EXAM 1 REVIEW

Applied Manufacturing Overhead (equation)

machine hours x predetermined overhead rate

Compute total activity cost for each product line

product line's pool rate x cost driver quantity for each product line = activity cost for each product line

In order for a company to achieve a sustainable competitive advantage, it must either

(1) Perform one or more activities in the value chain at the same quality level as its competitors, but at a lower cost, or (2) Perform its value chain activities at a higher quality level than its competitors, but at no greater cost

Important questions for the managerial accounting system to address are:

(1) What is an organization's practical capacity? (2) What are the costs of resources supplied to provide that capacity? (3) How have those resources been used?

How can a business' corporate controller use the cost behavior patterns identified in the cost study to help in the budgeting process?

1. A sales forecast is made for each month during the budget year 2. A cost prediction is made for each of the firm's cost items

Sale of Goods (Journal Entry)

1. Accounts receivable (top) sales revenue (below) 2. Cost of goods sold (top) finished-goods inventory (below)

5 Major Objectives of Managerial Accounting Activity

1. Providing information for decision making and planning 2. Assisting managers in directing and controlling operational activities 3. Motivating managers and other employees toward the organization's goals 4. Measuring the performance of activities, subunits, managers, and other employees within the organization 5. Assessing organization's competitive position, and working with other managers to ensure long-run competitiveness in its industry

Controllable Cost

A cost a manager can control or heavily influence the level of In classifying costs as controllable or uncontrollable, managerial accountants generally focus on manager's ability to influence cost -- question is not who controls the cost but who is in the best position to influence the level of a cost item EX: cost of raw material used to produce computer chips in an Intel factory + supervisor of the production department for computer chips → controllable -- production supervisor can exercise some control over the quantity of materials used by ensuring that waste and defective units are minimized EX: cost of food used in a Subway restaurant + restaurant manager → controllable -- restaurant manager exercises some control over the quantity of food used by scheduling production to ensure that excess food is not produced and wasted

Source Document

A document such as the material requisition form, which is used as the basis of an accounting entry

Time Record

A form that records the amount of time an employee spends on each production job The time record is the source document used in the cost-accounting department as the basis for adding direct-labor costs to WIP and to the job-cost records for the various jobs in process

Process-Costing System

Accumulates all production costs for a large number of units of output → then these costs are averaged over all units Used by companies that produce large numbers of identical units in a continuous-flow manufacturing process Some batch-production environments use process costing -- occurs when manufacturing process requires the product be produced in discrete batches rather than continuous flow, but identical products are produced (in contrast to the job-order costing system where products change between batches) EX: beer, microchips, and processed food, and in this setting there is no need to trace costs to specific batches of production, because the products in the different batches are identical

Product-Costing System

Accumulates costs incurred in a production process and assigns those costs to the organization's outputs

Compute the total unit product cost for each type of product

Add the direct-material and direct-labor costs for each product type to the ABC activity costs calculated

Period Costs

All costs that aren't product costs -- identified as expenses within period of time in which they are incurred rather than with units of purchased/produced goods Treated same way in all types of companies: retailers and wholesalers, manufacturers, and service industry firms All R&D, selling, and administrative costs = period costs R&D = all costs of developing new products and services (costs of running labs, building prototypes of new products, and testing new products) Selling = salaries, commissions, and travel costs of sales personnel, shipping costs incurred by a manufacturer, and costs of advertising and promo Admin = costs of running organization as a whole (salaries of top-management personnel and costs of accounting, legal, and PR activities)

Two-Stage Cost Allocation: Stage One

All manufacturing-overhead costs are assigned to the firm's production departments -- includes 2 different types of allocation processes Cost Distribution (Cost Allocation): all manufacturing overhead costs are assigned to departmental overhead centers -- assigned to both production and service departments EX: costs of heating a factory with natural gas would be distributed among all the departments, possibly in proportion to cubic feet of space in each department Service departments = equipment-maintenance and material-handling departments; do not work directly on the firm's products but are necessary for production to take place Service department cost allocation = process in which all service department costs are assigned to the production departments (allocate service department costs on basis of relative proportion of each service department's output used by the various production departments) EX: production departments with more equipment would be allocated a larger share of the maintenance department costs End of stage one = all manufacturing-overhead costs have been assigned to production departments

