Accounting Crash course - Success Formula

Accounting – Crash course

Year: 2015-2016

Crash Course

Accounting concepts

1

Financial Accounting Management Accounting

Internal

Facultative

For Managers

Full data

Understand the difference

External

Obligatory

For Stakeholders

Limited data

2

Question

Answers

Which of the following users is the most likely to use management accounting to get information

about ABC ?

A. ABC’s prospective shareholder

B. Banker testing a ABC financial strengh

C. ABC’s manager

D. ABC’s current shareholder

Answer: C

Exam time!

3

Sole Proprietorships Partnerships

Corporations

• Ownership: One owner

• Liability: Owners has unlimited personal

liability

Most common form

• 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

• Ownership: Stockholders

• Liability: Corporations are separate legal entities; Owners are not liable

Generate the largest percentage of revenue and least common form

The different types of firms

4

Question

Answers

Which of the following statements is true?

A. A partner always have unlimited liability

B. The government cannot be a shareholder of company

C. Corporation is the most common form of company

D. Sole proprietorships generate the least revenue on an aggregate level

Answer: D

Exam time!

5

Income statement

Cash flows statement

Balance sheet

Statement of change in equity

Do you speak Accounting?

6

Question

Answers

Which one of the following statements regarding the balance sheet and the income statement is

true?

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

Exam time!

7

The balance sheet equation

8

Left side Right side

Equity

Liabilities

Assets

Basic Structure of the Balance Sheet

Assets Liabilities

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

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

11. Share capital

12. Retained earnings • Revenue

• Expenses (contra)

• Dividends (contra)

Stockholders’ Equity

The numbers are used for defining the terms on the next pages.

“Other” is indicated to show it is not the FULL balance sheet. However it is sufficient for Accounting 102.

9

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

Term definition (1/2)

10

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

Term definition (2/2)

11

Crash Course

Transaction reporting

12

It’s all about balance

Right and left side

Left side Right side

Equity

Liabilities

Assets

In accounting and in particular transaction

recording:

• Debit = left side

• Credit = right side

Debit must be equal to credit for each

transactions

• 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.

General rule

Important concepts

13

Examples

Purchasing land with cash Purchasing on margin

You prepaid your rent for 6 months

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

Your monthly rent is 500€. Your company decides to pay out a cash

dividend of 10,000€

Paying dividends

14

Question

Answers

A company retained earning starting balance is 10,000€ while its ending is 10,000€. Which of the

following comments is always valid?

A. The company’s net income was positive

B. The company’s net income was negative

C. The company’s net income was positive only if it pays a dividend equal to the net income

D. The company’s net income was zero

Answer: C

Exam time!

15

Question

Answers

Debiting the dividend account …

A. Decreases the account and decreases liability

B. Increases the account and decreases equity

C. Increase the account and increases liability

D. Decreases the account and increases equity

Answer: B

Exam time!

16

Question

Answers

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. It purchases 50,000€ worth of supply on account

2. It provides a service worth 20,000€ to its customer which pays ABC right away

3. It buys a plant for 150,000€ by taking up a short term loan

4. It provides a service worth 10,000€ but will get paid next year

5. It pays its supplier 50,000€ for the supplies purchased in step 1

A. 220,000€

B. 250,000€

C. 280,000€

D. 300,000€

Answer: C

Exam time!

17

Crash Course

Revenue and expense recognition

18

Accrual accounting

Cash basis accounting

Understanding the two concepts

19

Defe

rrals

• Money first

• Recognized later

• e.g.

• Prepaid expense

• Unearned revenue

Accru

als

• Recognize first

• Money later

• e.g.

• Accounts Receivable

• Accounts payable

Depre

cia

tion

• Special kind of deferral

• Paid first

• Recognized over time

• e.g. plant purchase and spreading the cost over 3 years

Adjusting entries

20

Question

Answers

Under accrual accounting, which of the following statement is true?

