Managerial Accounting -Chapters 1-3

Behavioral Costs

-costs behave in response to change in activity 1. Variable Costs 2. Fixed Costs TC= VC + FC

Underapplied Manufacturing Overhead Clearing Account

if overhead applied to Work in Progress is Less than the actual overhead costs incurred -debit balance exists in Manufacturing Overhead

Step- Variable Costs

total cost increases to a new higher cost for the next higher range of activity totals cost remains constant within fairly wide range of activity

Closed out to Cost of Goods Sold

Cost of Goods Sold Manufacturing overhead (close out immaterial underapplied overhead) Manufacturing Overhead Cost of Goods Sold (close out immaterial overapplied overhead) -if underapplied (debit balance) manufacturing overhead must be credited to close out account

Sunk Costs

Costs that already has been incurred and cannot be changed by any decision made now or in the future -never differential costs and should always be ignored when making decisions

Direct Materials Indirect Materials

D - can be easily (physically and conveniently) traced to finished product I - not easily (physically and conveniently) traced to finished product

Direct Labor Indirect Labor

D - labor cots that can be easily (physically and conveniently) traced to individuals units of product I - costs that can NOT be easily (physically and conveniently) traced to individual units of production

Discretionary fixed costs

Fixed Costs: -altered in short-term by current managerial decisions (advertising, research, development) -easier to modify

Committed Costs

Fixed Costs: -long term cannot be reduced in short term (depreciation on buildings and equipment) -difficult to adjust

Standards of Ethical Conduct

IMA Guidelines for ethical behavior -Competence, Creditability, Confidentiality, Integrity

Cost Behavior Classifications

In Total: Variable - varies directly with activity level Fixed - remains constant Per Unit: Variable- remains constant Fixed- varies directly with activity level

To record actual overhead costs

Manufacturing Overhead Various Accounts

Direct Costs

can be easily and conveniently traced to a particular cost object (direct material and direct labor)

Indirect Costs

cannot be easily and conveniently traced to cost object manufacturing overhead

Manufacturing Overhead

consists of all manufacturing overhead costs except direct materials and direct labor : indirect materials, indirect labor, other manufacturing costs such as factory rent, factory utilities ect.

Conversion Costs

consists of direct labor plus manufacturing overhead (used to categorize manufacturing costs)

Prime Costs

consists of direct materials plus direct labor (used to categorize manufacturing costs)

Differential Costs

cost between two alternatives -only differential costs are relevant in making a choice between two alternatives

Nonmanufacturing Costs

costs involved with selling and administrative activities

Job- Ordering Costing -traceable

direct materials, direct labor are conveniently traceable -manufacturing overhead is Not conveniently traceable -manufacturing overhead must be applied to job using predetermined overhead rate

Overapplied Manufacturing Overhead Clearing Account

if overhead applied to Work in Progress Exceeds the amount of overhead cost actually incurred, then overhead has ben overapplied -credit balance exists in Manufacturing Overhead

Relevant Ranges

rang of activity within particular straight line is valid approximation to the curvilinear line -range of activity within the assumptions about cost behavior can be considered valid

Direct Materials v. Indirect Materials

raw materials that are traced directly to jobs are direct materials- debited to Work In Progress Inventory Raw materials that are not directly traced to jobs are classified as indirect materials - debited to "clearing" account - Manufacturing Overhead

Fixed Costs

remain constant in total amount (depreciation, supervisory salaries and rent)

Balance Sheet for Manufacturing Companies

three inventory accounts: -Raw materials -Work in Progress -Finished Goods

Job-ordering Costing

used in situations where many different products (individual and unique products) or services are produced each period -special order (customized) -products typically produced in small batches -two or three sofas of a particular design might be made in one batch- batch known as job

Least Squares Regression Method

uses all of the data to separate a mixed costs from its variable and fixed costs -regression line (y= m+bx) is fitted to the data -computes the regression line tat minimizes the sum of theses squared errors

Predetermined Overhead Rate

-computed before the year begins and based entirely on estimated date -used to apply overhead to jobs

Income Statement

-contains a Cost of Goods Manufactured BI+Add= Avail- ending= withdrawals from inventory

Record raw materials purchased on credit

Raw Materials Accounts Payable

Direct Materials

Raw materials used in production - indirect materials included in manufacturing overhead

Inventory Liquidation

additions < withdrawals -credits larger then debits

Inventory Build-ups

additions > withdrawals -debits larger then credits

Contribution Margin

amount remaining from sales revenues after all variable expenses have been deducted -contributes toward fixed expenses and then toward profit

Disposing of immaterial under/over- applied overhead

- at end of period 1.Closed Out to Cost of Goods Sold if amount is immaterial (insignificant) 2. Allocated among the Work In Progress, Finished Goods, and Cost of Goods Sold, in proportion to the overhead applied during the current period in ending balances