Raw Material Inventory

All materials before they are placed into production

Two-Stage Cost Allocation: Stage Two

All of the manufacturing-overhead costs accumulated in each production department are assigned to the production jobs on which the department has worked in process called overhead application (overhead absorption) Each production department has its own predetermined overhead rate -- these rates are often based on different cost drivers

Product Costing

Assignment of production costs to all output of the organization, whether items manufactured, goods merchandised (resold), or services delivered "Product" = physical items manufactured or merchandised "Services" = outputs less tangible in nature

Other Manufacturing Costs

All other manufacturing costs that are neither material nor labor costs are classified as manufacturing overhead Depreciation of building and equipment, property taxes, insurance, utilities such as electricity, as well as costs of operating service departments Overtime premiums and cost of idle time should be classified as manufacturing overhead, rather than associated with a particular production job, because the particular job on which they may occur tends to be random

Practical Capacity

Allows for normal occurrences such as equipment downtime and worker fatigue or illness

Chartered Global Management Accountant

American Institute of CPAs has teamed with CIMA to offer an experience- and examination-based certification -- Chartered Global Management Accountant (CGMA) Canada, Great Britain, and many other countries also have professional certification programs for managerial accountants

Underapplied Overhead

Amount by which actual overhead exceeds applied overhead

Overapplied Overhead

Amount by which actual overhead is less than applied overhead

Differential Cost

Amount by which the cost differs under two alternative actions

Cost Object

An entity, such as a particular product, service, or department, to which a cost is assigned

Discretionary Cost

Arises as a result of a management decision to spend a particular amount of money for some purpose Discretionary costs can be changed in the short run much more easily than committed costs Management can be flexible about expenditures for advertising, promotion, employee training, or R&D

Cost

At the most basic level = sacrifice made, usually measured by the resources expended, or given up, to achieve a particular purpose Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use

Material Requisition Form

Authorizes release of materials; completed by production department supervisor → a copy of the form goes to cost accounting department where it is used as basis for transferring cost of requisitioned material from Raw-Material Inventory account to the WIP account, and for entering the direct-material cost on the job-cost record for the production in process

Throughput Time (Cycle Time)

Average amount of time required to convert raw materials into finished goods ready to be shipped to customers Includes time required for material handling, producing processing, inspection, and packaging

Simple Regression

Based on a single independent variable

Engineered Cost

Bears a definitive physical relationship to the activity measure EX: Donut Desire's direct-material cost -- it's impossible to produce more donuts without incurring greater material cost for food ingredients

Curvilinear Cost

Behavior pattern has a curved graph -- for low levels of activity, cost exhibits decreasing marginal costs EX: Utilities cost is curvilinear as a result of the company's pattern of electricity usage in the company

Opportunity Cost

Benefit sacrificed when the choice of one action precludes taking an alternative course of action

Why Traditional Volume-Based Systems Distort Product Costs

Cause = use of a single, volume-based cost driver The company's old costing system assigned overhead to products on the basis of their relative usage of direct labor and many of the activities that result in company's overhead costs are not unit-level activities and company manufactures a diverse set of products

Degree of Correlation

Central concept of an activity-based costing system is to assign the costs of each activity to product lines on the basis of how each product line consumes the cost driver for that activity The idea is to infer how each product line consumes the activity by observing how each product line consumes the cost driver → accuracy of the resulting cost assignments depends on the degree of correlation between consumption of the activity and consumption of the cost driver

Variable Cost

Changes, in total, in direct proportion to a change in the level of activity (or cost driver) -- if activity increases by 20%, total variable cost also increases by 20% Variable cost per unit remains the same as activity changes -- slope of the cost line As activity changes, total variable cost increases or decreases proportionately with the activity change, but unit variable cost remains the same