A. The transaction is recorded when the risks and rewards of the good are transferred to the buyer

B. The transaction is recorded when the cash is received or paid

C. Transactions are recorded only when auditors deemed them valid

D. Using cash base accounting instead of accrual accounting leads to the same result

Answer: A

Exam time!

21

Capitalized cost (capital expenditure) Revenue cost (operating expense)

One-off cost

Directly fully accounted as cost

No long term value

Usually for smaller amounts

Understand the difference

First: added as an asset

Later: depreciated to account for cost

Cost with long term value

Usually for larger cost

22

Question

Answers

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?

A. 0

B. 100,000

C. 300,000

D. 700,000

Answer: D

Exam time!

23

What is the net book value of a machine knowing you bought it for 90,000 € and has accumulated

depreciation of 54,000€?

A. 36,000€

B. 54,000€

C. 90,000€

D. 144,000€

Answer: A

Exam time!

24

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.

When should you recognize revenue or expense

25

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.

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?

What entries do you need to make in

December?

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?

Knowing you had cash sales totaling 400,000€

and that the predicted gross margin held, what

entries do you need to make in December?

Application of principles

26

Question

Answers

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?

A. Debit prepaid rent by 2,000

B. Credit unearned revenue by 2,000

C. Debit expense by 2,000

D. Credit revenue by 2,000

Answer: D

Exam time!

27

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

Types of accounts and treatment

28

Question

Answers

In case of a regular business (with revenues and expenses), adjusting entries are

A. not always needed

B. needed to close the balance of the temporary accounts at the end of the year

C. needed to close the balance of the temporary accounts at the start of the year

D. needed only if accounting errors happened during the year

Answer: B

Exam time!

29

Question

Answers

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?

A. 100,000€

B. 150,000€

C. 200,000€

D. 275,000€

Answer: D

Exam time!

30

Crash Course

Understanding costs

31

Direct Indirect (overhead)

Variable

(on the

production)

A cost needed for the

construction of a product which

is variable on the total

production

e.g. the motherboard

A cost incurred due to the

construction of products which is

variable on the total production

e.g. the electricity used in the

factory

Fixed

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

Type of costs (for building a computer)

32

Cost behavior – Understanding relevant range

Total fixed cost

33

0

100

200

300

400

500

600

0 100 200 300 400 500 600 700 800 900 1000

Tota

l fi

xed c

ost

s

Units

Total cost (related to a cost object)

Direct cost

Indirect cost

Cost assignment

34

Cost

tracing

Cost

allocation

Type of process

Which cost to use (for any methods)

Job-costing (distinct

product/service) Process costing

(identical product/service)

Understanding the big picture

35

Actual costing Normal costing Standard costing

Direct Actual Actual Budgeted

Indirect Actual Budgeted Budgeted

Information

Actual costing

• 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

• Total direct cost: 18 * 80 = 1,440

• Indirect cost per unit = 15,000/1,000 = 15

• Total indirect cost = 15 * 80 = 1,200

• Total cost = 1,440 + 1,200 = 2,640

• Total direct cost: 18 * 80 = 1,440

• Indirect cost per unit = 16,000/800 = 20

• Total indirect cost = 20 * 80 = 1,600

• Total cost = 1,440 + 1,600 = 3,040

Normal costing

Applying the methods

36

Crash Course

Process costing

37

Total cost

Manufacturing

Direct material

Direct Labor

Manufacturing overhead

Non Manufacturing

Selling

Administrative

Manufacturing and non manufacturing cost

38

Prime cost

Conversion

cost

General idea

The steps to assign cost

• 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

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)

Guidelines for process costing

39

Weighted average

Data Equivalent units

Cost per unit

Units

Starting WIP: 400

Production: 800

Completed: 1000

Ending WIP: ???

