ACT2102 - Chapter 1

A company purchased a 12 month insurance policy on October 1 for $1,200. On the December 31 annual financial statements

$300 is reported as a expense and $900 is reported as an asset

The following information is for S&P enterprises for the month of July. Total fixed cost for the month of July was

$63,000 $30,000 + $15,000 + $18,000 = $63,000 (Fixed manufacturing overhead + fixed selling expense + fixed administrative expense)

Based on the following information, calculate net income for Dana's dress shop using the traditional formats. Sales $360,000 gross margin $140,000 contribution margin $110,000 total selling & administrative exp. $60,000

$80,000 Gross margin of $140,000 - Total Selling & Administrative Expense of $60,000 - $80,000

Transfer of product costs

1. When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. 2. Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. 3. Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. 4. When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

An activity base (cost driver)

A measure of what causes the incurrence of a variable cost - units produced - machine hours - miles driven - labor hours

Which of the following are differences between the traditional and contribution format to income statements

Compared to traditional statements, contribution format statements provide management with a tool to make decision making easier. Traditional income statements focus on cost classifications. Contribution format statements focus on cost behavior. The traditional income statement is for external users and the contribution margin income statement is for internal users.

Sales revenue minus all variable expenses equals

Contribution margin

Fixed costs that usually arise from annual spending decision by management are called ______ or manager fixed costs.

Discretionary

All of a company's depreciation, property taxes, and insurance are considered manufacturing overhead.

False Only indirect costs are associated with operating the factory are included in manufacturing overhead.

As the level of activity moves outside of the relevant range, _______ costs increased or decrease in discrete steps rather than a linear fashion.

Fixed

Within the relevant range of activity, ____ costs remains constant in total

Fixed Variable costs remain constant per unit within the relevant range of activity

The sum of direct materials and direct labor is called ______ cost.

Prime

Fixed costs that cannot easily be changed and often lock a company into a multi-year decision are called _______ fixed costs.

committed

Any item for which cost data is desired is called a(n)

cost object

Direct costs

costs that can be easily and conveniently traced to a unit of product or other cost object Examples: direct materials and direct labor

Differential costs, opportunity costs and sunk costs are all cost classifications used in:

decision making

In an automobile manufacturing plant, the assembly-line workers are classified as ________ ________ cost.

direct labor

Which of the following are most likely fixed costs?

factory rent, factory insurance, administrative salaries Electricity to operate factory machines represents a variable cost, as the amount of money paid for electricity will vary directly with the level of production activity.

Product costs flow through the inventory accounts until the goods are sold, at which time they are matched against sales on the

income statement

Differential costs are also known as ____ costs.

incremental

Product costs are also called _____ costs.

inventoriable costs or manufacturing

Discretionary fixed costs include

management training programs and advertising Factory depreciation is a committed fixed cost. Insurance expense is a committed fixed cost.

Factory materials, such as cleaning supplies, that are not components of finished products are classified as:

manufacturing overhead Period costs are non manufacturing selling and administrative costs. Administrative costs are non manufacturing costs. Direct materials are integral components of finished products.

A cost that contains both variable and fixed cost elements is a(n) ______ cost.

mixed

Inventoriable costs is another term for _____ costs.

product

The materials that go into the final product are called ____ materials.

raw or direct

Contribution margin is

sales revenue minus variable costs Gross margin is sales revenue minus cost of goods sold Net income is all revenues minus all costs Fixed costs are deducted from contribution margin to get net income

Direct labor is also called _______ labor.

touch

Traditional format

used primarily for external reporting

Indirect costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost object Example: manufacturing overhead (for instance, electricity to run a machine)

Differential costs

Differential costs (or incremental costs) are the difference in cost between any two alternatives. A difference in revenue between two alternatives is called differential revenue. Both are always relevant to decisions. Differential costs can be either fixed or variable.

