Chapter 2 Basic Cost Accounting Concepts

Consider the following taken from a schedule of cost of goods manufactured: Raw-material inventory, beginning $45,000 Purchases of raw materials $280,000 Raw material used $225,000 Direct labor $300,000 Total manufacturing overhead charged to production $450,000 Total manufacturing costs $975,000 What was the amount of the ending raw-material inventory?

$100,000 Raw materials used = Beginning raw-material inventory + Purchases of raw material - Ending raw-material inventory. $45,000 + $280,000 - X = $225,000, where X is the ending raw-material inventory. The ending raw materials inventory is $100,000 (= $325,000 - $225,000).

Behavioral Costs

-demonstrates how costs really behave or react to volume activity -Variable costs -Fixed costs -Semi-variable costs -Step fixed -Curvilinear -Step variable

Curvilinear

An expense that increases at an inconsistent rate as production volume increases

Sunk Costs

Costs that have been spent; irrelevant

Variable costs

Cumulative costs that change with activity volume (until, machine hours, etc.) -Variable Costs per unit does not change with volume Ex. direct labor and material costs

Expenses

Matching of expenses to revenues

Service

No inventory for a service firm -All costs are operating costs -No inventory is found in the balance sheet and there is no costs of goods sold in the income statement

Which of the following types of business would not incur a product cost?

Service provider These would: retailer, wholesaler, manufacturer

Indirect Labor

Supports building the product but cannot be directly traced to building the product. ex. plant supervisor, clean-up crews and machine maintenance crews

Marginal Costs

The additional cost of one more unit Relevant

Differential Costs

The difference between costs of alternate future actions -Values of alternates are different -Relavent costs

Average Cost

The total cost, both fixed and variable, divided by the total units sold/ produced -Irrelevant

Consider the following taken from a schedule of costs of goods manufactured: Raw Material used $140,000 Direct labor $500,000 Total manufacturing overhead charged to production $600,000 Beginning Work-in-process $15,000 Cost of goods manufactured $1,205,000

The total manufacturing costs are $1,240,000 ($140,000 + $500,000 + $600,000). Ending work-in-process inventory is $50,000 (= $1,240,000 + $15,000 - X = $1,205,000, where X is the ending work-in- process inventory) Answer is 50,000

Work in process

inventory that is being worked on and is not yet completed

The sacrifice made, usually measured by the resources given up, to achieve a particular purpose is called which of the following?

A cost

Inventory or Product Costs

As costs incurred, they are captured in inventory accounts

Manufacturing

Balance Sheet: Raw material Work in Process Finished Goods Income Statement: Costs of goods sold

Which of the following production processes is described as a process with multiple products and low volume?

Batch

Opportunity costs

Benefit of the next best alternate that was rejected -Value consists of the lost revenue and the costs really saved by rejecting this alternate -Relavent costs

Direct costs

Can be traced to building the product or providing the service

Indirect Costs

Cannot be traced to building the product or providing the service, although they support the product build or service -Costs are allocated on a reasonable basis

Semi-variable costs

Combo of fixed and variable costs Ex. phone bill, company with permanent employees, and temporaries added as volume volume increases

Which of the following refers to a cost that be substantially influenced by a manager?

Controllable cost

Consider the following: Units Total Per Unit 100,000 Cost A $50,000 $0.50 Cost B 50,000 0.50 Cost C 45,000 0.45 200,000 Cost A $100,000 $0.50 Cost B 50,000 0.25 Cost C 50,000 0.167 300,000 Cost A $45,000 $0.45 Cost B 60,000 0.30 Cost C 75,000 0.25 Which of the costs, A, B, or C, is a variable cost?

Cost A A variable cost changes in total in direct proportion to a change in the level of activity (or cost driver) and remains unchanged per unit of activity. Cost B is a fixed cost-it remained unchanged in total at different levels of activity and varied inversely per unit with increases in activity levels. Cost C is neither a variable cost nor a fixed cost.