Material rate: 100%

conversion rate: 70%

Period costs

Material: 44,000

Conversion: 29,000

WIP costs

Material: 20,000

Conversion: 4,211

Type Units Material Conversion

Completed 1000 1000 1000

Ending WIP 200 200 140

Equivalent 1,200 1,140

Assign costs to units

40

Type Material Conversion Total

Completed 53,330 29,130 82,460

Ending WIP 10,666 4,078 14,744

Type Material Conversion

WIP cost 20,000 4,211

Period Cost 44,000 29,000

Total cost 64,000 33,211

Equivalent 1,200 1,140

Unit cost 53.33 29.13

Weighted average unit flow

41

Previous period Current period Next period

Opening WIP New Production Completed Ending WIP

“Inflow” “outflow”

400 800 1000 X

X=200

400 + 800 = 1200 1400 + X = 1600

Data

Equivalent units

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%

Period costs

Material: 44,000

Conversion: 29,000

WIP costs

Material: 20,000

Conversion: 4,211

FIFO (Part I)

42

Type Units Material Conversion

Starting WIP completed 400 0 240

Newly Completed 600 600 600

Ending WIP 200 200 140

Equivalent 800 980

FIFO unit flow

43

Previous period Current period Next period

Opening WIP New Production Completed Ending WIP

“Inflow” “outflow”

400 800 1000 X

X=200

400 + 800 = 1200 1400 + X = 1600

400 600

Cost per unit

Units cost

FIFO (Part II)

* The WIP cost is added back

44

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

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

Rising price

Decreasing price

Effect of price fluctuation for inventory calculation

Weighted average would be in the middle (e.g. higher than COGS and lower than inventory in time of increasing price)

45

Pri

ce

Time

COGS Inventory

FIFO

Pri

ce

Time

COGS Inventory

FIFO

Question

Answers

In times of decreasing prices, which of the following sentences is correct?

A. Under First In First Out (FIFO), the gross profit is the highest

B. Under FIFO, the Cost Of Goods sold (COGS) is the lowest

C. Under the weighted average method, the ending inventory is the lowest

D. None of them is correct

Answer: D

Exam time!

46

Crash Course

Support department cost allocation

47

Departments Maintenance IT Content Teaching

Maintenance 0 200 800 1,500

IT 100 0 600 2,000

Data

48

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

50,000€

Teaching department

110,000€

Support Operating

Data (direct allocation)

49

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

50,000€

Teaching department

110,000€

Support



IT 100 0 600 2,000

Operating

Data (direct allocation)

50

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

56,602€

Teaching department

124,398€

Support


Maintenance 0 0 34.78% 65.22%

IT 0 0 23.08% 76.92%

Operating

34.78%*15,000=

5,217

76.92%*6,000=

4,615

65.22%*15,000=

9,783

23.08%*6,000=

1,385

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

Results (direct allocation)

51


Maintenance 0 0 34.78% 65.22%

IT 0 0 23.08% 76.92%



IT 100 0 600 2,000

Data

52

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

50,000€

Teaching department

110,000€

Support Operating

Method I (percentage of service)

Method II (absolute amounts)

The allocation in percentage is higher from maintenance to IT then the reversed. Therefore,

maintenance should be allocated first.

• 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

Which department should be allocated first?

53


Maintenance 0 8% 32% 60%

IT 3.70% 0 22.22% 74.07%

Data (step down allocation)

54

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

50,000€

Teaching department

110,000€

Support Operating



IT 100 0 600 2,000

Graphical results (step down allocation)

55

School

maintenance

15,000€

Information

Technology

7,200€

Content creation

department

56,462€

Teaching department

124,538€

Support Operating



IT 0 0 23.08% 76.92%

8%*15,000=

1,200

32%*15,000=

4,800

60%*15,000=

9,000

23.08%*7,200=

1,662

76.92%*7,200=

5,538


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

Results (step down allocation)

56



IT 0 0 23.08% 76.92%

Data (reciprocal allocation)

