EI - BI) Difference What is the? = Variable and Absorption Costing page 3 of 3

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59 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II Break-Even Analysis Objectives 1. determine the point in dollars and in units 2. determine net income 3. prepare a chart 4. determine the margin of safety in dollars and as a ratio (percentage) 5. determine the margin ratio The Break-Even Point You paid $5,000 for a car, drove it 6 months and sold it to a friend for $5,000. How did you do? You gained how much? Definition: the level of sales at which total is (exactly) equal to total Formula: where Sales is Fixed Costs are and Variable Costs are a This formula might be remembered as being like the on our aunt s or coffee table. Break-Even Analysis page 1 of 4

60 Example to Illustrate the Break-Even Formula (also used throughout the class period) Actual sales for Company A are $200,000 ($100 each), fixed costs (and expenses) are $60,000 and variable costs (and expenses) are 60% of sales. Compute the break-even point in dollars. Mathematical steps: Proof: Income Statement Sales (at break-even) $ 150,000 Less: Variable Costs (60%) 90,000 Less: Fixed Costs Net Income Break-Even in UNITS: Do you want to break even? Target Net Income -- What must sales be to increase net income by $20,000? Present net income: Sales $200,000 VC (60%) $120,000 FC 180,000 Net Income Break-Even Analysis page 2 of 4

61 Target Net Income Break-Even Chart Margin of Safety W, K, & K: is the difference between actual sales and sales at the break-even point. p. 946 How safe are you? RG & CW: Margin of Safety is the actual sales over sales at the break-even point. Break-Even Analysis page 3 of 4

62 Continuing Previous Example Actual sales for Company A are $200,000 ($100 each), fixed costs (and expenses) are $60,000 and variable costs (and expenses) are 60% of sales. Current net income is and sales at the break-even point are. Compute the margin of safety in dollars and as a ratio. Remember? Income Statement Sales $xx,xxxx Less: Cost of Goods Sold xxxx Gross Profit $xx,0000 Income Statement -- Variable Costing Sales $xx,xxxx Less: Variable Costs and Expenses xxxx Contribution Margin $xx,0000 GP = GP percentage S used to estimate goods destroyed in fire in Exercise E6-15, page 262. Contribution Margin Ratio Actual sales for Company A are $200,000 ($100 each), fixed costs (and expenses) are $60,000 and variable costs (and expenses) are 60% of sales. What is the contribution margin ratio? Break-Even Analysis page 4 of 4

63 PRINCIPLES OF FINANCIAL AND MANAGERIAL ACCOUNTING II What is a capital expenditure? From Chapter 10, page 436: Capital Budgeting evaluating proposed capital expenditures Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the plant asset. These expenditures are usually material in amount and occur infrequently. Expenditures for additions and improvements increase the company s investment in productive facilities and are generally debited to the plant asset affected. They are often referred to as. So you bought a new. debiting an is a capital expenditure Date 14 Account Title Ref Debit Asset? or Expense? 6,900 Cash Credit 6,900 Annual Rate of Return measure of anticipated of an investment alternative Three ways to determine average cost : 1. Sum book value each year and divide by number of years Capital Budgeting page 1 of 4

64 Limitations of Annual Rate of Return: 1. timing of 2. timing of Cash Payback Period time required to Cash coming in (revenue)! Cash going out (expense) = Revenue! Expense = Even Streams Uneven Streams Capital Budgeting page 2 of 4

65 Limitations of Cash Payback: ignores overall, cash flow, and cash flow beyond the payback period. Discounted Cash Flow: Net Present Value Method compares present value of with proposed outlay (already in today s dollars) is built into the computation. When there is an of future NCF over the, it IS an alternative. NCF x PV factor = PV of NCF PV of expenditure acceptable + or 0 not acceptable (A demonstration exercise is on the next page.) Capital Budgeting page 3 of 4

66 Capital Investment Analysis Victory Company is considering the acquisition of machinery at a cost of $750,000. The machinery has an estimated life of 5 years and no residual value. It is expected to provide yearly income of $37,500 and yearly net cash flows of $187,500. The company's minimum desired rate of return for discounted cash flow analysis is 6%. Compute the following: (a) The annual rate of return. = $ = % $ (b) The cash payback period. = $ = years $ (c) The excess (deficiency) of present value over the amount to be invested using the net present value method. Use the table of "Present Value of 1" in the appendix (and use the "memory" on your calculator). Year Net Cash Flow Factor PV of NCF 1 $ $ Total $ Proposed expenditure Excess $ Capital Budgeting page 4 of 4