Cost Driver

Characteristic of an activity or event that causes costs to be incurred In most organizations, different types of costs respond to widely differing cost drivers EX: manufacturing firm -- cost of assembly labor would be driven by quantity of products manufactured as well as number of parts in each product In identifying a cost driver, manager or accountant should consider the extent to which a cost or pool of costs varies in accordance with the cost driver The higher the correlation between the cost and cost driver, the more accurate will be the resulting understanding of cost behavior -- as number of cost drivers used in explaining an organization's cost behavior increases, accuracy of resulting information is likely to increase (cost of identifying + tracking information will increase also)

Cost Behavior in Service Industry

Choice of the cost driver is not obvious, and cost behavior pattern can depend on cost driver selected EX: Southwest Airlines -- cost driver could be air miles flown, passengers flown, or passenger miles flown

Decision Making

Choosing among the available alternatives

Cost Hierarchy

Classification of activities

Cost Behavior (Manufacturing Firms)

Common cost drivers: production quantity, direct-labor hours, and machine hours Variable costs = direct material, direct labor, some manufacturing-overhead costs, such as indirect material and indirect labor Fixed = costs of creating production capacity -- depreciation on plant and equipment, property taxes, plant manager's salary Semivariable or curvilinear = overhead costs such as utilities and equipment maintenance A semivariable-cost behavior pattern is generally used to approximate a curvilinear cost within the relevant range Step-fixed = supervisory salaries, since one person can supervise production over a range of activity -- when activity increases beyond that range, such as when a new shift is added, an additional supervisor is added

Bill of Activities

Commonly used element in an ABC analysis -- for a product or service, is a complete listing of the activities required for the product or service to be produced

Credibility

Communicate information fairly and objectively Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law

Timeliness

Companies want to receive cost information when it is still useful to them for decision making but actual overhead cost information is often only available after the production period has passed Only when actual costs are known can the actual overhead rate be computed EX: utility bills often arrive only monthly, after the production month is over and some days or even weeks have passed in the following month

IMA Standards

Competence, confidentiality, credibility, integrity

Activity Dictionary

Complete listing of the activities identified and used in the ABC analysis Helps in the implementation of activity-based costing across several divisions of an organization, because it provides for consistency in the ABC system terminology and the complexity of the ABC analyses in the various divisions

Four activities that make up the day-to-day work of the management team

Controlling Decision making Directing operational activities Planning

Product Cost (Inventoriable Cost)

Cost assigned to inventory (goods either purchased or manufactured for resale) Product cost is used to value inventory of manufactured goods or merchandise until goods are sold In addition to retailers, wholesalers, and manufacturers, the concept of product cost is relevant to other producers of inventoriable goods Agricultural firms, lumber companies, and mining firms = nonmanufacturers that produce inventoriable goods

New ABC System

Cost drivers were chosen that were appropriate for each activity cost pool EX: since setting up machinery for a new production run is a batch-level activity, the number of production runs is an appropriate batch-level cost driver

Cost Behavior, Prediction, and Estimation

Cost estimation (process of determining cost behavior; often focuses on historical data) → cost behavior (relationship between cost and activity) → cost prediction (using knowledge of cost behavior to forecast the level of cost at a particular level of activity; focus is on the future)

Expense

Cost incurred when a resource (asset) is used for the purpose of generating revenue Resource can be: cash, expended directly; promise to use up cash in the future, recognized as a liability (accounts payable); or reduction in value of a recorded asset such as plant and equipment (via depreciation) or inventory (via cost of goods sold)

Regression Line (Least-Squares Regression Line)

Cost line fit to the data using least-squares regression

Least-Squares Regression Method

Cost line is positioned to minimize sum of the squared deviations between cost line and data points -- statistical technique used to estimate objectively a cost behavior pattern using all of the available data Scatter diagram drawn with a cost line drawn through plotted data points -- since data points do not lie along a perfectly straight line, any cost line drawn through this scatter diagram will miss some or most of the data points

Responsibility Accounting

Cost management facilitated by tracing costs to department or work center in which the cost incurred