Fantastic Furniture makes custom order couches. The material used to make a couch is a(n) ______ cost of the customer placing the order.

direct

Prime costs include

direct materials and direct labor

Direct materials and direct labor are both ______ costs.

manufacturing costs

Nonmanufacturing costs include:

sales commissions company president's salary Insurance on plant equipment is a manufacturing overhead cost. Assembly line worker wages is a direct labor which is a manufacturing cost.

The following information is for s&p enterprises for the month of September. Total fixed cost for month of September was $________

63,000

Mixed costs

A mixed cost contains both variable and fixed element. The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y = the total mixed cost a = the total fixed cost b = the variable cost per unit of activity X = the level of activity Total costs = total fixed costs + total variable costs or total costs = total fixed costs + (variable cost per unit) X (# of units produced)

Variable cost

A variable cost varies, in total, in direct proportion to changes in the level of activity A variable cost per unit is constant Total variable costs will increase if level of activity (volume increases) Variable cost examples Example manufacturing variable costs for whatley inc. • direct materials • direct labor • indirect materials Variable cost examples Example non manufacturing variable costs for whatley Inc • salesmen commissions

Opportunity costs

Are benefits that are given up when selecting one alternative over another Should be considered in decision making Almost every decision involves opportunity costs. Opportunity costs are not usually found in accounting records

Costs that can be easily and conveniently traced to a specific product are called ______ costs.

Direct Common costs are at your or indirect cost. Indirect costs cannot be easily traced and must be allocated to products.

A laptop computer manufacturer would consider the computer's processor chip to be a(n) ______ cost.

Direct The computer processor chip can be easily and conveniently traced to the laptop, making it a direct material cost.

a cost that can be easily and conveniently traced to a specified cost object is a(n) _______ cost of that cost object, whereas costs that cannot be easily and conveniently traced to that specific cost are ____ costs.

Direct and indirect

Manufacturing product costs

For manufacturing companies, product costs include: • Raw materials: includes any materials that go into the final product. • 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. • Finished goods costs: consists of completed units of product that have not yet been sold to customers

Variable costs vary ____ within the relevant range of activity

In total Costs that vary per unit are fixed costs.

The difference in costs between two alternatives is called a(n) ______ cost.

Incremental, this is also called a differential cost. An opportunity cost is the potential benefit given up when one alternative is chosen over another. A sunk cost is a cost that has already been incurred and cannot be changed. A common cost benefits more than one product and cannot be traced to a specific product.

Sunk costs

Sunk costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.

The relevant range

The relevant range of activity pertains to fixed cost as well as variable costs. For example, assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat

The finished product of one company can become raw materials for another company.

True Reason: raw materials are anything that go into a finished product. For example, a computer chip is a finished product for the chip manufacturer and a raw material for the computer manufacturer.

Behavior of Cost within the relevant Range

Variable cost - In total • total variable cost increases and decreased in proportion to changes in the activity level - per unit • variable cost per unit remains constant Fixed cost - In total • total fixed cost is not affected by changes in the activity level within the relevant range - Per unit • fixed cost per unit decreases as the activity level rises and increases as the activity level falls

Example variable cost

Whatley Inc. produces desks. The material cost per unit is $100. What is the per unit material cost and total material cost if the company produces: 100 units, 200 units, 300 units At 100 units the cost per unit is $100 and the total cost is $1,000 At 200 units the cost per unit is $100 and the total cost is $2,000 At 300 units the cost per unit is $100 and the total cost is $3,000

Within the relevant range of activity

fixed costs remain constant in total costs and activity can be approximated by a straight line Within the relevant range of activity, variable costs remain constant per unit and change in total.

Committed fixed costs include

real estate taxes, top management salaries Public relations is an example of a discretionary fixed cost. Research is an example of a discretionary fixed cost.

Fixed costs that can be cut-back or eliminated without significant damage to a company's long term goals are _____ fixed costs and ______ fixed costs can not be easily changed or eliminated.

