Chapter 2

Is idle time and overtime premium a direct or indirect cost of the products that are worked on in a period?

Idle time caused by regular machine maintenance, slow order periods, or unexpected mechanical problems is an indirect cost of the product because it is not related to a specific product. Overtime premium caused by the heavy overall volume of work is also an indirect cost because it is not related to a particular job that happened to be worked on during the overtime hours. If, however, the overtime is the result of a demanding "rush job," the overtime premium is a direct cost of that job.

Define indirect costs. How are they assigned to cost objects?

Indirect cost: a cost that cannot be traced to a cost object in an economically efficient way Indirect costs are ALLOCATED to cost objects.

Distinguish between inventoriable and period costs.

Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are "inventoried") to build up the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

Distinguish between manufacturing, merchandising, and service-sector companies.

Manufacturing-sector companies purchase materials and components and convert them into different finished goods. Merchandising-sector companies purchase and then sell tangible products without changing their basic form. Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits. Service-sector companies do not maintain any type of inventory.

Do service-sector companies have inventoriable costs? Why?

No, service sector companies do not have inventoriable costs because they do not maintain inventories.

What is the equation for prime cost? For conversion cost?

Prime cost = Direct materials + Direct labor Conversion cost = Direct labor + MOH

What are product/inventoriable costs? What are period costs?

Product costs: Costs that are included in the inventory cost on the balance sheet Period costs: Selling and administrative costs that are included as expenses on the income statement

With respect to manufacturing, give the format of an income statement.

Revenues __ Cost of goods sold Beginning finished goods at... __ Cost of goods manufactured __ Cost of goods available for sale __ Ending finished goods at... __ __ Gross margin SG&A Operating income

How do you calculate GM?

Sales - COGS

What does classification as direct v. indirect depend on?

The cost object!

Define relevant range.

The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question.

Explain what F/S product costs appear on.

Upon purchase of goods and services that constitute inventory, product costs become an asset in an inventory account (RM, WIP, MOH, FG) on the B/S; they show up on the I/S when the inventory is sold and the product costs are expensed as COGS.

For Financial Accounting, list the users, time frame, and information attributes.

Users: Stockholders Time frame: historical- reporting past results Info. attributes: relevance & reliability - verifiable and precise

For Managerial Accounting, list the users, time frame, and information attributes.

Users: management Time frame: future-oriented Info. attributes: relevance & timeliness (for decision making)

What value should be used to for the cost of direct labor?

Wages per hour + benefits per hour

Can a cost be both inventoriable (product) and period?

Yes- for example, if manufacturing and selling operations were done in the same building, rent on the building would be both product and period.

What 3 factors affect classification as direct v. indirect cost?

1. Materiality of the cost: is the benefit of the info worth the cost? 2. Available information gathering technology 3. Design of operations

What is a cost object?

Anything for which a cost of measurement is desired

Direct and indirect costs are used for what?

Assigning costs to cost objects

What role does the relevant-range concept play in explaining how costs behave?

Costs are described as variable or fixed with respect to a particular relevant range.

Fixed and variable costs are used for what?

Describing cost behavior relative to some measure of activity

Define direct costs. How are they assigned to cost objects?

Direct cost: a cost that can be traced to a cost object in an economically efficient way Direct costs are TRACED to cost objects.

With respect to manufacturing, give the format of a schedule of COGM.

Direct materials costs Beginning inventory Purchases of direct materials Cost of direct materials available for use Ending inventory Direct materials used Direct manufacturing labor costs Indirect manufacturing costs Indirect manufacturing labor Plant supplies used Plant utilities Depreciation--plant and equipment Plant supervisory salaries Miscellaneous plant overhead Manufacturing costs incurred during year Add beginning work-in-process inventory Total manufacturing costs to account for Deduct ending work-in-process Cost of goods manufactured

What are the 3 different types of cost classifications?

Direct v. indirect Fixed v. variable Product (inventoriable) v. period

Compare financial and managerial accounting with respect to their entity focus and guidance.

Entity focus: -Financial produces a consolidated B/S, providing summary data for an organization as a whole -Managerial gives detailed information about segments and sub-units of an organization Guidance: -Financial follows GAAP, which is authoritative and mandatory -Managerial does not have any authoritative guidance

How do you calculate cost of goods available for sale?

Finished Goods Beg. Inv. + Cost of goods manufactured

What types of costs are product costs? How would this relate to depreciation on factory equipment?

For a manufacturing company, anything related to the factory would be a product cost, and thus put into an inventory account until the goods were sold and COGS is recognized. Depreciation on factory equipment would not be expensed as depreciation, but rather it would be recognized as an expense in COGS.

What unique indirect labor items appear in MOH?

-Overtime premiums (only the excess over regular wages) -Idle time due to lack of orders/breakdowns/delays

Explain how total fixed cost changes in relation to activity. And per unit fixed cost?

-Total fixed cost does not change regardless of level of activity, as long as activity is within the relevant range -Per unit fixed cost decreases exponentially; as more units are produced, fixed costs get spread over more and more units

Explain how total variable cost changes in relation to activity. And per unit variable cost?

-Total variable cost changes in direct proportion to changes in activity; as activity level rises, total cost rises -Per unit variable cost does not change with level of activity; variable cost is the same for each unit