Indirect Cost

Cost not directly traceable to a particular cost object EX: costs of national advertising for Walt Disney World are indirect costs of the departments or subunits for the recreational complex, such as Magic Kingdom and Epcot EX: the salary of a GE plant manager is an indirect cost of each of the plant's production departments -- the plant manager's duties are important to the smooth functioning of each of the plant's departments, but there is no way to trace a portion of the plant manager's salary cost to each department

Indirect Material

Cost of materials required for the production process but don't become an integral part of the finished product EX: cost of drill bits used in a metal-fabrication department at Ford -- drill bits wear out and are discarded, but do not become part of the product Materials that do become an integral part of the finished product but are insignificant in cost are also often classified as indirect material EX: various machine screws used in assembling computers are so inexpensive that it's not worth tracing their costs to specific direct materials → instead, they are added to the cost of indirect materials and become part of manufacturing overhead cost

Indirect Labor

Cost of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process EX: production department supervisors, quality control inspectors, assembly plant security guards

Direct-Labor Cost

Cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products The cost of fringe benefits associated with any labor spending classified as direct labor should also be classified as direct-labor costs Fringe benefits = costs of providing health insurance, making pension and social security contributions, and other non-salary benefits provided by the employer to the employee

Direct Cost

Cost that can be traced to a particular cost object When the cost object is a product or service and the direct cost is a material, we call it direct material

Cyclicality

Costs can vary from one part of the year to another for reasons that have nothing to do with the products or services being produced (weather) Actual costing would cause products and services produced in some months to appear more softly, and therefore less profitable, than those produced in other months -- most companies choose not to change their perception of product profitability based on the time of production

Uncontrollable Cost

Costs that a manager cannot influence EX: cost of national advertising for the Alamo car rental company + manager of the Alamo rental agency at the Orlando airport EX: cost of national accounting and data processing operations for Target + manager of a Target store in Gainesville, Florida

Step-Variable Costs

Costs that are nearly variable but increase in small steps instead of continuously -- usually include inputs purchased and used in relatively small increments EX: donut shop -- direct-labor costs of bakers, counter-service personnel, and delivery-truck drivers; many of these employees are part-time workers, called upon for relatively small increments of time, such as a few hours On a typical day, the shop may have 35 employees at work in the bakery and the donus shops -- if activity increases slightly, these employees can handle the extra work but if activity increases substantially, the bakery manager or various restaurant managers may call on additional help If the steps in a step-variable cost behavior pattern are small, the step-variable cost function may be approximated by a variable cost function without much loss in accuracy

Sunk Cost

Costs that have been incurred in the past and consequently do not affect future costs and can't be changed by any current or future action Although it is incorrect from an economic perspective, to allow sunk costs to affect future decisions, people often do so -- it is human nature to attempt to justify past decisions

Step-Fixed Costs

Costs that remain fixed over a wide range of activity but jump to a different amount for activity levels outside that range Indirect-labor -- consists of the salaries and fringe benefits for managers and assistant managers

Drawbacks of Actual Costing

Cyclicality, large payments, and timeliness

Outlier

Data point that falls far away from the other points in the scatter diagram and is not representative of the data Could be that the data point is in error -- utility bill was misread when data were compiled or the billing itself was in error or the cost observation was correct but due to unusual circumstances If the outlier is due to an error or very unusual circumstances, the data point should be ignored in the cost analysis

Three factors important in selecting appropriate cost drivers

Degree of correlation, cost of measurement, and behavioral effects

CFO (Controller/Comptroller)

Designation given to the executive responsible for all accounting and finance functions -- organization's top managerial and financial accountant Responsible for supervising the accounting and finance specialists throughout the company and for preparing the information and reports used in both managerial and financial accounting Interprets accounting information for line managers and participates as an integral member of the management team Most CFOs and controllers are involved in planning and decision making at all levels and across all functional areas of the enterprise -- this broad role has enabled many managerial accountants to rise to the top of their organizations Most companies have divisional controllers Increasing awareness of the importance of planning, budgeting, and analysis has caused some larger organizations to adopt a variation of the model described → subset of the managerial accounting functions relating to financial planning and analysis are overseen by a chief performance analyst -- sometimes reports to CFO but often reports to the Sr. VP for Planning and Control