Discretionary or managed, committed

Fixed cost

Is a cost that remains constant, in total, regardless of changes in the level of the activity On a per unit basis, the average fixed cost per unit varies inversely with changes in activity Example manufacturing fixed costs for whatley inc: • supervisor's salary • equipment depreciation • factory property taxes • building rent (if applicable) • factory insurance Example selling and administrative fixed costs for Whatley inc: • executive salaries • administrative equipment depreciation • property taxes on administrative building • rent on administrative building • insurance on administrative building

Which of the following statements are true?

Period costs do not flow through the inventory accounts. Period costs are expensed when incurred. Inventoriable costs are expensed in the period in which they are incurred, inventoriable costs are product costs that attach to the product and are expensed when the product is sold. All costs in a merchandising company are period costs, inventory purchases in a merchandise company are product costs.

How period costs impact the financial statements (manufacturing company)

Period costs include all selling costs and administrative costs Expense goes on the income statement Period costs • increase expenses when incurred (immediately lowers net income)

Prime costs and conversion costs

Prime costs are direct labor and direct materials, while conversion costs are direct labor and manufacturing overhead. You can think of conversion costs as the "costs of converting" direct materials into a product by using direct labor and overhead. Manufacturing costs are often classified as follows: • prime cost • direct materials • direct labor • conversion cost • direct labor • manufacturing overhead

How product costs impact the financial statements (manufacturing company)

Product costs include direct materials, direct labor, and manufacturing overhead Inventory goes on the balance sheet ——-> Sale Costs of goods sold goes on the income statement Manufacturing costs • increase assets when incurred • become an expense (costs of goods sold) when inventory is sold

Product costs

Product costs: costs involved in purchasing (ex: a retailer) or making a product (ex: a manufacturer) Product costs "attach" to a unit of product as it is purchased (ex: a retailer) or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale

On a traditional income statement, cost is goods sold reports the ________ costs attached to merchandise sold during the period, while selling and administrative expenses report all _____ costs that have been expensed as incurred

Product or manufacturing, period

Nonmanufacturing costs

Selling costs • the costs incurred to secure customer orders and get the finished product to the customer Administrative costs • the costs associated with the general management of an organization rather than with manufacturing or selling Non manufacturing costs: • include selling, general and administrative costs • are "non-factory" costs • these costs are recorded as an expense in the period incurred • sometimes referred to as period costs

Cost objects include:

anything for which cost data is desired organizational subunits customers Anything for which revenue data is desired is incorrect because cost objects refer to costs, not revenues.

How individual costs react to changes in activity level is referred to as cost

behavior

Materials that become an important component of the finished product whose cost can be easily and conveniently traced to the finished product are _______ materials.

direct

Three manufacturing cost categories

direct materials, direct labor, manufacturing overhead

Manufacturing costs include

direct materials, direct labor, manufacturing overhead Administrative costs are non manufacturing costs. Selling costs are non manufacturing costs.

Selling and administrative costs are _____ costs.

direct or indirect

Which of the following are most likely fixed costs?

factory rent, factory insurance, administrative salaries Electricity to operate factories represents a variable cost, as the amount of money paid for electricity will vary directly with the level of production activity.

Indirect labor costs include:

factory security guard wages, assembly-line supervisor salary Assembly-line worker wages, the wages of assembly line workers can be traced to a specific product or service and are considered direct labor costs. Administrative assistant salary, indirect labor includes manufacturing costs only. Administrative salaries are non-manufacturing costs.

As the level of activity moves outside of the relevant range, fixed costs:

increase or decrease in discrete steps Fixed costs do not increase or decrease within the relevant range

A manufacturing cost that cannot be easily traced to a specific cost object is a(n) ________ cost.

indirect

Salaries of factory supervisors and factory maintenance personnel are examples of ______ labor costs.

indirect It's not direct because only labor costs that can be expensive physically and conveniently traced to individual units of products are considered direct labor costs.

Which of the following is not a cost classification associated with decision making?

indirect costs While it is true that sunk costs are ignored, it is a cost classification associated with decision making. The decision maker must understand the concept and use it correctly in order to make the correct decision.

