Managerial Accounting

Activity Pool

An activity cost pool is a set of costs which are incurred when certain operations are performed within the organization. By accounting for all of the costs incurred in a specific activity with a pool, it is simpler to assign those costs to products and get an accurate estimate of production costs. Activity cost pool is an aggregate of all the costs required to perform a task such as production.

Organization-sustaining activity (AKA facility-level activity)

An activity that supports business operations in general and cannot be traced to individual units, batches, or products. EX: Factory electricity costs or insurance costs.

Direct Labor

Labor charges that are easily tracked. EX: Employee wages,

Overhead cost applied to a particular job

predetermined overhead rate X amount of the allocation base incurred by the job.

Overhead Application

the process of allocating overhead cost to jobs

Batch-level activity

is an activity performed on each batch of products or services regardless of how many units are in the batch. For instance, the cost of setting up equipment is the same whether the batch has ten or thousand units. EX: Machine set-up costs

Activity Cost Pool

An activity cost pool is a set of costs which are incurred when certain operations are performed within the organization. By accounting for all of the costs incurred in a specific activity with a pool, it is simpler to assign those costs to products and get an accurate estimate of production costs. Activity cost pool is an aggregate of all the costs required to perform a task such as production.

Difficulties of assigning manufacturing overhead to a job

1) Manufacturing overhead is an indirect cost 2) Manufacturing overhead consists of a lot of costs. 3) Total Manufacturing overhead tends to be constant despite the ever changing number of products

Differences between process and job order costing

1) process costing is used for a continuous product line while job order costing is used for merchandising companies that have multiple custom products. 2) in process costing there is no need to identify materials based on a particular job because all jobs are close to the same. 3) Process costing finds the cost of production by department rather then individual job

Product-level activity (AKA product-sustaining, service-sustaining)

An activity performed to support production of a specific product or service regardless of how many batches are run or how many items are produced. EX: Advertising a product, designing the product.

Period costs

An amount that should be charged to the current accounting period as an expense.

Manufacturing Overhead

Costs incurred that are not direct materials or direct labor. Examples: Property tax, manager salaries, indirect materials and labor.

Activity measure

The allocation driver to an activity. EX: In the processing activity pool for making a car a good activity measure is machine hours to be multiplied with the amount of hours to determine the estimated cost of that activity.

Activity rate

Total cost for each activity divided by the total activity. EX: Machine processing cost / machine hours used

Actual overhead costs are not attributed to jobs

true

Indirect labor

Labor costs that are difficult to track. Indirect labor is listed under Manufacturing Overhead. EX: Maintenance, supervision, and clean up.

Activity Rate Calculation

total cost of an activity divided by the total activity by a cost driver. EX: The activity rate of meeting with clients (given $154,791 total cost divided by 1053 total meetings is $147 per meeting)

Four steps to predetermined overhead

1) estimate the total amount of allocation base 2) estimate total fixed manufacturing overhead for the coming period, and estimate the variable manufacturing overhead cost per unit of the allocation base. 3)estimate total manufacturing overhead cost for the coming period (y=a+bx) 4)compute the predetermined overhead rate

5 steps in using ABC

1. Determine activities, activity pools, and activity measures. 2. Assign overhead costs to activities 3. Calculate the activity rate 4. Assign overhead costs to each activity by measure and rate 5. Prepare management reports

Cost Objects

A product, customer, or batch of products in an activity that generates costs. Essentially what it is that the activity is seeking to produce.

Under absorption costing what manufacturing costs are included in a companies product costs

All manufacturing costs

Customer-level activity

An activity that relates to specific customers, not specific products. Examples of customer-level activities include IT support, sales calls, sales visits, and catalog mailings. EX: IT, sales calls

First stage allocation

Determining the percentage of total overhead cost used in each activity pool and then distributing it to each department. For example: employees in the production department claim to spend 30% of their time in machine processing. If you take the total cost allocated to this departments wages and salaries then multiply it by the 30% you find the total estimated cost for that activity pool in that department.

Three Categories of Manufacturing costs

Direct Materials, Direct Labor, and Manufacturing overhead.

Product Cost

In manufacturing, the product cost includes direct materials, direct labor, and manufacturing overhead. A retailer's product cost is the net cost from suppliers plus costs to get the product in place and ready for use (e.g. freight-in).