Cost Measurement

Designing any information system entails cost-benefit trade-offs -- the more activity cost pools there are in an activity-based costing system, the greater will be the accuracy of the cost assignments More activity cost pools entail more cost drivers → results in greater costs of implementing and maintaining the system The higher the correlation between a cost driver and the actual consumption of the associated activity, the greater the accuracy of the cost assignments It may also be more costly to measure the more highly correlated cost driver

Schedule of Cost of Goods Manufactured

Details the cost of direct material, direct labor, and manufacturing overhead applied to work in process during a period of time and shows the change in WIP Cost of goods manufactured = shown in the last time of the schedule -- this is the amount transferred from WIP to FGI during the time the schedule was made

Cost Estimation

Determination of cost behavior

Planning

Developing a detailed financial and operational description of anticipated operations

Conversion Costs

Direct labor and manufacturing overhead (costs of "converting" raw materials into finished products)

Prime Costs

Direct material and direct labor

Total Manufacturing Cost

Direct material, direct labor, and manufacturing overhead

Manufacturing Cost Flows

Direct material, direct labor, and manufacturing overhead = product costs because they are assigned to products and stored in inventory until the time when the manufacturer's products are sold Manufacturers have product-costing systems to keep track of the flow of these costs from the time production begins until finished products are sold As material is consumed in production, the cost of these direct materials is removed from the raw-material inventory account and added to work-in-process inventory Costs of payroll classified as direct labor and manufacturing overhead expenditures are accumulated in work in process

Manufacturing Costs (Three Categories)

Direct material, direct labor, manufacturing overhead

Job-Order Costing

Each distinct batch of production is called a job or job order The cost-accounting procedures are designed to assign costs to each job → the costs assigned to each job are averaged over the units of production in the job to obtain an average cost per unit

Non-Unit-Level Overhead Costs

Each of the following characteristics will undermine the ability of a volume-based product-costing system to assign overhead costs accurately (distorts product costs): Large proportion of non-unit-level activities: unit-level cost driver, such as direct labor, machine hours, or throughput, will not be able to assign the costs of non-unit-level activities accurately Product diversity: when consumption ratios differ widely between activities, no single cost driver will accurately assign the resulting overhead costs

Activity Accounting

Emphasis in a cost management system on organization's activities; crucial to goal of producing quality goods and services at lowest possible cost Trace as many costs as possible directly to activities that cause them to be incurred -- vital to management's objective of eliminating non-value added costs

Controlling

Ensuring organization operates in the intended manner and achieves its goals

Completion of a Production Job (Journal Entry)

Entry = finished-goods inventory (top) work-in-process inventory (below)

Use of Indirect Labor

Entry = manufacturing overhead (top) wages payable (below)

Purchase of Material (Journal Entry)

Entry = raw-material inventory (top) accounts payable (below)

Use of Direct Material (Journal Entry)

Entry = work-in-process inventory (top) raw-material inventory (below)

Use of Direct Labor

Entry = work-in-process inventory (top) wages payable (below)

Overtime Premium

Extra compensation paid to an employee who works beyond the time normally scheduled For most nonmanagement employees in the U.S. and Canada, government regulations require that overtime work be paid at 1.5x the regular rate of pay -- overtime premium portion = extra one-half of regular pay

Production Process: Assembly

Few major products Higher volume Lower diversity Minimal customization

Supply Chain

Flow of all goods, services, and information into and out of the organization; often includes many companies and other organizations Supply chain management means proactively working with some or all of the organizations in a company's supply chain to improve service and to manage or reduce costs

Cost Prediction

Forecast of cost at a particular level of activity

CEO

Generally a member of the Board of Directors, and sometimes also serves as chairman of the Board of Directors

Operating Income (Operating Profit)

