acct mini exam 1

transfer of product costs

- When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. - Direct labor & 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 COGS

plantwide predetermined overhead rate

1 overhead rate for the whole company to allocate all manufacturing overhead costs to jobs based on their usage of direct labor hrs. may not be most accurate. it is often Over Simplistic & incorrect to assume that direct labor hrs is a company's only manufacturing overhead cost driver. Formula: Estimated manufacturing overhead Divided By total estimated activity

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

job-order costing systems used when:

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job & maintaining cost records for each job. (architect vs. single engineer- Unique)

activity cost pool

A "cost bucket" in which costs related to a single activity are accumulated

balance sheet equation

Assets = Liabilities + Stockholders' Equity

cost of direct materials used in production

Beginning Inventory + Purchases - indirect Materials - Ending Inventory of Materials

Cost of goods sold

COGS= beginning merchandise inventory + purchases - ending merchandise inventory

types of fixed costs

Committed: long term, can't be significantly reduced in the short term. include real estate taxes & top management salaries. Cant be easily changed & often lock a company in a multiyear decision Discretionary: (a.k.a Managed fixed costs) may be altered in the short term by current managerial decisions. usually arise from annual spending decisions by management. include management training programs & advertising

indirect costs

Costs that cannot be easily/ conveniently traced to a unit of product or other cost object

cost classifications used in Decision Making

Differential costs (or relevant/incremental costs): difference in cost between any 2 alternatives. Can be either fixed or variable. always relevant in making business decisions. A difference in revenue between 2 alternatives: Differential (incremental) revenue. Opportunity costs: potential benefit that is given up when 1 alternative is chosen over another (not usually found in accounting records) Incremental cost: the difference in costs between the 2 alternatives

job-order costing- a managerial perspective

Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions made by managers. 1. Job-order costing systems can Accurately trace Direct materials & Direct labor costs to jobs. 2. Job-order costing systems often Fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs. May inaccurately assign costs to jobs due to an inappropriate allocation base If more than 1 overhead cost driver can be identified, job cost Accuracy is Improved by using Multiple Predetermined overhead rates (compute the total cost & the unit product cost of a job using multiple predetermined overhead rates)

absorption costing

Is the most common approach to product costing throughout the world. A costing method that includes all manufacturing costs, fixed & variable (direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs). The U.S. requires absorption costing for external financial reports.

classifications used to prepare financial statements

Product costs: (inventoriable costs) include direct materials, direct labor & manufacturing overhead. All the costs that are involved in acquiring/ making a product. "Attach" to a unit of product as it is purchased/ manufactured & they stay attached to each unit of product as long as the unit remains in inventory awaiting sale. Period costs: include all selling costs & administrative costs. Ex: property taxes. Are always expressed on the income statement in the period which they were incurred. are recorded as expenses as incurred & do Not flow through the inventory accounts

gross margin

Sales - COGS

contribution margin

Sales revenue - all Variable Expenses

Non-manufacturing costs

Selling costs: costs necessary to secure the order & deliver the product, can be either direct or indirect costs. Include advertising, sales salaries, sales commissions Administrative costs: All executive, organizational & clerical costs. can be either direct or indirect costs. Ex: company president's salary, sales commissions, property taxes associated w/ a companys administrative facility. Nonmanufacturing costs are not assigned to individual jobs, they're expensed in the period incurred

computing predetermined overhead rates

The predetermined overhead rate is computed before the period begins using a 4 step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period & the variable manufacturing overhead cost per unit of the allocation base. 3. Using Y = a + bX, estimate the total amount of manufacturing overhead, Where, 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 4. Compute the predetermined over head rate POHR= Estimated total manufacturing overhead /Divided By Estimated total allocation base

3 cost classifications for predicting cost behavior

Variable cost: Cost that varies, in total, in direct proportion to changes in the level of activity, a variable cost per unit is constant. Includes COGS for a merchandising company, direct materials & commissions. Step-Variable costs: can be adjusted quickly as conditions change, treated essentially as VC for most purposes, include salaried employees Fixed cost: (committed & discretionary) Cost that remains constant, in total, regardless of changes in the level of activity w/in the relevant range. If expressed on a per unit basis, the avg. fixed cost per unit varies inversely w/ changes in activity. (FC per unit decrease as activity level rises, vice versa). Shouldn't be expressed on a per unit basis when making decisions (bc makes them look like variable costs). Includes rent, supervisors salary. as the level of activity moves outside of the relevant range FC in/decreases in discrete steps rather than linear. Mixed costs: Contain both variable & fixed elements. The total mixed cost line can be expressed as an equation Y=a+bX, where Y= total mixed cost, a= total fixed cost (the vertical intercept of the line), b= the variable cost per unit of activity (slope of the line), X= level of activity. When mixed costs are represented by a straight line, the Steeper the slope, the Higher the variable cost per unit. Has a minimum cost of having a service available & ready for use

