Managerial Accounting Chapter 2
Period Cost are often called
"Operating Expenses" or "selling, general, and administrative expenses" (SG&A) on the company's income statement. -ALWAYS expensed in the period in which they are incurred and NEVER become part of the inventory account
Service Companies:
-Provide customers with intangible services -Have NO inventories on the balance sheet
Merchandising Companies:
-Resell tangible products purchased ready-made from suppliers -Have only on category of Inventory
Merchandisers Balance Sheet:
-has just one inventory account called INVENTORY or MERCHANDISE INVENTORY
Raw materials inventory:
All raw materials used in manufacturing. -Ex. steel, glass, tires, upholstery fabric, engines, and other automobile components
Cost Object
Anything for which managers want a separate measurement of cost
Allocate
Assigning indirect costs among a collection of products. This results in a less precise cost figure being assigned to each product.
Inventoriable product costs of Manufacturing Companies
Direct Materials Direct Labor Manufacturing Overhead
Work in process inventory:
Goods that are partway through the manufacturing process but not yet complete.
Service company:
In business to sell intangible services; generally no inventory -EX. health care, insurance, banking, and consulting
Inventoriable Product Cost
Include only the costs incurred during the "production or purchases" stage of the value chain. Inventoriable Product Costs are treated as an asset (inventory) until the product is sold.
Other Indirect Manufacturing Costs
Include such plant-related costs as depreciation on the plant and plant equipment, plant property taxes and insurance, plant repairs, and maintenance, and plant utilities
Total Costs
Include the costs of ALL Resources used throughout the value chain.
Manufacturing Overhead
Includes ALL manufacturing costs other than direct materials and direct labor. Also referred to as factory overhead because all of the costs relate to the factory.
Indirect Labor
Includes the cost of all employees IN THE PLANtT other than those employees directly converting the raw materials into the finished product. -Ex. salaries, wages, and benefits of plan forklift operators, plant security officers, plant janitors, and plant supervisors
Cost Objects include:
Individual units, Different models, Alternative marketing strategies, Geographic segments of the business, Departments, A "green initiative"
In the long run most costs are Controllable meaning:
Management is able to influence or change them. -Ex. Toyota could replace existing production facilities with different-sized plants in different areas of the world that might cost less to operate, but that would take time.
Prime Costs
Refer to the combination of direct materials and direct labor
Differential Cost
Refers to the difference in sot between two alternatives.
Costs of Goods Manufactured
Represents the cost of those goods that were completed and moved to FINISHED GOODS INVENTORY during the period
Merchandising companies:
Resell tangible products they buy from suppliers; HAVE Inventory -EX Walmart and Best Buy resell tangible products they buy from suppliers
Three basic business models:
Service companies, Merchandising companies, Manufacturing companies
Assigning ( a cost)
Simply means that you are attaching a cost to the cost object
Direct Materials
The PRIMARY materials that become a physical part of the finished product. -Ex. steel, tires, engines, upholstery, carpet dashboards
Value Chain:
The activities that add value to the company's products and services. -R&D, Design, Production and Purchases, Marketing, Distribution, Customer Service
Direct Labor
The cost of compensating employees who physically convert raw materials into the company's products.
Marginal Cost
The cost of making ONE MORE UNIT. -Ex. Fixed costs will not change when Toyota makes one more Prius unless the plant is operating at 100% capacity and simply cannot make one more unit. If that is the case Toyota will need to incur additional costs to expand the plant. So, the marginal cost of a unit is simply its VARIABLE COST.
Accounting Treatment of Inventoriable Product Costs:
Treat as inventory until product is sold . When sold, expense as "Cost of Goods Sold".
Manufacturing Companies:
Use labor, plant, and equipment to transform raw materials into new finished products.
Periodic Inventory:
Used to account for breakage, theft, input errors, or obsolescence that occurred during the year.
Biomimicry
means that a company tries to mimic, or copy, the natural biological process in which dead organisms (plants and animals) become the input for another organism or process
Life-Cycle assessment
means the company analyzes the environmental impact of a product, from cradle to grave, in an attempt to minimize negative environmental consequences throughout the entire lifespan of the product.
Triple Bottom Line
notion in which the company's performance is evaluated not only in terms of profitability, but also in terms of its impact on people and the planet.
Wholesalers:
often referred to as "middle men"; buy products in bulk from manufacturers, mark up the prices, and then sell those products to retailers
Conversion Costs
refer to the combination of direct labor and manufacturing overhead. These are the costs of converting raw materials into finished goods
Merchandising companies include:
retailers and wholesalers
Retailers:
sell to consumers
The cost of inventory includes:
the cost merchandisers pay for the goods plus cost necessary to get the merchandise in place and ready to sell, such as FREIGHT-IN costs, IMPORT DUTIES and TARIFFS
Greenwashing
the unfortunate pro act of OVERSTATING a company's commitment to sustainability, can ultimately backfire as investors and consumers learn the truth about the company operations.
Manufacturing companies:
use labor, plant, and equipment to convert raw materials into new finished products
Examples of Manufacturing companies:
Procter and Gamble General Mills Dell Computer Toyota
Period Costs
R&D, Design, marketing, distribution, and customer service
Three Categories of inventory:
Raw Materials Work in Process Inventory Finished Goods inventory
Inventoriable product costs of Merchandising Companies
Cost of merchandise itself Freight-in Import Duties and customs (if any)
Direct Cost
A cost that can be traced to the cost object
Indirect Cost
A cost that relates to the cost object but cannot be traced to it
What costs should be assigned to cost objects:
Both direct and indirect costs are assigned to cost objects. Direct costs are traced to cost object, where as indirect costs are allocated to cost objects
In the short run costs are Uncontrollable Costs meaning:
Companies are "locked in" to certain costs arising from previous decisions. -Ex. Toyota has little or no control over property tax and insurance costs of its existing plants
Finished goods inventory:
Completed goods that have not yet been sold.
Tracing
Connecting a cost with a specific cost object. This results in a very precise cost figure , giving managers great confidence in the cost's accuracy.
Indirect Materials
Materials used in the plant that are not easily traced to individual units. -Ex. invoice sticker, glue - the cost of tracing the sticker to the vehicle outweighs the benefit management receives from the increased accuracy of the information
Inventoriable product costs of service companies:
None