Goes one step further than gross profit to report the profit remaining from revenues after deducting both cost of sales and all period costs of operations Represents profits resulting from operations, taking into account all costs of the operations but not effects of financing, taxes, or any other unusual business events Why omit these items from operating income? → Because they are affected by many factors beyond process of producing and selling goods and services: how the company chooses to raise financing it needs, tax strategy it follows, and unusual occurrences unrelated to regular operations

Semivariable (Mixed) Cost

Has both a fixed and a variable component GRAPH: distance between the fixed-cost line (dashed) and total-cost line = amount of variable cost (PG 237) Slope of total-cost line = variable cost per unit of activity

Production Process: Continuous Flow

High production volume Highly standardized commodity products EX: ExxonMobil (production of gas, a continuous-flow product)

Predetermined Overhead Rate

How do we make the costs of manufacturing overhead match up the way we think they should with the products and services produced? → apply overhead to products on basis of estimates made at beginning of accounting period, taking into account costs and activities of entire year -- this full-cycle approach: 1. Allows a timely but reasonable approximation to substitute for actual costs (approximation is later corrected to actual cost) 2. Combines costs only incurred sporadically (like the quarterly lease payments) and applies them to all production throughout the year 3. Dampens effects of cyclicality associated with causes unrelated to production (like weather) instead applying costs in a way that reflects annual average 4. Works by computing, in advance, a rate for expected manufacturing overhead that is then used in applying overhead costs throughout the period STEPS: 1. Accounting department chooses some measure of productive activity to use as basis for overhead application -- in traditional product-costing systems, this measure is usually some volume-based cost driver (or activity base), such as direct-labor hours, direct-labor cost, or machine hours Volume-based cost driver chosen is something that will assign costs roughly in proportion to amount (volume) of products produced 2. An estimate is made of amount of manufacturing overhead that will be incurred during year and amount of the cost driver (or activity base) that will be used or incurred during same year 3. Predetermined overhead rate, which will be used throughout the year to apply manufacturing overhead costs to production is computed (budgeted manufacturing-overhead cost/budgeted amount of cost driver)

Evaluating a Particular Least-Squares Regression Line

How does a cost analyst evaluate a particular regression line based on a specific set of data? → number of criteria may be used, including economic plausibility and goodness of fit Does the regression line make economic sense? Is it intuitively plausible to the cost analyst? → if not, the analyst should reconsider using the regression line to make cost predictions It may be that the chosen independent variable is not a good predictor of the cost behavior being analyzed or that there may be errors in the data upon which the regression is based -- rechecking data will resolve this issue Could be that fundamental assumptions that underlie the regression method have been violated → analyst may have to use other method Goodness of Fit

Some questions asked in assessing an organization's competitive position are

How well is the organization doing in its internal operations and business processes? How well is the organization doing in the eyes of its customers? Are their needs being served as well as possible? How well is the organization doing from the standpoint of innovation, learning, and continuously improving operations? Is the organization a trendsetter that embraces new products, new services, and new technology or is it falling behind? How well is the organization doing financially-- is it viable as a continuing entity?

IMA Principles

IMA's overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility -- members shall act in accordance with these principles and shall encourage others within their organizations to adhere them

Job-Cost Record

In a job-order costing system, costs of direct material, direct labor, and manufacturing overhead are assigned to each production job -- comprise the inputs of the product-costing system As costs are incurred, they are added to the WIP in the ledger -- to keep track of the manufacturing costs assigned to each job, a subsidiary ledger is maintained (job-cost record)

Cost Driver (ABC)

In activity-based costing systems, an organization's most significant cost drivers are identified → a database is created, which shows how these cost drivers are distributed across products

Internal Auditor

In larger organizations is director of an internal audit department, is responsible for reviewing accounting areas of responsibility, then expresses an opinion to top management and board of directors regarding effectiveness of organization's accounting system and system of internal controls In some organizations, the internal auditor's role is much more extensive than this and can include a broad assessment of company operations

Cost Behavior (Merchandising Firms)