57

School

maintenance

15,000€

Information

Technology

6,000€

Content creation

department

50,000€

Teaching department

110,000€

Support



IT 100 0 600 2,000

Operating

Equation

Resolutions

• M* = 15,000 + 100

2700 I*

• I* = 6,000 + 200

2500 M*

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

Cross allocation of cost

58

Graphical results(reciprocal allocation)

59

School

maintenance

15,267€

Information

Technology

7,221€

Content creation

department

56,490€

Teaching department

124,509€

Support



IT 3.70% 0 22.22% 74.07%

Operating

32%*15,267=

4,885

74.07%*7,221=

5,349

60%*15,267=

9,160

22.22%*7,221=

1,605

8%*15,267=

1,221

3.7%*7,221=

267


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

Results (reciprocal allocation)

60



IT 3.70% 0 22.22% 74.07%

Crash Course

Activity based costing

61

Traditional cost allocation Activity based costing allocation

Refining cost

62

Maintenance cost pool

(15,000€)

Cost driver: 2,300

dishes

Content Teaching

Utilization

800

(34.78%)

Utilization

1,500

(62.22%)

Maintenance cost pool

(15,000€)

Content Teaching

Utilizations:

A: 800

B: 20

C: 0

Utilizations:

A: 1,500

B: 80

C: 5

Cleaning dishes

(8,000€)

Cost driver:

2,300 dishes

Cleaning floor

(6,000€)

Cost driver:

100m² of floor

Cleaning windows

(1,000€)

Cost driver:

5 windows

Question Data

Answer

Using the table on the right and

activity based costing, the cost

allocated to the production of

product A is closest to …

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€

A. 30,000€

B. 35,000€

C. 40,000€

D. 45,000€

Answer: B

Activity based costing

63

Question Data

Answer

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 …

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€

A. 30,000€

B. 35,000€

C. 40,000€

D. 45,000€

Answer: D

Traditional costing

64

•Many small cost pools

•Many cost allocation bases

Activity Based

Costing

•One large cost pool

•One cost allocation base

Traditional costing

The key difference

65

Crash Course

Absorption vs variable costing

66

Inventory unit cost

Variable costing: operating profit

Method Variable manufacturing

cost Fixed manufacturing cost

Variable costing Included Not included

Absorption costing Included Included (based on units sold)

Revenue

- Total variable cost

= Contribution Margin

- Total fixed cost

= Operating profit

Revenue

- Total manufacturing cost

= Gross profit

- Total non manufacturing cost - Total Variable non manufacturing cost

- Total fixed non manufacturing cost

= Operating profit

Absorption costing: operating profit

The main differences

67

Applying the methods

Data Variable costing

Absorption costing

No opening stock, Production = 500,000 units, sale = 300,000 units at 12€ each

68

Type Per unit

Material 2.10

Labor 1.30

Manufacturing overhead 0.75

Inventory cost 4.15

Type Per unit

Variable costing

(variable manufacturing cost)

4.15

Fixed manufacuring 0.75

Inventory cost 4.90

Type Per unit

Variable 4.40

Material 2.10

Labor 1.30

Manufacturing overhead 0.75

Non-manufacturing 0.25

Fixed (production as cost driver) 1.30

Manufacturing 0.75

Non-manufacturing 0.55

Variable costing Absorption costing

Comparison of methods

No opening stock, Production = 500,000 units, sale = 300,000 units at 12€ each

69

Type Amount

Revenue 3,600,000

Total variable 1,320,000

Contribution margin 2,280,000

Total fixed 650,000

Operating profit 1,630,000

Type Amount

Revenue 3,600,000

COGS 1,470,000

Gross Margin 2,130,000

Total variable non manufacturing 75,000

Total fixed non manufacturing 275,000

Operating profit 1,780,000

Increasing inventory

Decreasing inventory

Impact of a change in inventory on operating profit

70

Difference in operating profit (in favor of abs. costing) =

Change in inventory * fixed manufacturing cost per unit

Crash Course

Cost forecasting

71

Linear cost functions

72

Fixed cost

Variable cost

Mixed cost

Regression High low method

Estimating the cost equation

73

High low method

Data Slope estimation

Teaching hours

1700 = a + 4.17 * 400

a = 32

Students

1500 = a + 270 * 5.91

a = - 95.7

Intercept estimation

74

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

Crash Course

Breakeven analysis

75

• Revenue – Var. costs – Fix. costs = Operating profit

• Contribution margin method

Equation method

• Total cost line

• Total revenue line

Graph method

Forecast operating profit and breakeven point

76

Question

Answers

Which of the following items increase the breakeven point?