Step Variable

Cost that generally varies with the level of activity, but which tends to be incurred at certain discrete points and to involve large changes in amounts when such a point is reached.

Operating or Period Expenses

Costs are not involved with building the product -Costs before or after the product has been built- sales, services, billing the customer, product delivery, research and development

Overhead Costs

Costs of activities that support building of the product, but cannot be direct traced to the product build -Indirect labor -Indirect material -Other overhead costs

Out of Pocket costs

Costs paid for via cash or incurring debt -Not included under out of pocket costs spread over there life of an asset that had already been paid for Ex. depreciation for building or machine -Relavant cost

Relavent Costs

Costs that are future oriented and there values between the options are different

Step fixed

Costs that change with volume after major changes in volume. Ex. adding shift supervisors are required for added shifts

Fixed Costs

Cumulative costs that do not change with volume -If volume goes up, the fixed cost per unit goes down -If volume goes down, then unit fixed costs goes up Ex. depreciation, rent, supervisor salary

Prime Costs

Direct Material and Direct Labor -Combo is called total direct costs

Product Costs

Direct Materials Direct Labor Overhead Costs- Indirect labor, indirect material, other overhead costs

Cost of Goods Manufactured Schedule

Direct Materials: Raw materials inventory beg. Add Purchases of raw material Raw material available for use Deduct raw material inventory end =Raw materials used Direct Labor: given Manufacturing overhead Indirect material Indirect labor depreciation of Factory Depreciation on equipment Utilities Insurance =Total manufacturing overhead Total manufacturing costs: direct material direct labor and manufacturing overhead Total manufacturing costs Add: work in process inventory, beg. Subtotal Deduct: Work in process inventory, end =costs of goods manufactured

Conversion Costs

Direct labor and overhead -Costs of converting raw material into the finished product

Types of inventory

Direct or raw Work in process Finished goods costs of goods sold

Other overhead costs

Everything else -Depreciation of machines

Costs of Goods Sold schedule

Finished Goods inventory Beg. Add: Costs of guppies manufactured =Costs of good available for sale - finished goods inventory end =costs of goods sold

Costs of goods sold

Finished goods inventory that is sold

Indirect Material

Helps assure product built can be accomplished -costs are consumables -Ex, oil, rags to clean material, drill bits that are worn out

Direct Labor

Hours worked directly building the product

Product costs are

Initially capitalized on the balance sheet -in the period of the sale, the product costs are recognized as an expense called cost of goods sold

Costs of Goods Sold

Inventory costs of a product that has been sold

Finished goods

Inventory that is completed but not sold yet

Inventory Impact on Income Statement and Balance Sheet

Manufacturing Merchandising Service

Which of the following production processes is described as a production process with high production volume, and with many standardized components and/or customized combo of components?

Mass customization

Merchandising

Only finished goods inventory is found in the balance sheet because no product is built -Only finished products are purchased and sold only -Income statement includes costs of goods sold or a cost of sales

Which of the following refers to a cost that is a benefit sacrificed when the choice of one action precludes taking an alternative course of action?

Opportunity Cost

Correct statment

Overtime premiums should be treated as a component of manufacturing overhead

True statement

Product costs eventually affect both the balance sheet and the income statement

Direct or raw material

Raw material that is ready to be worked on

Direct Materials

Raw material that is used to build the new product Ex. metal, wood, oil and glass

Product physical flow and flow of cost info concepts

Raw material to Work in Process to finished goods to costs of goods sold

Manufacturers, such as caterpillar, have 3 broad types of inventory accounts showing up on their balance sheet.

Raw materials, work in process and finished goods

Which of the following incurs a period cost?

Retailer, wholesaler, manufacturer and service provider

Cost

Sacrifice of resources for future benefits

Which of the following is a conversion cost?

Salary paid to production line worker

Income Statement schedule

Sales revenue Less: Costs of goods sold =gross margin -selling and administrative expenses =income before taxes -income tax expense =net income

Analytical Costs

Used for future decision making -Fixed and variable costs are used for analytic purposes