ACC 406 Chapter Notes - Chapter 2: Management Accounting, Financial Statement, Variable Cost

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24 Feb 2021

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Learning objectives: after studying this chapter, you should be able to, 1. Explain the meaning of cost and how costs are assigned to products and services: 2. Define the various costs of manufacturing products and providing services as well as the costs of selling and administration: 3. Prepare income statements for manufacturing and service organizations. Cost and cost assignment: cost is the amount of cash or cash equivalent sacrificed for goods and/or services, costs are incurred to produce future benefits. In a profit-making firm, these benefits usually mean revenues. Cost and profit: as costs are used up in the production of revenues, they are said to expire, expired costs are called expenses, for a company to remain viable, revenues must be greater than expenses. Income statement: on the income statement, expenses are deducted from revenues to determine net income (also called profit).

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FILL IN THE CORRECT TERMINOLOGIES IN THE BLANK SPACES
_____ 1.		a. A method of internal (managerial accounting) reporting that emphasizes the distinction between variable and fixed costs.

_____ 2.		b. A discounted cash flow approach to capital budgeting that computes the present value of all future cash flows.

_____ 3.		c. Determination of the maximum cost a company can spend to make a product given a set volume, selling price and desired operating profit.

_____ 4.		d. An analysis of the additional costs and benefits of a proposed alternative compared with the current situation.

_____ 5.		e. A historical cost that the company has already incurred which is irrelevant to the decision making process.

_____ 6.		f. Costs that will not continue if an ongoing operation is changed or deleted.

_____ 7.		g. An already owned production site that is not currently in use.

_____ 8.		h. The maximum available benefit foregone by using a resource for a particular purpose.

_____ 9.		i. The predicted future costs and revenues that will differ among alternative courses of action.

_____ 10.		J. The time it will take to recoup, in the form of cash inflows from operations, the initial dollars invested in a project

_____ 11.		k. Those costs of facilities and services that are shared by users

_____ 12.		l. The juncture of manufacturing where separate products developed in the same process become individually identifiable.

_____ 13.		m. A costing approach that considers all indirect manufacturing costs (both variable and fixed) to be product (inventoriable) costs.

_____ 14.		n. Purchasing products or services from a supplier outside the company.

_____ 15.		o. Capital budgeting models that focus on cash inflows and ouflows while taking into account the time value of money

_____ 16.		p. Calculation of a selling price sufficient to cover the cost of producing a product as well as desired operating income

_____ 17		q. The long-term planning for investment commitments with returns spread over multiple years

_____ 18.		r. A decision process that compares the differential revenues and costs of alternatives.

_____ 19.		s. Costs that will continue even if a company discontinues one of its current operations

_____ 20.		t. The increase in expected average annual operating income divided by the original required investment

taupeotter443

1. EXPLICIT AND IMPLICIT COSTS An annual income statement fromQuest Realty, Inc. is shown below: Revenues Revenue from sales ofgoods and services.............................. $80,000,000Operating costs and expenses: Cost of products and services sold.......................................... $30,000,000 Sellingexpenses..........................................................................$3,000,000 Administrativeexpense.............................................................$4,000,000 Total operating costs and expenses.................................. $37,000,000 Income fromoperations....................................................................$43,000,000 Interest expense (corporate bonds &loans)................................... $300,000 Non-recurringexpense (Legal expenses/fines in settling a federal antitrustsuit.................................................. $200,000Incometaxes.......................................................................................$700,000 Net income.........................................................................................$41,800,000 During this year of operation, Quest Realty owned andoccupied an office building in downtown Indianapolis. For thisyear, the building could have been leased to other businesses for$2,000,000 in lease income. Quest Realty also owned undevelopedland valued at $15,000,000. Owners of Quest Realty can earn a 14%rate of return annually on funds invested elsewhere.

Detail each of the items that make up the explicit costs forQuest Realty. Why are they explicit?

Detail each of the items that make up the implicit costs forQuest Realty for this year. Why are they implicit?

Over the next three years, a firm is expected to earn theeconomic profit of $50,000 in the first year, $60,000 in the secondyear, and $90,000 in the third year. After the end of the thirdyear, the firm goes out of business.

What would happen to the value of the firm if the adjusteddiscount rate went from 8 to 12 percent?

What does the discount rate increase mean?

redcod327

Course Project Week 4

For this next part of the project you will build the Income Statement and Balance Sheet for the Bike Repair & Maintenance Shop (BRMS) for 2018. Use the information below and add another sheet to your Excel Workbook.

BRMS Information for 2018

In 2017, the repair shop was opened in October and ended the year with a ($10,500) operating loss.