In merchandising firms, the activity base (or cost driver) is usually sales revenue The cost of merchandise sold = variable cost Most labor costs = fixed or step-fixed costs, since a particular number of sales and stock personnel can generally handle sales activity over a fairly wide range of sales Store facility costs, such as rent, depreciation on buildings and furnishings, and property taxes = fixed costs

Collecting ABC Data: Multidisciplinary ABC Project Teams

In order to gather information from all facets of an organization's operations, it is essential to involve personnel from a variety of functional areas -- multidisciplinary project team not only designs a better ABC system but also helps in gaining credibility for the new system throughout the organization Typical ABC project team includes accounting and finance people, engineers, marketing personnel, production and operations managers, and so forth

Cost of Goods Sold

In the period of sale, when the inventory asset is reduced, the product costs that have been recorded are reclassified as this expense Product cost of merchandise inventory acquired by a retailer or wholesaler for resale = purchase cost of inventory + any shipping charges paid by them Product cost of manufactured inventory = all costs incurred in its manufacture EX: labor cost of a production employee at Texas Instruments is included as a product cost and cost-of-goods-sold expense

Limitation of Direct Labor as a Cost Driver

In traditional product-costing systems, the most common volume-based cost drivers are direct-labor hours and direct-labor cost There is a trend away from using direct labor as the overhead application base -- many production processes are becoming increasingly automated, through the use of robotics and computer-integrated manufacturing systems Increased automation brings two results: manufacturing-overhead costs represent a larger proportion of total production costs + direct labor decreases in importance as a factor of production As direct labor declines in importance as a productive input, it becomes less appropriate as a cost driver → some firms have switched to machine hours, process time, or throughput time as cost drivers that better reflect the pattern in which overhead costs are incurred

Product-Sustaining-Level Activity

Includes activities that are needed to support an entire product line but are not performed every time a new unit or batch of products is produced (ex: engineering design costs)

Manufacturing Overhead

Includes three types of costs: indirect material, indirect labor, and other manufacturing costs

Incremental Cost

Increase in cost from one alternative to another

Behavioral Effects

Information systems have the potential to facilitate decisions but also to influence behavior of decision makers -- can be good or bad, depending on behavioral effects In identifying cost drivers, an ABC analyst should consider possible behavior consequences EX: in a just-in-time production environment, goal is to reduce inventories and material-handling activities to absolute minimum level possible → number of material moves may be most accurate measure of consumption of material-handling activity for cost assignment purposes and also may have a desirable behavioral effect of inducing managers to reduce number of times materials are moved, reducing material-handling costs Dysfunctional behavioral effects are also possible EX: the number of vendor contacts may be a cost driver for the purchasing activity of vendor selection → could induce purchasing managers to contact fewer vendors, which could result in the failure to identify the lowest-cost or highest-quality vendor

Product and Service Costing: Managerial Accounting

Inside organizations, product and service costs are needed to help managers with planning and to provide them with high-quality data for decision making Product costs = difference between what we can sell output for and what we report as the cost of that output Relative profitability of different products and services -- way we choose to assign costs to them helps define outputs as successful or unsuccessful Controlling + reducing production costs = frequent goal in organizations -- impossible to accomplish without a clear and reasonable accurate measure of the costs to make its products and deliver its services Profits derived from product cost information are used to measure performance + make resource-allocation decisions that can lead to success or failure of a product

Financial Accounting (Overview View)

Interested parties outside the organization use information Regulation is required, must conform to generally accepted accounting principles -- regulators = International Accounting Standards Board, Financial Accounting Standards Board (U.S.), and U.S. Securities and Exchange Commission Data is almost exclusively drawn from organization's core accounting system, which accumulates financial information Published reports focus on the enterprise in its entirety -- generally consolidated from reports of geographic or business segment divisions and based almost exclusively on historical transaction data

Functional Areas

To assist managers in planning, decision making, and cost management, managerial accountants classify costs by the functional area of the organization to which costs relate Examples of functional areas are manufacturing, marketing, administration, and R&D

Confidentiality

Keep information confidential except when disclosure is authorized or legally required Inform all relevant parties regarding appropriate use of confidential information -- monitor subordinates' activities to ensure compliance Refrain from using confidential information for unethical or illegal advantage

