acct mini exam 1

transfer of product costs

- When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. - Direct labor & manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. - Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. - When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to COGS

plantwide predetermined overhead rate

1 overhead rate for the whole company to allocate all manufacturing overhead costs to jobs based on their usage of direct labor hrs. may not be most accurate. it is often Over Simplistic & incorrect to assume that direct labor hrs is a company's only manufacturing overhead cost driver

purposes of cost classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

job-order costing systems used when:

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job & maintaining cost records for each job. (architect vs. single engineer- Unique)

Cost of goods sold

COGS= beginning merchandise inventory + purchases - ending merchandise inventory

types of fixed costs

Committed: long term, can't be significantly reduced in the short term. include real estate taxes & top management salaries. Cant be easily changed & often lock a company in a multiyear decision Discretionary: (a.k.a Managed fixed costs) may be altered in the short term by current managerial decisions. usually arise from annual spending decisions by management. include management training programs & advertising

indirect costs

Costs that cannot be easily/ conveniently traced to a unit of product or other cost object

cost classifications used in Decision Making

Differential costs (or relevant/incremental costs): difference in cost between any 2 alternatives. Can be either fixed or variable. always relevant in making business decisions. A difference in revenue between 2 alternatives: Differential (incremental) revenue. Opportunity costs: potential benefit that is given up when 1 alternative is chosen over another (not usually found in accounting records) Incremental cost: the difference in costs between the 2 alternatives

job-order costing- a managerial perspective

Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions made by managers. 1. Job-order costing systems can Accurately trace Direct materials & Direct labor costs to jobs. 2. Job-order costing systems often Fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs. If more than 1 overhead cost driver can be identified, job cost Accuracy is Improved by using Multiple Predetermined overhead rates (compute the total cost & the unit product cost of a job using multiple predetermined overhead rates)

absorption costing

Is the most common approach to product costing throughout the world. A costing method that includes all manufacturing costs, fixed & variable (direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs). The U.S. requires absorption costing for external financial reports.

classifications used to prepare financial statements

Product costs: (inventoriable costs) include direct materials, direct labor & manufacturing overhead. All the costs that are involved in acquiring/ making a product. "Attach" to a unit of product as it is purchased/ manufactured & they stay attached to each unit of product as long as the unit remains in inventory awaiting sale. Period costs: include all selling costs & administrative costs. Ex: property taxes. Are always expressed on the income statement in the period which they were incurred

contribution margin

Sales revenue - all Variable Expenses

Non-manufacturing costs

Selling costs: costs necessary to secure the order & deliver the product, can be either direct or indirect costs. Include advertising, sales salaries, sales commissions Administrative costs: All executive, organizational & clerical costs. can be either direct or indirect costs. Ex: company president's salary, sales commissions, property taxes associated w/ a companys administrative facility

job cost sheets

Subsidiary Ledger: all of a companys job cost sheets combined Balance Sheet reporting: provide a financial record that explains what specific jobs compromise the amounts reported in Work in Process and Finished Goods on the balance sheet Income Statement reporting: set of financial records that explains what specific jobs compromise the amount reported in COGS on the income statement

computing predetermined overhead rates

The predetermined overhead rate is computed before the period begins using a 4 step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period & the variable manufacturing overhead cost per unit of the allocation base. 3. Using Y = a + bX, estimate the total amount of manufacturing overhead, Where, Y = The estimated total manufacturing overhead cost, a = The estimated total fixed manufacturing overhead cost, b = The estimated variable manufacturing overhead cost per unit of the allocation base, X = The estimated total amount of the allocation base 4. Compute the predetermined over head rate POHR= Estimated total manufacturing overhead cost for the coming period Divided By Estimated total units in the allocation base for the coming period

3 cost classifications for predicting cost behavior

Variable cost: Cost that varies, in total, in direct proportion to changes in the level of activity, a variable cost per unit is constant. Includes COGS for a merchandising company, direct materials & commissions. Step-Variable costs: can be adjusted quickly as conditions change, treated essentially as VC for most purposes, include salaried employees Fixed cost: (committed & discretionary) Cost that remains constant, in total, regardless of changes in the level of activity w/in the relevant range. If expressed on a per unit basis, the avg. fixed cost per unit varies inversely w/ changes in activity. (FC per unit decrease as activity level rises, vice versa). Shouldn't be expressed on a per unit basis when making decisions (bc makes them look like variable costs). Includes rent, supervisors salary. as the level of activity moves outside of the relevant range FC in/decreases in discrete steps rather than linear. Mixed costs: Contain both variable & fixed elements. The total mixed cost line can be expressed as an equation Y=a+bX, where Y= total mixed cost, a= total fixed cost (the vertical intercept of the line), b= the variable cost per unit of activity (slope of the line), X= level of activity. When mixed costs are represented by a straight line, the Steeper the slope, the Higher the variable cost per unit. Has a minimum cost of having a service available & ready for use

