Principles of Accounting - D074 UNIT:6
Overhead costs must be paid for—
either by the owners or by the customers
Management planning
involves a process of recognizing problems or opportunities, identifying alternatives, analyzing alternatives, then choosing and implementing the best alternative(s) (long term and short term)
Evaluating
involves analyzing results, providing feedback to managers and other employees, rewarding performance, and identifying problems
Controlling
involves the process of tracking actual performance
cost accountant
specially trained to prepare and analyze accounting information for internal decision-making.
Long-run planning
strategic planning, and capital budgeting.
variances
Deviations from standards
Which product costs are substantial in both a service company and a manufacturing company?
Direct labor and overhead
Which item is a product cost?
Direct materials
What are the three components of product costs?
Direct materials, direct labor, and manufacturing overhead
relevant range
The range of operating level, or volume of activity, over which the relationship between total costs (variable plus fixed) and activity level is approximately linear.
What is the relevant range?
The range of volume over which the variable cost per unit is expected to remain the same The relevant range is the range over which the variable cost per unit stays the same and the fixed cost remains the same in total.
If overhead is underapplied during a period, which statement below is true?
The total cost of goods sold will be understated.
break even
To make just enough income to cover costs without any profit or loss.
What problem will be caused if overhead is underapplied?
Total cost of products or orders will be understated.
Which statement below is true with regard to fixed costs?
Total fixed costs do not change in total within a relevant range of activity.
In a service business, the cost flow is the same except that....
a service business typically does not inject many direct materials into the production process.
What is work-in-process inventory?
All material on the factory floor that is not yet completed
stepped costs
Costs that change in total in a stair-step fashion (in large amounts) with changes in volume of activity.
mixed costs
Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level.
fixed costs
Costs that remain the same in total, regardless of the number of dental patients
Out-of-pocket costs
require an outlay of cash or other resources
What is a mixed cost?
A cost that includes both a fixed portion and a variable portion
What is an opportunity cost?
Revenue lost from selecting a different alternative
How is contribution margin calculated?
Sales minus variable cost
Lucas works for a professional consulting firm. He has been asked to compare his firm's financial performance to the performance of another firm. Which company should Lucas use as a benchmark for his company's performance
A consulting firm
Which statement is true with respect to fixed and variable costs?
A fixed cost is fixed in total and decreases per unit as the number of units increases. A fixed cost is fixed in total and decreases per unit as the number of units increases, because that constant fixed cost is spread over more units as the number of units increases.
return on sales revenue
A measure of operating performance; computed by dividing net income by total sales revenue. Similar to profit margin.
What is an important difference in the cost accounts of a merchandising company compared to a manufacturing company?
A merchandising company has no raw materials inventory or work-in-process inventory.
What costs are included in manufacturing overhead?
All manufacturing costs that are not classified as direct materials or direct labor
Paradigm Toys is a manufacturing company that produces stuffed animals. In one step of the manufacturing process, raw materials such as fabric, thread, and polyester filling are moved from the warehouse to the production floor. What would be the effect of this event on the company's books?
An increase in work-in-process inventory Correct! When raw materials are moved to the production floor, they become work in process inventory.
service business
Any organization whose main economic activity involves producing a nonphysical product that provides value to a customer.
manufacturing business
Any organization whose main economic activity involves using components or raw materials to make finished goods for sale to customers.
Why do companies allocate overhead costs based on estimated overhead numbers instead of actual numbers?
Because overhead costs must be allocated beginning the very first day of the period, but the actual numbers not available until the end of the period
Yoshida Company manufactures cell phones. Which item is a product cost for Yoshida Company?
Bonuses paid to the phone assemblers who work on the production line
Which types of costs does a manufacturer have?
Both product and period costs
Which types of costs does a merchandiser have?
Both product and period costs
Maria just started a cosmetics company. She purchases makeup and nail polish from a wholesale distributor and sells these products on social media. Which costs will Maria's new company have?
Both product costs and period costs
Estimated manufacturing overhead
Budgeted manufacturing overhead costs that are used to establish the predetermined overhead rate.
Which activity involves the process of tracking the actual performance of a company?
Controlling
A successful law firm called Kim and Lee provides legal services to large corporations and employs over 100 attorneys to represent clients. The firm does not purchase products to sell to its clients but focuses solely on providing legal counsel. Which line item must be absent from the firm's income statement?
Cost of goods sold
Which statement correctly distinguishes the uses of financial accounting information from the uses of managerial accounting information?
Financial accounting information is prepared according to a generally accepted set of rules.
What are differential costs?
Future costs that change as the result of a decision
Leilani and Diego are discussing different types of businesses. They agree that, in terms of cost flows, there are many similarities between a manufacturer of cars, such as General Motors, and a consulting company, such as McKinsey. However, they also agree that there is one very important difference in the costs being incurred by General Motors and McKinsey. What is the important difference in the costs of GM as compared to McKinsey?
GM likely has relatively high materials costs, whereas the materials costs for a McKinsey are relatively low.
What must be true of an indirect cost?
It is a cost that cannot be traced to a specific business unit or product.
What must be true of a direct cost?
It is a cost traceable to a specific business unit.
Which statement about managerial accounting data is true?
Managerial accounting data are created based on competitive needs that are unique to the organization.
Which statement accurately describes managerial and financial accounting data?
Managerial accounting data are created based on competitive needs that are unique to the organization.
Which characteristic is a unique feature of management accounting information?
Management accounting information is composed of both financial and nonfinancial data.
production prioritizing
Management's continual evaluation of various product lines and divisions' profitability in order to analyze and identify opportunities to improve profits.