Activity-based costing

When a company creates overhead rates based on the activities that it performs. an alternative approach to developing multiple predetermined overhead rates. Managers utilize to more accurately measure the demands that jobs, products , customers & other cost objects make on overhead resources. When a company implements ABC, overhead costs shifts from high-volume to low-volume products

cost driver (or allocation base)

a factor that causes overhead costs. a measure such as direct labor hrs. or machine hrs used to assign overhead costs to products & services. an essential quality of an overhead allocation base is that it must be common to all the companys products & services. an allocation base that doesnt drive the overhead costs will not accurately measure the cost of overhead use

activity rate

a predetermined overhead rate for each activity cost pool

disposition of under/overapplied overhead

any remaining balance in thr manufacturing overhead account is disposed in one of 2 ways: 1. it can be closed to COGS 2. it can be closed proportionally to Work in Process, Finished goods & COGS

cost object

anything that cost data are desired, including, products, customers, departments etc. Include organizational subunits

MFG. overhead T account

applied: left side debit side actual: right side credit side if actual & applied manufacturing overhead arent = , a year end adjustment is required

normal cost system

assigns overhead to jobs using predetermined overhead rate x actual amount of allocation base incurred by the job

Unadjusted COGS

beginning finished goods + Cost of goods manufactured - ending finished goods

cost of goods available for sale

beginning finished goods inventory + cost of goods manufactured

manufacturing company

buy raw materials, transforming them to finished goods

merchandising company

buying & selling items

barcodes

can be used to automatically record & post Direct labor costs to jobs

differential net income from proposal

change in revenues - change in variable cost - change in fixed cost

direct materials & labor

charge direct labor & materials costs to each job as work is performed/ issued and record on the job cost sheet

Job Order Costing

companies that make many different products each period. is used in manufacturing firms & service industries. many different products, jobs, or services are produced each period

managerial accounting

concerned w/ providing info to managers w/in an organization so they can formulate plans, control operations & make decisions

financial accounting

concerned w/ reporting financial info to external parties (stockholders, creditors, & regulators)

Accountant's straight line approximation

constant unit variable cost a straight line closely approximates a curvilinear variable cost w/in the relevant range

bill of materials

contains the quantity of each type of direct material needed to complete a unit of product

common costs

costs shared by multiple cost objects in a company. indirect costs incurred to support a # of cost objects. Cannot be traced to any individual cost object

direct costs

costs that Can be easily/ accurately traced to a unit of product or other cost object. Ex: direct material & direct labor

activity dictionary

defines each of the activities that will be included in the activity-based costing system and how the activities will be measured

conversion cost

direct labor + overhead costs incurred to change raw materials into finished products

total cost of a job

direct materials + direct labor + predetermined overhead rate x direct labor costs

total manufacturing costs added to production

direct materials used in production + direct labor + manufacturing overhead applied to work in process

3 basic manufacturing cost categories schedule of Cost of goods manufactured & COGS

direct materials, direct labor, manufacturing overhead (these are all product costs)

job cost sheets

document that records the materials, labor & manufacturing overhead costs charged to a job -Subsidiary Ledger: all of a companys job cost sheets combined -Balance Sheet reporting: provide a financial record that explains what specific jobs compromise the amounts reported in Work in Process and Finished Goods on the balance sheet -Income Statement reporting: set of financial records that explains what specific jobs compromise the amount reported in COGS and selling & administrative expense on the income statement

time ticket

document used to record the hrs workers spend on each job & task. to keep track of labor time & costs, many firms replaced paper time tickets w/ computerized systems

indirect labor cost

employees such as janitors (wages), security, supervisors salary

ending balance in retained earnings as part of stockholders equity

ending balance in retained earnings= beginning balance in retained earnings + net operating income - dividends

cost measure

expresses how much of the activity is carried out & is used as the allocation base for applying overhead costs

cause of inaccurately assigning costs to jobs

generally due to indirect manufacturing cost assignment which often relates to the choice of an allocation base

net operating income

gross margin - selling & administartive expenses

sunk costs

have already been incurred & cant be changed by any decision ever. these irrelevant costs should be ignored & disregarded when making decisions

