ACCT 2

Direct cost

A cost that can be easily and conveniently traced to a specified cost object.

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Remember that debit entries to the account represent

actual overhead costs incurred

Sales minus cost of goods sold equals

gross margin

y=a+bx

y=total mixed cost a= total fixed b=variable cost per unti of activity x= level of activity

Fixed cost per unit

Increases as activity falls and decreases as activity rises.

The factory manager's salary would be an ________ cost of a particular variety such as chicken noodle soup.

Indirect

Discretionary fixed costs

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

total manufacturing costs

DM+DL+ Applied MOH

Conversion cost

Direct labor cost plus manufacturing overhead cost.

Job cost sheet

A form that records the materials, labor, and manufacturing overhead costs charged to a job.

Nonmanufacturing costs are often divided into two categories:

Selling and Administrative

Common cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight.

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

Job-order costing

A costing system used in situations where many different products, jobs, or services are produced each period.

Differential cost

A difference in cost between two alternatives.

Bill of materials

A document that shows the quantity of each type of direct material required to make a product.

Materials requisition form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials.

Predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed (by estimated total manufacturing overhead cost for the period)/ (estimated total amount of the allocation base for the period.)

Business process

A series of steps that are followed in order to carry out some task in a business.

The 3 customer value propsitions

customer intimacy, operational excellence, and product leadership.

Prime cost

Direct materials cost plus direct labor cost.

Note that because the Manufacturing Overhead account has a debit balance, closing the account requires

Manufacturing Overhead must be credited to close out the account.

Period costs (or selling and administrative expenses) _____ flow through inventories on the balance sheet

dont

Actual>Applied

under

COGM=

Total Manu. Cost+BI- EI

Underapplied effect on NI

Decrease NI

Variable cost formula

Change in cost/ change in activity y2-y1/x2-x1

Variable cost in total______

increases and decreases in proportion to activity

Fixed cost in total

stays the same within the relevant range

Applied overhead=

POHR*Allocation Base

Activity base

Goes hand in hand with variable cost. A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film. (Cost Driver)

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted.

Value chain

The major business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service.

Cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Mixed cost

A cost that contains both variable and fixed cost elements. Nooksack Expeditions example, the company incurs a mixed cost called fees paid to the state. It includes a license fee of $25,000 per year plus $3 per rafting party paid to the state's Department of Natural Resources. If the company runs 1,000 rafting parties this year, then the total fees paid to the state would be $28,000, made up of $25,000 in fixed cost plus $3,000 in variable cost.

Manufacturing Overhead

Manufacturing overhead includes items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities. A company also incurs costs for heat and light, property taxes, insurance, depreciation, and so forth, associated with its selling and administrative functions, but these costs are not included as part of manufacturing overhead. Only those costs associated with operating the factory are included in manufacturing overhead.

Direct Labor

consists of labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made.

Product costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Incremental cost

An increase in cost between two alternatives.

Cost object

Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions. A cost object is a specific instance of an item, whose cost can be given, either by estimation, cost allocation, or direct measurement. Office supplies for a specific division, for a specific period of time, are a cost object if a cost figure for these supplies can be measured or otherwise assigned.

Overapplied effect on NI

Increases NI

Variable cost per unit______

Remains constant

IMA adopted

Statement of Ethical Professional Practice

Differential revenue

The difference in revenue between two alternatives.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another.

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Allocating OH balance to close account

WIP, FG, COGS all need to be weighted toward total Applied overhead. Use the wiehgt to calculate dispersion amoung the three accounts.

y (Estimated total MOH)= a+bx

Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base

What goes in 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. Notice that direct labor costs are added directly to Work in Process—they do not flow through Raw Materials inventory. Manufacturing overhead costs are applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job

The amount transferred from Work in Process to Finished Goods

cost of goods manufactured.

product costs flow through inventories on the balance sheet and then on to

cost of goods sold

corporate social responsibility to serve

is a concept whereby organizations consider the needs of all stakeholders when making decisions. features other stakeholders—such as customers, employees, suppliers, communities, and environmental and human rights advocates

gross margin minus selling and administrative expenses equals

net operating income

Depreciation on office equipment is a

period expense rather than a product cost. Unlike depreciation on equipment.

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes.

Unadjusted COGS

BI+COGM-EI

IMA Standards

Competence, Confidentiality, Integrity, and Credibility

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs.

Reebok is assigning costs to its various regional and national sales offices, then the salary of the sales manager in its Tokyo office would be a _________ cost of that office.

Direct

Committed fixed costs

Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.

Indirect Labor

Just like indirect materials, indirect labor is treated as part of manufacturing overhead. Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and night security guards. Although the efforts of these workers are essential, it would be either impractical or impossible to accurately trace their costs to specific units of product. Hence, such labor costs are treated as indirect labor.

cost of goods sold for a merchandising company can be computed directly by

multiplying the number of units sold by their unit cost

Strategy

A company's "game plan" for attracting customers by distinguishing itself from competitors.

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object.

Fixed cost element=

high or low cost-variable cost element (Variable cost*high or low activity)

Administrative costs

include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole.

Selling

include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. Direct or Indirect.

Difference in financial and managerial

managerial accounting serves the needs of managers employed inside the organization. Because of this fundamental difference in users, financial accounting emphasizes the financial consequences of past activities, objectivity and verifiability, precision, and companywide performance, whereas managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance. managerial accounting is not mandatory and it does not need to comply with externally imposed rules

Three vital activities of managerial accounting

planning involves establishing goals and specifying how to achieve them. ( Plans are often accompanied by a budget.) controlling involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change. (performance report) Decision making involves selecting a course of action from competing alternatives

Variable cost

varies in total, in direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs

Lean Production

A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. Examples of fixed costs include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising.

Lean Production

A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders. (just in time production)

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects.

Enterprise risk management

A process used by a company to identify its risks and develop responses to them that enable it to be reasonably assured of meeting its goals.