Overhead Costs to Manufacturing overhead

-Actual Overhead cost -> debits -Applied Overhead cost -> credit

Job-Costing and Labor

-Direct labor- labor time spent directly on specific jobs -Indirect labor- spent working on supportive tasks- (supervision. maintenance, janitorial) Work In Progress (direct Labor) Manufacturing Overhead (indirect labor) Salaries and Wages Payable

Manufacturing Overhead Clearing Account

-amount of overhead accost applied to Work in Process will differs from amount of actual overhead cost incurred -Underapplied or Overapplied Actual Overhead costs - overhead costs applied to work in process = underapplied

Costs of Good Manufactured

-amount transferred from Work in Progress to Finished Goods -includes manufacturing costs associated with the goods that were finished during the period

Mixed Variables

-cost that contains both variable and fixed costs y= a = bx total mixed cost =fixed cost+(variable cost*activity level) analyzed : 1. account analysis 2. engineering approach 3. high-low method 4. regression methods

Manufacturing Costs (Production Cost)

-costs involved in making a product 1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead

when completed products are sold

-costs transferred from finished goods to cost of goods Cost of Goods Sold Finished Goods

High-Low Method

-estimates of variable and fixed elements of a mixed cost on the data at its highest and lowest levels of activity variable cost per unit of activity =change in cost/ (Variable rate) change in activity -rate ten used to estimate fixed costs: fixed cost = total cost at high activity level- variable rate at high activity level -quick but not reliable -based on costs for only two periods

Period Cost

-for purpose of external financial reports - Income statement- expense in period incurred (selling and administrative costs) ( sales commissions, advertising, executive salaries, public relations0

Product Costs

-for purpose of external financial reports -until sold product costs considered assets - inventory on balance sheet (inventorial costs) -Income Statement - expense only when units are sold (direct materials, direct labor, mfg overhead) (depreciation of equipment, wages of machine operators, insurance on factory equip)

Need For a Predetermined Rate

-makes it possible to estimate total job costs sooner 1. actual overhead for the period is not known until end of period 2. actual overhead is an indirect cost 3. actual overhead is mixed behavior

Allocated between accounts

-more accurate than closing out (find percentages- 100% total overhead applied) -assigns overhead costs to where they would have gone has the estimates included in the predetermined overhead rate matched the actual amounts Work in Progress Finished Goods Cost of Goods Sold Manufacturing Overhead (to allocate underapplied overhead (debit balance) material)

Contribution Approach

-preparation of income statement emphasizes cost behavior - sales - variable expenses = contribution margin - fixed costs = net operating income -useful in internal reports - important in planning, budgeting, controlling, and evaluation not GAAP

Finished Goods

-products that are completed and ready for sale (not yet sold) -in finished warehouse -when sold transferred to Cost of Goods Sold

Managers

-run organizations -carry out three major activities 1. Planning 2. Directing and Motivating 3. Controlling

Process Costing

-used in situations where a single homogenous product, such as bricks, are produced for long periods of time -costing system

Variable Costs

-vary in total, direct proportion to changes in level of activity (direct materials, direct labor, commissions to salespersons and costs of goods sold)

to record cost of good manufactured

-when jobs are completed Finished Goods Work In Progress

Differences Between Managerial & Financial Accounting Managerial:

1. provides data for Internal Users (mangers) 2. emphasis on Future 3. emphasis on Relevance and Flexibility 4. emphasis on Segments of organization (v. whole) 5. Not governed by GAAP & other regulatory reporting standards 6. Not Mandatory 7. No established Record- Keeping Requirements

Computing Predetermined Overhead Rate

1.POHR= (estimated total manufacturing overhead cost for the coming period) / (estimated total units in the activity base for the coming period) 2. Overhead applied = POHR * Actual Activity

Raw materials used in production

=Beginning Raw Materials Inventor + Purchases of raw material - ending raw materials inventory

Unadjusted Cost of goods sold

=beginning finished goods inventory + cost of goods manufactured- ending finished good inventory

Total manufacturing Costs

=direct materials + direct labor + manufacturing overhead( applied to work in process)

Cost of Goods Manufactured

=total manufacturing costs + beginning work in process inventory - ending work in process inventory

Actual Overhead Costs

Not charged to Work In Progress -charged to Manufacturing overhead clearing account

Record the raw materials issued to production

Work In Progress (direct materials) Manufacturing Overhead (indirect materials) Raw Materials -when a job is started materials are withdrawn from raw materials inventory

to record Applied Overhead

Work in Progress Manufacturing Overhead

Work in Progress

inventory consists of unfinished products- factory- being converted -when products are finished, costs are transferred to finished good account -direct labor and manufacturing overhead are put into account

Raw Materials

materials on hand in stockrooms that will be used to make products- products that go into final product -direct and indirect materials -stored in warehouse -when used transferred to work in progress account

Opportunity Costs

potential benefit given up by selecting one alternative over another -not recorded in accounting records