A. A decrease in fixed costs per unit

B. An increase in variable costs per unit

C. An increase in selling price per unit

D. Both A and C

Answer: B

Exam time!

77

Find the breakeven point

Data I Data II

Solution I

Selling price 200€

Variable cost per unit: 120€

Fixed cost: 500,000€

Find the break event point

Selling price 200€

Variable cost per unit: 120€

Fixed cost: 500,000€

Find the target level to reach a profit of

100,000€

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

Solution II

78

Crash Course

Information for decision making

79

Relevant cost

Irrelevant cost

Understand the main concepts

80

A worthy choice

Current data Offer

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.

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

Calculation

This offer is not real and was just made for example purpose

81

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

Rent

(Fixed) 1500 400 3.75

Question

Answers

An opportunity cost is

A. not a real cost

B. the cost of doing an opportunistic action

C. the revenue forgone by doing an other action

D. None of the above

Answer: A

Exam time!

82

Crash Course

Budget variances

83

Static •Budgeted price * Budgeted quantity

Flexible •Budgeted price * Actual quantity

Actual •Actual price * Actual quantity

Understanding the concepts

84

Static budget

variance

Flexible budget

variance

Sales volume variance

The two levels

85

Updated Success Formula budget information

Marketing data and sales data Budgets

Level I

Forecasted sales

Tutoring DVDs: 20,000

Forecasted selling

value

DVD: 9€

Actual sales

Tutoring DVDs: 25,000

Actual selling value

DVD: 8€

Static = 20,000 * 9 = 180,000

Flexible = 25,000 * 9 = 225,000

Actual = 25,000 * 8 = 200,000

Static budget variance:

Actual results – static budget =

200,000 – 180,000 = 20,000 = 20,000 F

Favorable because we made more money than

expected

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

Level II

86

Crash Course

Exam practise

87

Question

Answers

Which of the following company forms always have all its owner(s) fully liable?

A. Sole proprietorship

B. Partnership

C. Corporation

D. Both A and B

Answer: A

Exam time!

88

Question

Answers

Accrual accounting permits …

A. Both accruals and deferrals

B. Only deferrals

C. Only accruals


Answer: A

Exam time!

89

Question

Answers

Which of the following accounts is a temporary account?

A. Share capital

B. Accounts receivable

C. Accounts payable

D. Dividends

Answer: D

Exam time!

90

Question

Answers

Recording the purchase of building as an increase of PPE when incurred and recognizing its cost

later via depreciation is an example of …

A. Operating expense

B. Accruals

C. Capitalized cost

D. Both A and B

Answer: C

Exam time!

91

Question

Answers

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?

A. Debit depreciation expense by 200€

B. Credit accumulated depreciation by 133€

C. Credit accumulated depreciation by 200€

D. Both A and C

Answer: B

Exam time!

92

Question

Answers

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

A. Assets will be understated

B. Assets will be overstated

C. Assets will be correctly stated


Answer: B

Exam time!

93

Question

Answers

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€

A. 1,000€

B. 4,000€

C. 5,000€

D. 8,000€

Answer: A

Exam time!

94

Question

Answers

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€

A. - 1,000€

B. 3,000€

C. 7,000€

D. 11,000€

Answer: A

Exam time!

95

Question

Answers

Which of the following categories are adequate to classify costs?

