Managerial Accounting Chapter 3

Direct Materials (DM)

Materials and components that become part of the product.

Selling, General and Administrative Costs (SG&A Costs)

Period costs (not product costs) for manufacturing firms. -Fixed and Variable SG&A

Direct Labor (DL)

Physical labor that converts materials & components into finished product. Ex: Assembly workers

Cost Terms in Manufacturing Firms

Product Costs: Direct Materials, Direct Labor, Manufacturing Overhead, Fixed Overhead, and Variable Overhead. Period Costs: Selling, General and Administrative (SG&A) Costs, Fixed SG&A, Variable SG&A

Matching Principle in GAAP

Product costs on the income statement are MATCHED to sales revenue (expensed when the product is sold, not when the cost was incurred). -To do matching, we flow product costs through inventory accounts on the balance sheet. Period costs are expensed in the period in which they were incurred (not flown through inventory accts).

Variable Overhead

Varies in proportion with production volume. Ex: Glue used in production, drill bits, packaging materials, etc.

Variable SG&A Costs

Vary in proportion with sales volume Ex: sales commissions

Cost Flows in Manufacturing Firms

1. Period costs (SG&A) are expensed in the period when they're incurred. 2. Product costs (DM, DL, Manufacturing Overhead) flow through inventory accts., and are expensed when the product is sold. -Logic: When you incur product costs, you create new assets (finished products that will create future revenue). Expensed only when you use up these assets to generate revenue.

Cost Flows in Merchandising Firms

1. When firm buys goods, their costs enters inventory on balance sheet (treated as an asset- something that will generate future revenues) 2. When inventory is sold, its cost moves from inventory to cost of goods sold (COGS).

Period Costs

All costs that are not product costs. Ex: Sales office rent, advertising, customer service costs, sales force comp., CEO salary, etc.)

FP Account

BI + COGM -COGS =EI

WIP Account

BI + DM + DL + MO - COGM = EI

Materials Account

BI + Purchase - DM = EI

Merchandising Firms

Buy goods from suppliers and resell them to customers. Maintain inventory of goods.

Cost of Goods Manufactured

COGM= Cost of beginning WIP inventory + Cost of materials used + Cost of direct labor + Manufacturing overhead - Cost of ending WIP inventory, *WIP= Work in process (unfinished goods).

Inventory Equation for Merchandising Firm

COGS during period = Cost of beginning inventory + Cost of goods purchased during period - Cost of ending inventory. COGS=BI + Purchase - EI BI + Purchase - COGS = EI

COGS in Manufacturing Firms

COGS= Cost of beginning FG inventory + COGM - Cost of ending FG inventory. *FG= Finished Goods

Cost of Materials Used Formula

Cost of Materials Used= Cost of beginning inventory or materials + Purchases of materials - Cost of ending inventory of materials

Manufacturing Overhead

Cost of shared resources that cannot be traced to a specific product, or it is not practical to trace them.

Product Costs

Costs related to getting products or services ready for sale. Ex: Materials and labor used in production, depreciation of production equipment, rent of factory building, etc.)

Direct Costs

Costs that we can trace directly to a specific product. -Direct materials and direct labor. -DM & DL are variable costs- They vary in proportion with production volume.

Measurement Difference: DM/DL vs. Overhead

Direct Costs (DM/DL) are traced to products. We directly measure how much DM & DL was used for each product line. Indirect Costs (Overhead) are allocated to products. We use some sensible method to estimate what proportion of overhead was used by each product line.

GAAP

Distinguishes between product costs and period costs Requires matching of product costs to revenue.

Fixed SG&A Costs

Do not vary with sales volume Ex: rent for sales office, (non-production) managers' salaries, sales staff salaries, etc.

Fixed Overhead

Does not vary with production volume Ex: Factory rent, depreciation on machines, salaries of production supervisors, etc.

Cost of Goods Sold (COGS)

Expensing costs of items when you sell them (matching principle), not when you purchase them wholesale. -Use inventory equation to compute COGS.

Income Statement

Gross Margin = Revenue - COGS Profit= Gross Margin - SG&A costs