Cost Accounting Unit 1

direct materials cost

acquisition of costs of all materials that eventually become part of the cost object (WIP & then finished goods) & can be traced to the cost object in an economically feasible way. Aquisistion costs of direct materials include: freight-in (inward delivery) charges, sales tax, & custom duties. Ex of Direct materials cost are the steel and tired used to make the BMW X5, and the computer chips used to make cellular phones.

actual manufacturing overhead cost rate

actual total indirect costs/actual total quantity of cost-allocation base

3 methods for adjusting over/underapplied overhead

adjusted allocation rate approach- all allocations are recalculated with the actual, exact allocation rate proration approach- the difference is allocated between cost of goods sold, work in process, and finished goods based on their relative sizes. write off approach- the difference is simply written off to cost of goods sold

inventoriable costs

all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. ex: indirect manufacturing labor, indirect materials, plant insurance, deprec.-plant, building, and equip., plant utilities, repairs and maintenance- plant, equipment leasing costs. The manufacturing costs of finished goods include direct materials, other direct manufacturing costs such as direct manu. labor, and manufacturing overhead costs such as supervision, production control, & machine maintenance

prime cost

all direct manufacturing costs (direct materials costs + direct manufacturing labor costs = prime costs)

conversion cost

all manufacturing costs other than direct material costs. Represents all manufacturing costs incurred to convert direct materials into finished goods. =direct Manu. Costs + Manu. OH Costs

period costs

all other costs other than COGS.( exs: market,distributions, & customer service costs; research and development costs.) For manufacturing companies, period costs are all nonmanufacturing costs (ex: design costs and costs of shipping products to customers)

process costing

allocates system accounting for mass production of identical or similar products (ex. oil refining, orange juice, soda pop)

source document

an original record (such as labor time card on which employee's work hours are recorded) that supports journal entries in an accounting system

margin of safety

answers the "what-if" question: If budgeted revenues are above the break even and drop, how far can they fall below budget before the break even point is reached? A low margin of safety increases the risk of loss while a high margin of safety decreases the risk of loss

direct costs

any cost that can be directly related to a cost object at reasonable cost.

cost pool

any logical grouping of related cost objects

cost object

anything for which a measurement of cost is desired- ex: a product, such as iMac computer, or a service, such as the cost of repairing an iMac computer, a project , a customer, a brand category, an activity, and a department

cost object

anything of interest for which a cost is desired

direct labor

compensation of all manufacturing labor that can be traced to the cost object (product/inventoriable costs)

labor-time sheet

contains info about the amount of labor time used for a specific job in a specific department

materials-requisition record

contains information about the cost of direct materials used on a specific job and in a specific department

cost allocation base

cost driver is used as a basis upon which to build a systematic method of distributing indirect costs

actual costing

costing system that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs . It allocates indirect costs based on the actual indirect-cost rates times the actual quantities of the cost allocation bases

Indirect costs of a cost object

costs related to a particular cost object that can't be traced to that cost object in a cost-effective way.- ex: the costs of supervisors who oversee multiple products, one of which is the iMac, or the rent paid for the repair facility that repairs many different Apple computer products besides the iMac . Indirect costs are allocated using the cost allocation method

Direct costs of a cost object

costs related to a particular cost object that cannot be traced to that cost object in an economically feasible way (cost-effective way) - ex:the cost of purchasing the main computer board or the cost of parts used to make an iMac computer

operating leverage

describes the effects that fixed costs have on changes in operating income as changes occur in units sold, expressed as changes in contribution margin

indirect manufacturing

factory costs that are not traceable to the product in an economically feasible way. exs: lubricants, indirect manufacturing labor, utilities, ad suplies (product/inventoriable costs)

financial accouting

focus on reporting to external users including investors, creditor, and governmental agencies. Must be based on GAAP.

contribution income statement

groups costs into variable costs and fixed costs to highlight contribution margin

direct manufacturing labor costs

includes the compensation of all manufacturing labor that can be traced to the cost object (WIP & then finished goods) in an economically feasible way . Ex: wages & fringe benefits paid to machine operators & assembly line workers who convert direct materials purchased to finished goods

managerial accouting

measures, analyzes, and reports financial and nonfinancial info to help managers make decisions to fulfill organizational goals. Not GAAP Compliant.