Supply Inventory of parts & supplies maintained	$3,000
Replacement parts are ordered as they are used.
Shop hours of operation: 52 weeks a year.
Monday - Friday 11am - 7pm	8 hrs
Saturday 9am - 7pm	10 hrs
Staff	FTEs	Salary
Manager	1	$ 40,000
bookkeeper/purchaser	0.8	$ 20/hr
Repairers	2.5	$ 18.50/hr

Employee benefits: 20% of salary for the manager; 17% of salary for all others.

Supply costs	$ 65,000
utility costs	$ 7,200
marketing costs	$ 10,000
other costs	$ 22,000

Services Provided:

Budgeted: Repair Services: $100 each for 2,600 repairs

New Packages being considered

Package A: Preventative maintenance service package $ 80

Package B: Basic inspection, lube, adjust & clean shifting braking system $ 90

Package C: Annual peak performance package $100

Package D: Basic inspection, + replace shifting cables & preventative maintenance package $250

Estimated Services Provided under the new options:

Package A: 25 per week

Package B: 15 per week

Package C: 10 per week

Package D: 5 per week

Bike Repair & Maintenance Shop
Budgeted Income Statement
For the Year Ended December 31, 2018
Revenue
Repair Fees	?
Other Income	?
Gross Revenues	?

Expenses
Salaries & Benefits	?
Wages & benefits	?
Utilities	7,200
Marketing costs	10,000
Supply costs	65,000
Other costs	22,000
Total Expenses	104,200
Operating Income	?
Income tax	?
Net Income	$(43,692)
Profit Margin	?

a) For the first full year of operations, BRMS was budgeted to lose over $40,000 performing repair services. These repairs have high fixed costs for the replacement parts in the repairs. If BRMS decided to expand their services to provide bicycle inspections and preventative maintenance, which use more employee time than supplies, what would the projected change in profit be?

b) If a decision is made to add more service oriented repairs is there a change in fixed and variable costs for repair services?

c) Complete a new ACTUAL Income Statement based on your decisions in a & b. Then complete the Balance sheet below.

Bike Repair & Maintenance Shop
Balance Sheet
December 31, 2018
Assets
Cash	$ 8,500
Investments	-
Accounts Receivable (net)	6,000
Prepaid Expenses	3,000
Inventory	?
Plant, Property & Equipment	5,000
Less: Accumulated Depreciation	(167)
Total Assets	$ 25,333

Liabilities
Accounts Payable	$ 4,500
Accrued Liabilities	700
Salaries Payable	4,000
Long-term liabilities	-
Total Liabilities	$ 9,200

Common Stock	?
Retained Earnings	?
Total Stockholders' Equity	?
Total Liabilities & Stockholders' Equity	?

Next Steps: Financial Analysis for both BRBS & BRMS.

Using the information below for BRBS complete the financial metric analyses as indicated in Chapter 9 of the textbook for both BRMS (above) & BRBS.

The Income Statement for the Buy-Right Bike Shop is provided below for 2017 and 2018.

BUY-RIGHT BIKE STORE
Income Statement
	2018	2017
Sales - Online	$ 11,080,000	$ 6,240,000
Sales - In store	580,400	312,000
Sales returns	221,600
Gross Revenues	11,438,800	6,552,000
Cost of Goods sold	5,540,000	3,276,000
Contribution Margin	$ 5,898,800	$ 3,276,000
Expenses
Salaries & Benefits	$ 144,000	$ 139,206
Wages & benefits	391,880	274,997
Utilities	13,200	13,000
Marketing costs	200,000	200,000
Contributions & Community Involvement	58,040	31,200
Other costs	1,375,000	1,200,000
Operating Income	3,716,680	1,417,597
Income tax	1,077,837	411,103
Net Income	$ 2,638,843	$ 1,006,494
Profit Margin	23%	15%
Sales volume
Bike C - online	95,000	60,000
Bike A - online	4,800	-
Bike C - in store	5,100	3,000
Bike A - in store	200	-
total Sales volume	100,000	63,000

The Balance Sheet for Buy-Right Bike Store is provided below:

Buy-Right Bike Store
Balance Sheet
December 31, 2018
Assets
Cash		$ 1,500,000
Investments		225,000
Accounts Receivable (net)		1,250,000
Prepaid Expenses		30,000
Inventory		58,280
Plant, Property & Equipment		1,800,000
Less: Accumulated Depreciation		60,000
Total Assets		$ 4,923,280

Liabilities
Accounts Payable		83,250
Accrued Liabilities		4,414
Salaries Payable		7,913
Long-term liabilities		30,000
Total Liabilities		$ 125,577

Common Stock		1,152,366
Retained Earnings		3,645,337
Total Stockholders' Equity		$ 4,797,703
Total Liabilities & Stockholders' Equity		$ 4,923,280

ACC 406 Chapter Notes - Chapter 2: Management Accounting, Financial Statement, Variable Cost

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