Prologue & Chapter 1 ACC 202 Managerial Accounting and Cost Concepts

limitations of quality cost information

- Simply measuring and reporting quality cost problems does not solve quality problems. - Results usually lag behind quality improvement programs. - The most important quality cost, lost sales, is often omitted from quality cost reports.

Transfer of Product Costs

- When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. - Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. - Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. - When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

Why have ethical standards?

-Ethical standards in business are essential for a smooth functioning economy -Without ethical standards in business, the economy, and all of us who depend on it for jobs, goods, and services, would suffer -Abandoning ethical standards in business would lead to a lower quality of life with less desirable goods and services at higher prices

Purposes of Cost Classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

managerial accounting helps managers perform three financial activities

1. planning 2. controlling 3. decision making

ISO 9000 standards

1. quality control system is in use and the system clearly defines an expected level of quantity. 2. the system is fully operational and is backed up with detailed documentation of quality control procedures. 3. the intended level of quality is being achieved on a sustained basis.

quality of conformance

Costs incurred to prevent defects or that result from defects in products are known as quality costs.

indirect costs (allocate/apply)

Costs that cannot be easily and accurately traced to a cost object.

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.

Conversion Cost

Direct Labor + Manufacturing Overhead these costs are incurred to convert direct materials into finished products.

Prime Cost

Direct Materials + Direct Labor

Uses of Quality Cost Information

Help managers see the financial significance of defects Help managers identify the relative importance of quality problems Help managers see whether their quality costs are poorly distributed

external failure costs

Incurred as a result of defective products being delivered to customers

internal failure costs

Incurred as a result of identifying defects before they are shipped

appraisal costs

Incurred to identify defective products before the products are shipped to customers

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to the finished product. example; a radio installed into a car, apple uses it in its iPhones, and the doors that Whirlpool installs on its refrigerators.

true or false only those indirect costs associated with operating the factory are included in manufacturing overhead.

TRUE

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

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. also called managed fixed costs

Y= a + bX

Y= The total mixed cost a= The total fixed cost (the vertical intercept of the line b= The variable cost per unit of activity (the slope of the line) X= The level of activity Because the variable cost per unit equals the slope of the straight line, the steeper the slope, the higher the variable cost per unit. This equation makes it easy to calculate the total mixed cost for any level of activity within the relevant range

variable costs

a cost that varies in total, in direct proportion to changes in the level of activity. cost per unit is constant. examples- costs of goods sold for a merchandising company, direct materials, direct labor, indirect materials, supplies, etc.

activity base

a measure of whatever causes the incurrence of a variable cost sometimes referred to as a cost driver. examples- direct labor hours, machines hours, units produced, and units sold.

selling costs

all costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer sometimes called order getting and order filling costs. can be indirect of direct costs examples: advertising, shipping, sales travel, sales commissions, and cost of finished goods warehouses.

differential costs

also called incremental costs are the difference in cost between any two alternatives differential revenue- difference between revenue between two alternatives. both are always relevant to decisions. can either be fixed or variable.

Period Costs

are all the costs that are not product costs. include all selling costs and administrative costs an expense on an income statement expensed on the income statement in the period in which they incurred using the usual rules of accrual accounting.

t/f non manufacturing costs

are also called selling, general, and administrative costs or just selling and admin costs.

Cost of Goods Sold Equation

beginning merchandise inventory + purchases - ending merchandise inventory

finished goods

consist of completed units of product that have not yet been sold to customers.

work in process inventory

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 Costs(Trace)

costs that can be easily and accurately traced to a cost object

sunk costs

costs that have already been incurred and cannot be recovered these should not be ignored

manufacturing overhead examples

depreciation of manufacturing equipment utility costs property taxes insurance premiums incurred to operate a manufacturing facility

quality cost report

details the prevention costs, appraisal costs, and costs of internal and external failures that arise from the company's current quality control efforts

administrative costs

include all costs associated with the general management of an organization rather than with manufacturing or selling examples: executive compensation, general accounting, secretarial, public relations, etc.

product costs

include all costs involved in acquiring or making a product. they "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale. direct materials, direct labor, manufacturing overhead inventory(balance sheet) to costs of goods sold (income statement) they are recorded as expenses in the period in which the related products are sold(typically called cost of goods sold) *& matched against sales on the income statement.

Manufacturing Overhead

includes all manufacturing costs except direct materials and direct labor, portion of raw materials known as indirect materials and labor. only indirect costs associated w operating the factory are included in this.

Raw Materials Inventory

includes any materials that go into the final product.

appraisals costs

incurred to identify defective products before the products are shipped to customers.

common costs

is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. it is a type of indirect cost.

fixed costs

is a cost that remains constant, in total, regardless, of changes in the level of activity. not affected by changes in activity if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. manufacturing overhead include these such as depreciation, insurance, property taxes, rent, etc.

Direct Labor

labor costs that can be easily traced to individual units of product, sometimes called "touch labor" examples: assembly line workers at Toyota, carpenters at the home builder KB Home, and electricians who instal equiptment on aircraft.

Prologue

none

Managerial Accounting

providing information to managers within an organization within an organization so that they can formulate plans, control operations, and make decisions.

Indirect Materials

raw materials whose costs cannot be easily or conveniently traced to finished products

cost behavior

refers to how a cost reacts to changes in the level of activity could be fixed, variable, or mixed

committed fixed costs

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

Contribution Format Income Statement

sales - variable expenses = contribution margin - fixed expenses = net operating income used as internal planning and decision making tool.

Prevention Costs

support activities whose purpose is to reduce the number of defects

opportunity cost

the potential benefit that is given up when one alternative is selected over another these costs are not usually found in accounting records but must be explicitly considered in every decision.

Relevant Range

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

Traditional Income Statement Format

used primarily for external reporting sales-cost of goods sold= gross margin- selling and admin expenses = net operating income

inventoriable costs

when units of product are sold, their costs are released from inventory as expenses. because product costs are initially assigned to inventories, they are known as.