Which statement identifies a difference between managerial and financial accounting?
Managerial accounting has substantial competitive value, while financial accounting is not a competitive tool.
What is a characteristic of managerial accounting systems that is not also a characteristic of financial accounting systems?
Managerial accounting includes budget and forecast data.
Which group represents the primary users of managerial accounting information?
Managers
What type of cost are the wages paid to a factory supervisor?
Manufacturing overhead
Direct materials.
Materials that become part of the product and are traceable to it
Which type of business purchases finished goods for resale?
Merchandising
Which type of business is a typical retailer?
Merchandising business
What are sunk costs?
Past costs that cannot be changed by a current decision
Company managers are important users of managerial accounting information. What are the three primary functions of company managers?
Planning, controlling, and evaluating
What is the sequence of the flow of costs through a manufacturing operation?
Purchase raw materials, transfer raw materials to production, add direct labor and manufacturing overhead costs, transfer the cost of completed goods to finished goods inventory, sell goods and transfer cost to cost of goods sold.
The C-V-P equation (or cost-volume-profit equation) is this:
Sales Revenue-Variable Costs-Fixed costs=Profit
The break-even point is the activity level at which no profit or loss is earned and is calculated as follows:
Sales revenue-Variable costs-fixed costs=$0
The contribution margin is the amount of revenue that remains to cover fixed costs and provide profit. It is calculated as follows:
Sales revenue-variable costs
Jack just started a business that develops websites for other businesses. Which type of organization is Jack's new business?
Service organization
indirect materials
Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.
operational budgeting
Sometimes known as profit plans, are used by managers to establish and communicate daily, weekly, and monthly goals (also known as standards) for the organization.
What does long-run planning include?
Strategic planning and capital budgeting
cost-volume-profit (C-V-P) analysis
Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.
Opportunity costs
The benefits lost or forfeited as a result of selecting one alternative course of action over another.
Which statement below is true with regard to variable costs?
Total variable costs change in relationship to the volume of activity.
Financial Accounting:
Uniform across companies (generally accepted accounting principles) Restricted to financial data Data often made public Used primarily by investors and creditors in deciding whether to provide capital to the company
Management Accounting:
Unique competitive tool Both financial and nonfinancial data Usually kept secret from competitors Used for internal planning, control, and evaluation
What is an example of an indirect cost in a hospital?
Utility costs for the hospital building
Which item is a period cost?
Wages of secretarial staff
Baby Jude Company manufactures car seats. Your colleague works in the sales and marketing department, and is trying to understand the differences between a product and a period cost for Baby Jude Company including examples for both. Which item is a period cost for Baby Jude Company?
Wages of the janitors in the executive office building
cost of goods manufactured statement
a confidential internal managerial accounting information statement and is included as part of the preparation of the income statement
segment
a subsection of a company that is distinct from the whole company based on its operational activities, customers, or geographic location
product costs
costs that are a necessary and integral part of producing the finished product. (Balance Sheet) inside the production facility
Indirect costs
costs that are normally incurred for the benefit of several segments. Indirect costs can also be either fixed or variable, although they are nearly always fixed.
period costs
costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued(outside the production Facility)
Direct costs
costs that can be physically traced to a business unit or segment being analyzed
variable costs
costs that vary directly with the level of production
The predetermined overhead rate is
created by dividing estimated manufacturing overhead by the estimate of the expected level of activity (for example, direct labor hours) to be used to allocate overhead during the year.
Manufacturing overhead accounting
effectively a temporary holding account that simultaneously records actual overhead costs as they occur irregularly throughout the year while regularly transferring allocated overhead costs into the asset account called work-in-process inventory
work-in-process inventory
goods that are partway through the manufacturing process but not yet complete
Manufacturing overhead
includes all manufacturing costs incurred during the manufacturing process that are not classified as direct materials or direct labor
raw materials inventory
inventory of raw materials that have not yet begun the production process
finished goods inventory
manufactured items that are completed and ready for sale
Actual manufacturing overhead
manufacturing costs other than direct materials and direct labor—in other words, these are the indirect manufacturing costs that are not assigned to specific products. They are recorded as costs are incurred.
return on investment
net profit after taxes divided by total assets
The three functions of management are...
planning, controlling, and evaluating
Sunk costs
past costs that cannot be changed as the result of a future decision.
Short-run planning
production and process prioritizing, and operational budgeting (profit planning).
Underapplied manufacturing overhead
the amount of actual overhead expenses incurred during the period exceeded the amount of overhead applied during the period
Overapplied manufacturing overhead
the amount of actual overhead expenses incurred during the period was less the amount of overhead applied during the period
Target income
the amount of income that will enable management to reach its objectives
Applied manufacturing overhead
the amount of the manufacturing overhead that is assigned to the goods produced. Applied overhead costs are entered as production takes place and are applied to work-in-process on the basis of a predetermined overhead rate.
economy of scale
the cost per unit of weight decreases as the size of the shipment increases
differential costs
the future costs that change as a result of that decision.(The term differential is also commonly applied to future revenues that will be affected by the decision.)
Direct labor
the hourly wages and other payroll-related costs and expenses (as mandated by federal and state payroll rules and regulations) of factory employees who work directly on products
contribution margin ratio
the percentage of sales revenue left after variable costs are deducted
capital budgeting
the process of planning and managing a firm's long-term investments
cost behavior
the way in which a cost reacts to changes in the level of activity
merchandising business
which is a business that purchases finished goods for resale
In a manufacturing business, costs are accumulated in..
work-in-process inventory, then are transferred to finished goods inventory, and then to cost of goods sold.