ACC 312 - Managerial Accounting Chapters 1-3
Transfer of Product Costs
- in production, Raw Materials -> Work in Process - Direct labor and manufacturing overhead costs are added to Work in Process -> - Once units of product are completed, Finished Goods - When a manufacturer sells to customers, Finished Goods -> Cost of Goods Sold
Job-order costing systems are used when:
1. Many different products are produced each period 2. Products are manufactured to order 3. The unique nature of each order requires tracing oral locating costs to each job, and maintaining cost records for each job
Three types of costs in Schedules
1. direct materials 2. direct labor 3. manufacturing overhead
Yost Precision Machining estimates that it will require 40,000 direct labor-hours to meet the coming period's estimated production level. In addition, the company estimates total fixed manufacturing overhead at $640,000, and variable manufacturing overhead costs of $4.00 per direct labor hour.
640,000 + (4 X 40,000) $800,000 estimated total manufacturing overhead / 40,000 estimated direct labor hours (DLH) = $20.00 per direct labor-hour
Fixed Cost
A cost that remains constant, in total, regardless of changes in the level of the activity; the average varies inversely with changes in activity if expressed on a per unit basis
Variable Cost
A cost that varies, in total, in direct proportion to changes in the level of activity; is constant per unit
Absorption costing
A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product
Normal costing
A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job
Job-order costing
A costing system used in situations where many different products, jobs, or services are produced each period
differential revenue
A difference in revenue between two alternatives
Job cost sheet
A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job
Allocation base
A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects
Predetermined overhead rate
A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period
Administrative Costs
All executive, organizational, and clerical costs; can be either direct or indirect costs
Common costs
Are indirect and incurred to support a number of cost objects; cannot be traced to any individual cost object
Selling Costs
Costs necessary to secure the order and deliver the product; can be either direct or indirect costs
Conversion Cost
Direct Labor + Manufacturing Overhead
Prime Cost
Direct Material + Direct Labor
POHR =
Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period
Performance reports
Feedback that compares actual results with the budget, are an essential part of the control function
subsidiary ledger
Formed by all of a company's job cost sheets (Jobs A - F) collectively
Decision making
Involves making a selection among competing alternatives
Committed Fixed Costs
Long term, cannot be significantly reduced in the short term
Discretionary
May be altered in the short term by current managerial decisions
Overhead application formula
Overhead applied to a particular job = Predetermined overhead rate x Amount of allocation base incurred by the job
Core functions of management
Planning, controlling, decision-making
Predetermined overhead rate equation
Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base
Matching Principle
The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another; usually found in accounting records, but must be explicitly considered in every decision
Y = a + bX
Total Mixed Cost = Total Fixed Cost + (Variable Cost Per Unit of Activity x Level of Activity)
underapplied overhead
When a company applies less overhead to production than it actually incurs
overapplied overhead
When a company applies more overhead to production than it actually incurs
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
[(760,000 / 20,000) x 10] + 200 + (15 x 10) = 730
activity-based costing
an alternative approach to developing multiple predetermined overhead rates, employed when a company creates overhead rates based on the activities that it performs,
Schedules of Cost of Goods Manufactured and Cost of Goods Sold
calculate: 1. the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production 2. the manufacturing costs associated with goods that were finished during the period
Direct costs
can be easily and conveniently traced to a unit of product or other cost object (e.g., direct material and direct labor)
Differential costs
can be either fixed or variable
Indirect costs
cannot be easily and conveniently traced to a unit of product or other cost object (e.g., manufacturing overhead)
indirect labor
cannot be easily or conveniently traced to specific units of product
indirect materials
cannot be easily or conveniently traced to specific units of product
Managerial accounting
concerned with providing information to employees within an organization so that they can formulate plans, control operations, and make decisions
Financial accounting
concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators
Finished goods
consist of completed units of product that have not yet been sold to customers
Work in process
consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer
Direct labor
costs that can be easily traced to individual units of product (e.g., Wages paid to automobile assembly workers)
adjustment for overapplied overhead
decreases cost of goods sold and increases net operating income
The control function
gathers feedback to ensure that plans are being followed
Sunk costs
have already been incurred and cannot be changed now or in the future; are irrelevant costs that should be ignored when making decisions
Product costs
include all costs involved in acquiring or making a product (direct materials, direct labor, and manufacturing overhead); "attach" to a unit of product as it is purchased or manufactured and they remain attached to each unit of product as long as it remains in inventory awaiting sale
Period costs
include all selling costs and administrative costs
Raw materials
include any materials that go into the final product
Manufacturing overhead
includes all manufacturing costs except direct material and direct labor; cannot be readily traced to finished products (Incl. indirect materials and indirect labor)
Cost of goods manufactured
includes the manufacturing costs associated with the goods that were finished during the period
adjustment for underapplied overhead
increases cost of goods sold and decreases net operating income
allocation base
is used to assign manufacturing overhead to individual jobs (such as direct labor hours, direct labor dollars, or machine hours)
The relevant range of activity
pertains to fixed cost as well as variable costs
job costs sheets
provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Work-in-Process and FinishedGoods on the balance sheet
Direct materials
raw materials that become an integral part of the product and that can be conveniently traced directly to it (e.g., A seat installed in an aircraft)
For manufacturing companies, product costs include
raw materials, work in process, finished goods
Overhead application
the process of assigning overhead costs to specific jobs
The relevant range of activity for a fixed cost
the range of activity over which the graph of the cost is flat
The contribution income statement format
used as an internal planning and decision-making tool
predetermined overhead rate (POHR)
used to apply overhead to jobs is determined before the period begins
Examples of manufacturing overhead
• Depreciation of manufacturing equipment • Utility costs • Property taxes • Insurance premiums incurred to operate a manufacturing facility
Cost Classifications for Predicting Cost Behavior
• Variable costs • Fixed costs • Mixed costs