CH. 2 Managerial Accounting

What are EXPENSES?

As costs are used up in the production of revenues, they are said to expire. Expired costs are called expenses.

Explain INDIRECT COSTS.

Some costs, however, are hard to trace. Indirect costs are costs that cannot be easily and accurately traced to a cost object.

Explain COSTS OF GOODS MANUFACTURED.

The cost of goods manufactured represents the total product cost of goods completed during the current period and transferred to finished goods inventory. The only costs assigned to goods completed are the manufacturing costs of direct materials, direct labor, and manufacturing overhead.

What are PERIOD COSTS?

The costs of production are assets that are carried in inventories until the goods are sold. There are other costs of running a company, referred to as period costs, that are not carried in inventory. Thus period costs are all costs that are not product costs (i.e., all areas of the value chain except for production). The cost of office supplies, research and development activities, the CEO's salary, and advertising are examples of period costs.

Explain COST OBJECTS.

Managerial accounting systems are structured to measure and assign cost to entities called cost objects. A cost object is any item such as a product, customer, department, project, geographic region, plant, and so on, for which costs are measured and assigned.

Explain WORK IN PROCESS (WIP).

Once the direct materials are calculated, the direct labor and manufacturing overhead for the time period can be added to get the total manufacturing cost for the period. Now we need to consider the second type of inventory-work in process. Work in process (WIP) is the cost of the partially completed goods that are still on the factory floor at the end of a time period. These are units that have been started, but not finished.

Explain PRODUCTS.

are goods produced by converting raw materials through the use of labor and indirect manufacturing resources such as the manufacturing plant, land, and machinery. Televisions, hamburgers, automobiles, and computers are examples of product costs.

What are PRODUCT (MANUFACTURING) COSTS?

are those costs, both direct and indirect, of producing a product in a manufacturing firm of acquiring a product in a merchandising firm and preparing it for sale. Therefore, only costs in the production section of the value chain are included in product costs.

What are DIRECT MATERIALS?

are those materials that are a part of the final product and can be directly traced to the goods being produced. The cost of these materials can be directly charged to products because physical observation can be used to measure the quantity used by each product.

Explain ASSIGNING COSTS?

the way that a cost is linked to some cost object. A cost object is something for which a company wants to know the cost. For example, of the total phone expense, how much was the sales department, and how much was for manufacturing? Assigning costs tells the company why the money was spent.

What are ACCUMULATING COSTS?

the way that costs are measured and recorded. Accumulating costs tells the company what was spent.

What are ADMINISTRATIVE COSTS?

All costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either selling or production are administrative costs.

What is MANUFACTURING OVERHEAD?

All product costs other than direct materials and direct labor are put into a category called manufacturing overhead.

Explain DIRECT COSTS.

Direct costs are those costs that can easily and accurately traced to a cost object. For example, suppose that Chef Courtney, from our earlier discussion, want to know the cost of emphasizing fresh, in-season fruits and vegetables in her entrees. The purchase cost of the fruits and vegetables would be relatively easy to determine.

How do you assign indirect costs?

Even though indirect costs cannot be traced to cost objects, it is still important to assign them. This assignment usually is accomplished by using allocation. ALLOCATION means that an indirect cost is assigned to a cost object by using a reasonable and convenient method. Allocating indirect costs to products is needed to determine the value of inventory and of cost of goods sold. Perhaps more importantly, as companies become more complex in number and types of products and services they offer to customers, the need to understand allocate, and effectively control indirect costs becomes increasingly important. Therefore, accurately tracing and allocating indirect costs to products and services is important for many management decisions.

What are PRIME and CONVERSION COSTS?

Prime cost is the sum of direct materials cost and direct labor cost: Prime Cost=Direct Materials+Direct Labor. Conversion cost is the sum of direct labor cost and manufacturing overhead cost: Conversion Cost=Direct Labor+ Manufacturing Overhead. For a manufacturing firm, conversion cost can be interpreted as the cost of converting raw materials into a final product.

What is the PRICE?

The revenue per unit is called price.

What are SELLING COSTS?

Those costs necessary to market, distribute, and service a product or service are selling costs. They are often referred to as order-getting and order-filling costs.

What is COST?

the amount of cash or cash equivalent sacrificed for goods and/ or services that are expected to bring a current or future benefit to the organization. Costs are incurred to produce future benefits. In a profit-making firm, those benefits usually mean revenues. If a furniture manufacturer buys lumber for $10,000, then the cost of that lumber is $10,000 cash.

What is DIRECT LABOR?

the labor that can be directly traced to the goods being produced. Physical observation can be used to measure the amount of labor used to produce a product.