A. Fixed and variable

B. Indirect and direct

C. Manufacturing and non manufacturing

D. All of the above

Answer: D

Exam time!

96

Question

Answers

Which of the following sentences is false?

A. Actual costing includes both actual direct and indirect cost

B. Normal costing includes actual material, budgeted labor, and budgeted indirect costs

C. Standard costing budgets all the manufacturing costs

D. All of the sentences above are false

Answer: B

Exam time!

97

Question

Answers

Completed the following sentence, as production output increases…

A. variable cost per unit vary within the relevant range

B. total variable cost do not vary within the relevant range

C. fixed cost per unit vary outside of the relevant range

D. Total fixed cost vary within the relevant range

Answer: C

Exam time!

98

Question

Answers

The criterion used to decide which method to use between job costing or process costing is

A. the amount of work on the units in work in process

B. arbitrary and depends on the company

C. whether the units produced are distinct or not

D. the cost of the units produced

Answer: C

Exam time!

99

Question

Answers

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€

A. 100€

B. 180€

C. 220€

D. Not enough information given to be calculated

Answer: D

Exam time!

100

Question

Answers

Conversion cost includes all manufacturing cost except

A. direct material cost

B. labor cost

C. overhead cost

D. design cost

Answer: A

Exam time!

101

Data Question

Answers

Units

Starting WIP: 2,000

Started: 900

Completed: 2,500

Completion rates

Starting WIP

Material rate: 80%

Conversion rate: 40%

Ending WIP

Material rate: 30%


Costs

Period costs

Material : 44,000

Conversion: 29,000

WIP Costs

Material : 20,000

Conversion: 4,211

Using the First In First

Out (FIFO) inventory

costing method, what

is the number ending

WIP units?

A. 200

B. 400

C. 600

D. Not enough information available

Answer: B

Exam time!

102

Data Question

Answers

Units

Starting WIP: 2,000

Started: 900

Completed: 2,500

Completion rates

Starting WIP

Material rate: 80%


Ending WIP

Material rate: 30%


Costs

Period costs

Material : 44,000

Conversion: 29,000

WIP Costs

Material : 20,000

Conversion: 4,211



costing method, what

is the number of

equivalent units for

the direct material

and conversion cost?

A. 600; 600

B. 980; 1,600

C. 1,020; 1,940

D. 1,340; 2,030

Answer: C

Exam time!

103

Data Question

Answers

Units

Starting WIP: 2,000

Started: 900

Completed: 2,500

Completion rates

Starting WIP

Material rate: 80%


Ending WIP

Material rate: 30%


Costs

Period costs

Material : 44,000

Conversion: 29,000

WIP Costs

Material : 20,000

Conversion: 4,211



costing method, the

direct material cost

per equivalent unit is

closest to…

A. 40€

B. 45€

C. 50€

D. 55€

Answer: B

Exam time!

104

Data Question

Answers

Units

Starting WIP: 2,000

Started: 900

Completed: 2,500

Completion rates

Starting WIP

Material rate: 80%


Ending WIP

Material rate: 30%


Costs

Period costs

Material : 44,000

Conversion: 29,000

WIP Costs

Material : 20,000

Conversion: 4,211



costing method, the

cost of material for

the ending WIP units

is closest to …

A. 4,500€

B. 5,000€

C. 5,500€

D. 6,000€

Answer: B

Exam time!

105

Figure 1

106

School

maintenance

17,000€

Information

Technology

9,000€

Content creation

department

55,000€

Teaching department

90,000€

Support



IT 200 0 400 1,400

Operating

Question

Answers

Using figure 1 and the direct allocation method, what amount is allocated from information

technology to the content creation department?

A. 2,000€

B. 6,000€

C. 7,000€

D. 11,000€

Answer: A

Exam time!

107

Question

Answers

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)

A. School Maintenance

B. Information Technology

C. Content Creation

D. Cannot be said

Answer: A

Exam time!

