ACCOUNTING chp.1
FIXED COST
A COST THAT REMAINS CONSTANT, IN TOTAL, REGARDLESS OF CHANGES IN THE LEVEL OF ACTIVITY WITHIN THE RELEVANT RANGE. IF A FIXED COST IS EXPRESSED ON A PER UNIT BASIS, IT VARIES INVERSELY WITH THE LEVEL OF ACTIVITY.
Formula for TOTAL PRODUCT (MANUFACTURING) COSTS
Direct materials cost + direct labor cost + applied manufacturing overhead.
PRIME COST
DIRECT MATERIALS COST PLUS DIRECT LABOR COST.
DIRECT LABOR
LABOR COSTS THAT CAN BE EASILY TRACED TO INDIVIDUAL UNITS OF PRODUCT. ALSO CALLED TOUCH LABOR. Example: Wages paid to automobile assembly workers
DIRECT MATERIALS
MATERIALS THAT BECOME AN INTEGRAL PART OF A FINISHED PRODUCT AND WHOSE COSTS CAN BE CONVENIENTLY TRACED TO IT. Example: A radio installed in an automobile
Indirect materials
Materials used to support the production process. Examples: Lubricants and cleaning supplies used in the automobile assembly plant.
VARIABLE COST
A COST THAT VARIES, IN TOTAL, IN DIRECT PROPORTION TO CHANGES IN THE LEVEL OF ACTIVITY.
MANUFACTURING OVERHEAD
ALL COSTS ASSOCIATED WITH MANUFACTURING EXCEPT DIRECT MATERIALS AND DIRECT LABOR. Examples: Indirect materials and indirect labor
Formula for COST OF GOODS SOLD
Beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory
Formula for DIRECT MATERIALS COST
Beginning raw materials inventory + purchases - ending raw materials inventory
CONVERSION COST
DIRECT LABOR COST PLUS MANUFACTURING OVERHEAD COST. Conversion costs are costs incurred to convert the direct materials into a finished product.
Distinguish between product costs and period costs and give examples of each.
Product costs are incurred in manufacturing the product and first go into inventory (an asset on the Balance Sheet). Period costs are operating expenses and go directly onto the Income Statement.
Prepare a schedule of cost of goods manufactured.
Refer to your Power Point Presentation
Understand the differences between variable costs and fixed costs.
Variable cost: Variable cost per unit never changes. Total variable cost goes up as we make more products. Fixed cost: Total fixed cost never changes. Fixed cost per unit goes down as we make more products.
indirect labor
Wages paid to employees who are not directly involved in production work. Examples: Maintenance workers, janitors and security guards.
PRODUCT COSTS
ALL COSTS THAT ARE INVOLVED IN THE PURCHASE OR MANUFACTURE OF GOODS. IN THE CASE OF MANUFACTURED GOODS, THOSE COSTS CONSIST OF DIRECT MATERIALS, DIRECT LABOR, AND MANUFACTURING OVERHEAD.
PERIOD COSTS
COSTS THAT ARE TAKEN DIRECTLY TO THE INCOME STATEMENT AS EXPENSES IN THE PERIOD IN WHICH THEY ARE INCURRED OR ACCRUED.
Understand the differences between direct and indirect costs.
Direct cost: Can be easily and accurately traced to a product. Indirect Cost: Cannot be easily and accurately traced to a product and must be assigned.
Formula for COST OF GOODS MANUFACTURED
Direct materials cost + direct labor cost + applied manufacturing overhead + beginning work in process inventory - ending work in process inventory.
Identify and give examples of each of the three basic manufacturing cost categories.
Manufacturing costs are: direct materials, direct labor, and manufacturing overhead. Direct materials become part of the product. Direct labor touches the product in its assembly. Manufacturing overhead is everything else we need to manufacture the product on the factory floor.
Identify the major differences and similarities between financial and managerial accounting.
Our managerial accounting reports are used for planning and control. Financial accounting reports (financial statements) are designed for users outside of the organization to report what has happened in the prior accounting period.
Prepare an income statement including calculation of the cost of goods sold.
Refer to your Power Point Presentation.