overallocated indirect costs

occur when the allocated amount of the indirect costs in an accounting period is greater than the actual (incurred) amount (aka overapplied/overabsorbed)

underallocated indirect costs

occurs when the allocated amount of direct costs in an accounting period is less that the actual amount (aka underapplied/underabsorbed)

net income

operating income + nonoperating revenues (such as interest revenue) - nonoperating costs (such as interest cost) - income taxes

finished goods

products completed and ready for sale. Goes in the income statement. Add beginning inventory to COGM & deduct ending FG for gross profit

work in process

products started but not yet completed

service-sector companies

provides services (intangible items). Does not hold inventories of intangible products

merchandising- sector companies

purchase and then sell tangible items w/o changing basic form. they hold only one type of inventory, called merchandise inventory

manufacturing- sector companies

purchase materials and components and convert them into finished goods. All manufacturing costs are inventoriable for this sector.

sales mix

quantities (or proportion) of various products (or services) that constitute total unit sales of a company

break even point

quantity of output sold at which total revenues equal total costs- that is the quantity of output sold that results in $0 of operating income

cost allocation

refers to assigning indirect costs

cost of goods manufactured

refers to the cost of the goods brought to completion, whether they were started before or during the current accounting period.

fixed costs

remain unchanged in total regardless of changes in the related level of activity or volume. Becomes smaller and smaller on a per unit basis as number of units assemble increases.

direct materials

resources in stock and available for use; acquisition costs of all materials that will become part of the cost object (inventoriable costs)

adjusted allocation-rate approach

restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates

PV graph

shows how changes in the quantity of units sold affect operating income

cost tracing

specific term for assigning direct costs

cost volume profit analysis

studies the behavior & relationship among these elements as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product

overtime labor costs

studies the behavior and relationship among these elements as changes occur in the elements sold, the selling price, the variable cost per unit, or the fixed costs of a product.

job costing

system accounting for distinct cost objects called jobs. Each job may be different from the next, and consumes different resources

Manufacturing Overhead Allocated

the amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate multiplied by actual quantity used of the allocation base (budgeted rate X actual quantity used of the allocation base)

relevant range

the band of normal activity (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost

contribution margin percentage

the contribution per dollar of revenue. Companies use this as a handy away to calculate contribution margin for different dollar amounts of revenue.

job costing system

the cost object is a unit or multiple units of a distinct product or service called a job

product cost

the sum of all costs assigned to a product for specific purpose. different purposes can result in different measures of product cost. such as pricing and product mix decisions, contracting w/ government agencies, or preparing financial statements for external reporting under GAAP

WIP Control Account

Account that product costs are accumulated in- Direct materials Used; direct labor incurred; & factory overhead allocated or applied

manufacturing overhead control account

Account where actual indirect costs (overhead) are accumulated

period cost

All costs on the income statement other than COGS. Ex: marketing, distribution, and customer service costs ; R&D costs. For manufacturing companies, period costs are all nonmanufacturing costs, ex: designing costs, & costs of shipping products to customers, salaries of sales people, deprec. on computers, other equipment used in marketing, & cost of leasing warehouse space for distribution. For merchandising companies, period costs are all costs not related to the COGP for resale.

contribution margin per unit

useful tool for calculating contribution margin & operating income. CM per unit recognizes the tight coupling of selling price & variable cost per unit.

budgeted indirect cost rate

using indirect-cost rates gives rise to normal costing. Budgeted indirect cost rate = budgeted annual indirect costs/ budgeted annual quantity of the cost-allocation base

idle time

wages paid for unproductive time caused by lack of orders,machine or computer breakdowns , work delays, poor scheduling, and etc.

sensitivity Analysis

CVP provides structure to answer a variety of "what-if" scenarios. "what" happens to profit "if": -selling price changes -volume changes -cost structure changes -variable cost per unit changes -fixed cost changes Is a simple approach to recognizing uncertainty, which is the possibility that an actual amount will deviate from an expected amount.

variable cost

Changes in total proportion to changes in the related level or total activity of or volume within the relevant range of activity

cost benefit approach

Commonly used. Benefits generally must exceed costs as a basic decision rule.