108

Question Data

Answers

Using the table on the right and activity based

costing, the cost alocated to the regular

products is closest to …

Component

A

Component

B

Working

hours

Regular 3 5 4

Premium 5 8 4

Cost 30,000 40,000

A. 20,000€

B. 25,000€

C. 30,000€

D. 35,000€

Answer: B

Exam time!

109

Question Data

Answers

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 …

Component

A

Component

B

Working

hours

Regular 3 5 4

Premium 5 8 4

Cost 30,000 40,000

A. 20,000€

B. 25,000€

C. 30,000€

D. 35,000€

Answer: D

Exam time!

110

Question

Answers

What is the main difference between valuing the inventory cost using absorption cost and variable

costing?

A. The operating profit will always be different

B. Variable costing does not included fixed non-manufacturing cost in its inventory cost

C. Absorption costing includes all the manufacturing costs

D. Inventory cost under variable costing is always lower than under absorption costing

Answer: C

Exam time!

111

Question Data

Answerss

What is the inventory cost per unit using

absorption costing?

A. 4

B. 4.75

C. 6

D. 7.5

Answer: C

Exam time!

112

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

Question Data

Answerss

What is the cost of goods sold using variable

costing?

A. 6,000

B. 8,000

C. 9,000

D. 12,000

Answer: B

Exam time!

113

Type Cost


Labor (var.) 0.75










Question Data

Answerss

What is the cost of goods sold using absorption

costing?

A. 6,000

B. 8,000

C. 9,000

D. 12,000

Answer: D

Exam time!

114

Type Cost


Labor (var.) 0.75










Question Data

Answerss

What is the contribution margin?

A. 3,500

B. 5,500

C. 6,000

D. 11,000

Answer: D

Exam time!

115

Type Cost


Labor (var.) 0.75










Question Data

Answerss

What is the operating profit using absorption

cost?

A. 3,500

B. 5,500

C. 6,000

D. 11,000

Answer: B

Exam time!

116

Type Cost


Labor (var.) 0.75










Question Data

Answerss

What is the difference in profit between

variable and absorption costing?

A. 1,000 (in favor of variable costing)

B. 1,000 (in favor of absorption costing)

C. 2,000 (in favor of variable costing)

D. 2,000 (in favor of absorption costing)

Answer: D

Exam time!

117

Type Cost


Labor (var.) 0.75










Question

Answers

Cost-volume-profit analysis assumes all of the followings except

A. All costs are variables or fixed

B. Units manufactured are sold

C. Total Variable costs do not fluctuate within the relevant range

D. Total Fixed costs do not fluctuate within the relevant range

Answer: C

Exam time!

118

Question

Answers

Which of the following items increases the breakeven point?

A. A decrease in fixed costs per unit

B. An increase in variable costs per unit

C. An increase in selling price per unit

D. Both A and C

Answer: B

Exam time!

119

Exam time!

Data Slope estimation

A. 4.53

B. 6.92

C. 6.53

D. 5.91

Answer: D

Coefficient estimation

120

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…

Exam time!

Current data New information

Success Formula received a one time offer

from company ABC. What is the minimum price

per hour Success Formula should charge ABC?

A. 0€

B. 17.5€

C. 18€

D. 23.25€

Answer: C

Calculation

121

Type 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 400 3.75

Data Question

Answers

Forecasted sales

20,000

Forecasted cost value

9€

Actual sales

18,000

Actual cost value

10€

What is the sales volume variance?

A. 0€

B. 10,000€ U

C. 18,000€ U

D. 18,000€ F

Answer: D

Exam time!

122

Answers

Data Question

Answers

Forecasted sales

20,000

Forecasted selling

value

9€

Actual sales

18,000

Actual selling value

10€

What is the flexible budget variance?

A. 0€

B. 10,000€ U

C. 18,000€ U

D. 18,000€ F

Answer: D

Exam time!

123

Answers

We wish you Success!

Documents

Accounting Crash course - Success Formula