Customer Profitability Report

Sales made to customer-costs of order taken on by the company=Customer margin

If substantial batch-level or product-level costs exist, then overhead allocation based on a measure of volume such as direct labor-hours alone:

will systematically overcost high-volume products and undercost low-volume products

y=a+bx

y = estimated total manufacturing overhead cost a = estimated total fixed manufacturing overhead cost B = estimated variable manufacturing overhead cost per unit of allocation base x = estimated total amount of allocation base

Conversion Cost

Combination of Direct labor and Manufacturing overhead. You can think of conversion costs as the manufacturing or production costs necessary to convert raw materials into products. Expressed another way, conversion costs are a manufacturer's product or production costs other than the costs of raw materials.

Allocation Base

Is a measure of direct labor costs, or machine hours that is used to assign overhead costs to products and services.

Purchasing Department

Is in charge of evaluating different price options of raw materials, purchasing raw materials, paperwork and accounting involving the purchase of materials, and determining how to allocate the materials across departments. For a factory style company a good cost driver for this department is the amount of orders processed.

Prime Costs

Prime cost is the combination of a manufactured product's costs of direct materials and direct labor. In other words, prime cost refers to the direct production costs. Indirect manufacturing costs are not part of prime cost.

Income Statement Format for ABC

Sales xxx COGS: xxx Direct Materials xxx Direct Labor xxx MOH *add all overhead by department* xxx GROSS MARGIN (sales-cogs) (neg)(Pos) Selling and Administrative expenses: Shipping Expenses* xxx General Administrative Expenses xxx Marketing expenses* xxx Total Selling and administrative expenses xxx Net Operating income (or loss) - Gross Margin minus expenses

Difference between traditional absorption and ABC costing methods

TA costing uses one cost pool where ABC uses a cost pool for each department in producing a product. Types of activity pools are as follows Batch-level activity unit-level activity organization-sustaining activity Product-level activity The difference in computing the total cost happens in computing overhead costs. ABC costing is more specific by allocating costs to each individual activity pool containing non manufacturing costs that TA costing would not account for. ABC is used as supplement to TAC rather then a replacement. TAC is for external affairs where ABC is used for internal decision making.

Second stage allocation to individual customers

Activity rate x Activity of that customer = ABC cost per customer. Add all total ABC cost per customer in each activity cost pool to find the total overhead cost for a specific customer.

Effects of increasing activity (flip results to get effects of decreasing activity)

Fixed costs are usually recovered on the basis of actual production. So if, production increases, fixed costs per unit will decrease and if production decreases, fixed costs per unit will increase. Variable costs cause the increase in production to increase total costs.

Finding the cost per equivalent unit for conversion costs for the month

Total conversion cost at the beginning of the month plus costs incurred during the month divided by the equivalent units of production Equivalent units of production is found by adding the benign amount of units to the units purchased and subtracting out the units that are not fully completed times the percentage of their completion.

Difference between period and product costs

Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. Therefore period costs would be the cost of transporting products because it is unconnected to the manufacturing of the product.

Management Reports: Product Profitability Reports

Sales - Direct costs (DL, DM) - MOH costs = Product margin Simplified: Sales-total costs=profitability of that product

Annual Overhead Company Costs by activity

Production Department costs: : XXX Indirect Factory Wages Factory Equipment Depreciation Factory Utilities Factory Building lease General Admin Department costs: Admin Wages and saleries Office Equipment Depreciation Administrative Building Lease Marketing Department costs Marketing wages and salaries selling expenses Total overhead costs XXX

Second Stage allocation

Using the activity rate to assign costs to individual products, customer orders, and customers. Take the activity rate and multiply it by the activity to find the total cost of that activity pool in that product line. **If there is an activity pool called "OTHER" then u must add the total cost of that pool to the other activities in that department in order to have the total overhead cost of that department

Predetermined overhead rate

estimated total manufacturing overhead cost / estimated total amount of the allocation base

Unit-level activity

is an activity performed on each individual product or service. At this level, the cost drivers will be volume-based since the amount of activity will proportionally depend on the number of units produced. EX: Installing a steering wheel to a car