Professional ethics

Competence; Confidentiality; Integrity; Objectivity

finished goods inventory

Completed but not yet sold

variable costs

Costs that change in direct proportion to with a change in volume within the relevant range of activity

types of manufacturing inventories

Direct materials - resources in sock & available for use Work-in-process (or progress) - products started but not yet completed Finished goods- products completed and ready for sale

direct materials inventory

Direct materials in stock and awaiting use in the manufacturing process. Ex: computer chips & components needed to manufacture cell phones

Work in Process Inventory

Goods partially worked on but not yet completed. Ex: cell phones at various stages of completion in the manufacturing process. The manufacturing costs of finished goods include direct materials, other direct manufacturing costs such as direct manu. labor, and manufacturing overhead costs such as supervision, production control, & machine maintenance. All these costs are inventoriable: They are assign to WIP inv. until the goods are completed and then to finished goods inventory until the goods are sold.

contribution margin

Indicates why operating income changes as the number of units sold changes. Total Revenue-Total Variable Costs

degree of operating leverage

Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of sales fluctuations on operating income. Contribution Margin/Operating Income

proration

Spreads underallocated overhead or overallocated overhead among ending WIP inventory, finished goods, & COGS. Materials inventory isn't included in this proration, because no manufacturing overhead costs have been allocated to it.

Key Success Factors

The dimension of performance that customers expect, and that are key to the success of a company include: Cost & Efficiency; Quality; Time; Innovation.

Value

The sequence of business functions in which customer usefulness is added to products or services. Consists of 1.) Research & Development 2.) Design 3.) Production 4.) Marketing 5.) Distribution 6.) Customer Service

overtime premium

Usually considered to be part of indirect costs or overhead. wage rate paid to workers (for both indirect labor & direct) in excess of their straight-time wage rates

cost accumulation

a collection of cost data in an organized manner

actual cost

a cost that has occured

normal costing

a costing system that (1) traces direct costs to a cost object by using the actual direct-cost rate times the actual quantities of the direct-cost inputs and (2) allocates indirect costs based on the budgeted indirect-cost rate time the actual quantities of the cost-allocation bases

cost assignment

a general term that includes gathering accumulated costs to a cost object. This includes: - tracing accumulated costs with a direct relationship to the cost object and-allocating accumulated costs with an indirect relationship to a cost object

budgeted cost

a predicted cost

undercosting

a product consumes a high level of resources but is allocated low costs per unit

overcosting

a product consumes a low level of resources but is allocated high costs per unit

cost driver

a variable that causally affects costs over a given time span

products are sold to customers on credit

accounts receivable control xx sales xx the associated costs are transferred to an expense (cost) account cost of goods sold yy finished goods control yy

5 step decision making process in planning and control

1. Identify the problem and uncertainties 2. obtain info 3. make predictions about the future 4. Make decisions by choosing between alternatives, using cost volume profit analysis. 5. implement the decision, evaluate performance, and learn

foundational assumptions in CVP

1. changes in production/sales are the sole cause for cost and revenue changes 2. total costs consist of fixed costs and variable costs 3. revenue and costs behave and can be graphed as a linear function 4. selling price, variable cost per unit, and fixed costs are all known and constant 5. in many cases only a single product will be analyzed. if multiple products are studied, their relative sales proportions are known and constant 6. the time value of money (interest) is ignored

7 step job costing

1. identify the job that is the chosen cost object 2. identify the direct costs of the job 3. select the cost allocation base(s) to use for allocating indirect costs to the job 4. match indirect costs to their respective cost-allocation base(s) 5. calculate on overhead allocation rate 6. allocate overhead costs tp the job 7. compute total job costs by adding all direct and indirect costs together

Planning and control

5 Step Decision Making Process 1.) Identify the problem & uncertainties. 2.) Obtain info. 3.) Make predictions about the future. 4.) Make decisions by choosing between alternatives. 5.) Implement the decision, evaluate performance, & learn

operating income

= total revenues from operations - COGS & - operating (period) costs (excluding interest expense & income taxes)

revenue driver

A variable, such as volume, that causally affects revenues.

manufacturing overhead allocated

(aka manu. OH applied) amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate multiplied by actual quantity used of the allocation base

indirect manufacturing costs

(also called factor overhead costs or manufacturing overhead costs) All manufacturing costs that are related to the cost object (WIP & finished goods) but can't be traced to that cost object in a feasible way. Ex: suplies, indirect materials suchas lubricants, indirect manufacturing labor such as plant maintenance & cleaning labor, plant rent, plant insurance, property taxes on the plant, plant depreciation, & the compensation of plant managers

Unit cost

(average cost). Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for many decisions.

job-cost sheet

(job cost sheet) records and accumulates all the costs assigned to a specific job, starting when work begins.

accounting for overhead

-actual costs will almost never equal budgeted costs. -accordingly, an imbalance situation exists between the 2 overhead accounts -if overhead control > overhead allocated, this is called under-allocated overhead - if overhead control < overhead allocated, this is called over-allocated overhead -This difference will be eliminated in the end of the period adjusting entry process, using one of the three possible methods -The choice of method should be based on such issues as materiality, consistency, and industry practice.