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