Activity-based costing

When a company creates overhead rates based on the activities that it performs. an alternative approach to developing multiple predetermined overhead rates. Managers utilize to more accurately measure the demands that jobs, products , customers & other cost objects make on overhead resources

cost driver

a factor that causes overhead costs

cost object

anything that cost data are desired, including, products, customers, departments etc. Include organizational subunits

manufacturing company

buy raw materials, transforming them to finished goods

merchandising company

buying & selling items

differential net income from proposal

change in revenues - change in variable cost - change in fixed cost

direct materials & labor

charge direct labor & materials costs to each job as work is performed

Job Order Costing

companies that make many different products each period. is used in manufacturing firms & service industries.

managerial accounting

concerned w/ providing info to managers w/in an organization so they can formulate plans, control operations & make decisions

financial accounting

concerned w/ reporting financial info to external parties (stockholders, creditors, & regulators)

Accountant's straight line approximation

constant unit variable cost a straight line closely approximates a curvilinear variable cost w/in the relevant range

common costs

costs shared by multiple cost objects in a company. indirect costs incurred to support a # of cost objects. Cannot be traced to any individual cost object

direct costs

costs that Can be easily/ accurately traced to a unit of product or other cost object. Ex: direct material & direct labor

conversion cost

direct labor + overhead costs incurred to change raw materials into finished products

3 basic manufacturing cost categories

direct materials, direct labor, manufacturing overhead (these are all product costs)

indirect labor cost

employees such as janitors (wages), security, supervisors salary

sunk costs

have already been incurred & cant be changed by any decision ever. these irrelevant costs should be ignored & disregarded when making decisions

Manufacturing Overhead (a.k.a. indirect manufacturing cost, factory overhead, or factory burden)

includes all manufacturing costs Except direct materials & direct labor (cant be readily traced to finished product) Includes Indirect Labor costs & Indirect Materials that can be easily/ conveniently traced to specific units of product, are allocated to all jobs rather than directly traced to each job. is a Conversion cost. Ex: depreciation, utility costs, property taxes, insurance, supervisors salary, maintenance)

the relevant range of activity for a fixed cost

is the range of activity over which the graph of the cost is flat. relevant range of activity pertains to fixed costs as well as variable costs

allocation base such as direct labor hrs & dollars, or machine hrs

is used to assign manufacturing overhead to individual jobs bc: its impossible to trace overhead costs to particular jobs, manufacturing overhead consists of many different items (from machine parts to salaries), many types of overhead are fixed even though output fluctuates during the period

direct labor (touch labor)

labor costs that can be easily traced to individual units of product. can be a prime cost or conversion cost

an activity base

measures whatever causes costs to vary. A.k.a, a cost driver. include machine hrs, units sold, & direct labor hrs

allocation base for job-order costing system

often dont reflect how jobs actually use overhead resources. the allocation base in the predetermined overhead rate must Drive the overhead cost to improve job cost accuracy (cost driver)

manufacturing product costs

prior to being recorded on the income statement, these costs flow through these 3 categories Raw Materials: any materials that go into the final product Work in Process: units of product that are only partially complete & will require further work before they are ready for sale to the customer Finished Goods cost: completed units of product that haven't been sold yet

direct materials

raw materials that become an integral part of the finished product & that can be easily/ conveniently traced directly to the finished product. is a prime cost

cost behavior

refers to how a cost will change as activity level changes& categorizes costs as Fixed, Mixed, & Variable

financial statement adjust for overhead applied

the COGS reported on a companys income statement must be adjusted to reflect under/overapplied overhead -Underapplied overhead increases COGS & decreases Net Operating income -Overapplied overhead decreases COGS & increases Net Operating income

Matching Principle

the accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized

job order costing for financial statements to external parties

the amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period. -When a company applies Less overhead to production than it actually incurs, it creates Underapplied Overhead -When it applies more overhead to production than it actually incurs, results in Overapplied Overhead.

cost structure

the relative proportion of each type of cost in an organization

marginal revenue

the revenue from selling 1 additional unit

prime cost

the sum of direct materials cost & direct labor cost

the contribution format

used primarily by management, as an internal planning & decision making tool, assists management decision making & separates costs into their fixed & variable components. making easier to predict how decisions affect the future. focus on cost behavior. income statement makes a distinction between fixed & variable costs, aids in decision making & distinguishes between FC & VC

the traditional format

used primarily for external reporting. focused on cost classifications income statement focused on product & period costs. Net income: Gross Margin - Total selling & admin expense. COGS reports the Product costs attached to merchandise sold during the period, while selling & administrative expenses report all Period costs that have been expensed as incurred

predetermined overhead rate (POHR)

used to apply overhead to jobs is determined before the period begins. POHR= Estimated total manufacturing overhead cost for the coming period Divided By Estimated total units in the allocation base for the coming period. (ideally the allocation base is a cost driver that causes overhead) Used to calc. manufacturing overhead. Rely on estimated data bc: actual overhead for the period isn't known until the end of the period inhibiting the ability to estimate job costs during the period, actual overhead costs can fluctuate seasonally which misleads decision makers.