Minor items such as nails and glue are usually considered to be:

indirect materials Direct materials isn't the answer because while it is true that these are materials that could be traced and treated as direct, it isn't worth the costs and effort to do it. Administrative costs isn't the answer because selling and administrative costs are period, not product costs. Selling costs isn't the answer because selling and administrative costs are period, not products costs.

Manufacturing overhead costs include

indirect materials, factory supervisors' salaries, and factory depreciation Only indirect costs associated with operating the factory are included in manufacturing overhead.

Manufacturing overhead costs include

indirect materials, factory supervisors' salaries, and factory depreciation Only indirect costs associated with operating the factory are included in manufacturing overhead.

Factory costs such as cleaning supplies, taxes, insurance, and janitor wages are classified as ______.

manufacturing overhead Indirect labor isn't the answer because janitor wages are indirect labor, but the other costs listed are not. Direct materials isn't the answer because cleaning supplies, taxes, insurance, and janitors wages are indirect costs. Period costs isn't the answer because period costs are non manufacturing costs.

The revenue obtained from selling one additional unit of product is called ___________ revenue.

marginal

The revenue from selling one additional unit is called _____ revenue.

marginal Opportunity cost, not revenue, is what is given up by selecting one alternative over another

The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is known as the ______________ principle.

matching

A cost that contains both variable and fixed cost elements is a(n) ______ cost.

mixed Mixed costs are known as semi variable costs.

Indirect materials include

nails, glue, and thread Reason: relatively insignificant materials are treated as indirect because it isn't worth the effort to trace the costs. Laptop computer keyboards - indirect materials are minor, rather insignificant materials. A computer keyboard is a significant item and thus a direct material. Factory manager's salary is not a material cost. Factory rent and insurance are not material costs.

A potential benefit that is forfeited or lost when one decision is chosen over another is called a(n)

opportunity cost

Cost behavior

refers to how a cost will change as activity level changes categorizes costs as fixed, mixed and variable Is a detailed analysis technique used to determine whether costs are fixed or variable, this is the analysis of a mixed cost Is the relative proportion of each type of cost in an organization, this is the definition of cost structure.

Cost behavior

refers to how a cost will react to changes in the level of activity The most common classifications are: • variable costs • fixed costs • mixed costs

The assumption that cost behavior is strictly linear is reasonably valid within the ____ of activity.

relevant range

Period costs are always expensed n the income statement in the period in which

they are incurred The cash for the expense changes hands, this is incorrect because cash may or may not change hands in the same period in which the expense is incurred. The related goods are sold, this is incorrect because product costs are expenses in the period in which the related goods are sold.

A fixed cost remains fixed ______ within the relevant range of activity.

total Costs that remain fixed per unit are variable costs.

An income statement focusing on product and period costs has been prepared using a(n) ______ format, while a(n) ______ format income statement makes a distinction between fixed and variable costs.

traditional, contribution

Contribution format

used primarily by management The contribution format income statement is used as an internal planning and decision making tool. We will use this approach for: 1. Cost-volume-profit analysis 2. Segmented reporting of profit data 3. Budgeting 4. Special decision such as pricing and make-or-buy analysis

Within the relevant range, a cost that changes in direct proportion to changes in the activity level is a ______ cost.

variable Mixed costs do not cheats with changes in activity level. Because of the fixed component the change in cost is not in direct proportion to the change in activity level. Fixed costs remain constant in total within the relevant range of activity. Fixed cost per unit changes with changes in the activity level.

Which type of cost changes in total, in direct proportion to changes in activity level?

variable cost Opportunity costs are the potential benefits given up when one alternative is a chosen over another Differential costs are the differences in costs between any two alternative Fixed costs remain constant in total within the relevant range of activity

Manufacturing overhead - examples

• depreciation of factory equipment • utility costs of the factory facility • property taxes of the factory facility • insurance premiums incurred to operate a factory facility • factory supervisor (indirect labor) • factory supplies (indirect material) Only those indirect costs associated with operating the factory are included in manufacturing overhead Manufacturing costs include: • direct material • direct labor • indirect manufacturing overhead These are product costs (costs incurred to produce the product) These costs are recorded in the inventory account when incurred