Manufacturing Overhead (a.k.a. indirect manufacturing cost, factory overhead, or factory burden)

includes all manufacturing costs Except direct materials & direct labor (cant be readily traced to finished product) Includes many different items, Indirect Labor costs & Indirect Materials that can be easily/ conveniently traced to specific units of product, are allocated to all jobs rather than directly traced to each job. is a Conversion cost. Also contains FC. Ex: depreciation, utility costs, property taxes, insurance, supervisors salary, maintenance). factory labor charges that cannot be easily traced to a job are treated as manufacturing overhead. Total manufacturing overhead costs tend to remian fairly Constant. Is a clearing account, always has beginnign & end balance of 0. This account is used to record the actual overhead costs & the amount of manufacturing overhead Applied to production using the Predetermined overhead rate

the value of work in process

is = to the cost of all unfinished jobs

multiple predetermined overhead rate system

is more complex & accurate than a plantwide overhead rate

the relevant range of activity for a fixed cost

is the range of activity over which the graph of the cost is flat. relevant range of activity pertains to fixed costs as well as variable costs

unit product cost

is the same as total job cost Divided By the # of units produced and the same as avg. product cost per unit unit product cost is different from the cost that would be incurred of another unit were produced bc the unit product cost is an avg Not an incremental cost

allocation base such as direct labor hrs & dollars, units of production, or machine hrs

is used to assign manufacturing overhead to individual jobs bc: its impossible to trace overhead costs to particular jobs, manufacturing overhead consists of many different items (from machine parts to salaries), many types of overhead are fixed even though output fluctuates during the period

direct labor (touch labor)

labor costs that can be easily traced to individual units of product. can be a prime cost or conversion cost

an activity base

measures whatever causes costs to vary. A.k.a, a cost driver. include machine hrs, units sold, & direct labor hrs

cost plus pricing

occurs when a markup % is added to the cost of a job. when a predetermined markup is applied to a base to determine the target selling price

allocation base for job-order costing system

often dont reflect how jobs actually use overhead resources. the allocation base in the predetermined overhead rate must Drive the overhead cost to improve job cost accuracy (cost driver)

manufacturing product costs (Flow of costs)

prior to being recorded on the income statement, these costs flow through these categories Raw Materials: any materials that go into the final product. is na asset account Work in Process: units of product that are only partially complete & will require further work before they are ready for sale to the customer. actual direct labor costs and materials cost & applied manufacturing overhead Finished Goods cost: completed units of product that haven't been sold yet Cost of good manufactured: manufacturing costs associated w/ the goods that were finished during the period

overhead application

process used to assign manufacturing overhead cost to jobs/products. Formula for applying overhead to a specific job: predetermined overhead rate x amount of actual allocation base incurred by job (direct labor hrs)

direct materials

raw materials that become an integral part of the finished product & that can be easily/ conveniently traced directly to the finished product. is a prime cost

cost behavior

refers to how a cost will change as activity level changes& categorizes costs as Fixed, Mixed, & Variable

materials requisition form

specifies the type & quantity of materials to be drawn from the storeroom & the job that will be charged for the cost of the materials. Used for making journal entries in accounting records, & controlling the flow of materials into production

avg. manufacturing overhead cost per unit

tends to vary from 1 period to the Next when the # of units produced fluctuate

financial statement adjust for overhead applied

the COGS reported on a companys income statement must be adjusted to reflect under/overapplied overhead -Underapplied overhead increases COGS & decreases Net Operating income -Overapplied overhead decreases COGS & increases Net Operating income

Matching Principle

the accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized

job order costing for financial statements to external parties

the amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period. -When a company applies Less overhead to production than it actually incurs, it creates Underapplied Overhead -When it applies more overhead to production than it actually incurs, results in Overapplied Overhead.

cost structure

the relative proportion of each type of cost in an organization

marginal revenue

the revenue from selling 1 additional unit

prime cost

the sum of direct materials cost & direct labor cost

the contribution format

used primarily by management, as an internal planning & decision making tool, assists management decision making & separates costs into their fixed & variable components. making easier to predict how decisions affect the future. focus on cost behavior. income statement makes a distinction between fixed & variable costs, aids in decision making & distinguishes between FC & VC

the traditional format

used primarily for external reporting. focused on cost classifications income statement focused on product & period costs. Net income: Gross Margin - Total selling & admin expense. COGS reports the Product costs attached to merchandise sold during the period, while selling & administrative expenses report all Period costs that have been expensed as incurred

predetermined overhead rate (POHR)

used to apply overhead to jobs is determined before the period begins. POHR= Estimated total manufacturing overhead cost for the coming period Divided By Estimated total units in the allocation base for the coming period. (ideally the allocation base is a cost driver that causes overhead) Used to calc. manufacturing overhead. Rely on estimated data bc: actual overhead for the period isn't known until the end of the period inhibiting the ability to estimate job costs during the period, actual overhead costs can fluctuate seasonally which misleads decision makers.