Collecting ABC Data: Interviews

Key employees in each of the organization's support departments and a careful review of each department's records EX: ABC project team members interviewed each engineer to determine breakdown of time spent on each product and also examined every engineering change order completely in past two years → concluded engineering costs were driven largely by engineering hours and were able to calculate breakdown

Volume-Based (Throughput-Based) Costing System

Labor hours are related closely to the volume of activity in the factory Tends to overcost high-volume product lines and undercost the complex, relatively low-volume product line

Bill of Materials

Lists all of the materials needed -- for products and components that are produced routinely that material requisitions are based on

Production Process: Job Shop

Low production volume little standardization One-of-a-kind products EX: Habitat for Humanity (custom home builder)

Competence

Maintain an appropriate level of professional expertise by continually developing knowledge and skills Perform professional duties in accordance with relevant laws, regulations, and technical standards Provide decision support information and recommendations that are accurate, clear, concise, and timely Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity

Balanced Scorecard

Management framework used to assess competitive position + ensure long-run competitiveness -- includes financial and nonfinancial performance measures If organization is to remain viable, managers need to continually ask questions emphasized in balanced scorecard Financial Perspective: how does company look to its shareholders? Internal Business Process Perspective: in which activities must company excel? Learning + Growth Perspective: how can company continually improve + create value? Customer Perspective: what do customers think of services provided by company?

Cost Management System

Management planning and control system with objectives of: Measure costs of resources consumed in performing organization's significant activities and measure unused capacity of those resources Identify + eliminate non-value added costs (costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value) Determine efficiency + effectiveness of all major activities performed in the enterprise Identify + evaluate new activities that can improve future performance of organization

Cross-Functional Deployment

Managerial accountants are increasingly being deployed in cross-functional management teams Managerial accountants work with executives from top management, marketing and sales personnel, design engineers, operations managers, legal experts, quality-control personnel, and virtually every other specialized type of employee in an organization Managerial teams are formed to make decisions, engage in planning services, or address operational problems from many perspectives → since financial and other managerial accounting issues often are critically important in addressing business problems, managerial accountants routinely play a major role in these cross-functional teams

Where do managerial accountants do their work?

Managerial accountants do their work just about everywhere

Attention-Directing Function

Managerial accounting reports rarely solve a decision problem but managerial accounting information often directs managers' attention to an issue that requires their skills

Line Positions

Managers directly involved in the provisions of goods or services

Staff Positions

Managers that supervise activities that support a company's overall mission but are only indirectly involved in operational activities EX (Disney): General counsel, executive VP for human resources, and CFO

Managerial Accounting (Overview View)

Managers within the organization use the information Regulation isn't required -- unregulated since it's intended only for management The source of data is organization's core accounting system, plus various other sources -- provide financial and nonfinancial data such as product defect rates, quantities of material and labor used in production, occupancy rates in hotels, and average take-off delays in airlines Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines -- based on combination of historical data, estimates, + projections of future events

Finished-Goods Inventory (FGI)

Manufactured goods that are complete and ready for sale The values of WIP and FGI are measured by their product costs

Work-in-Process Inventory (WIP)

Manufactured products only partially completed at the data when the balance sheet is prepared The values of WIP and FGI are measured by their product costs

Cost Schedules

Manufacturers generally prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold to summarize the flow of manufacturing costs during an accounting period These schedules are intended for internal use by management and not made available to the public

Flow of Costs in Manufacturing Firms

Manufacturing costs = direct material, direct labor, and manufacturing overhead As production takes place, all manufacturing costs are added to WIP (debited) Products are completed → product costs are transferred from WIP (credited) to FGI (debited) Time period when products are sold = product cost of inventory sold is removed from FGI (credited) and added to COGS (debited), which is an expense of the period in which the sale occurred COGS is closed into the Income Summary account at the end of the accounting period, along with all other expenses and revenues of the period

Use of Indirect Material (Journal Entry)

Manufacturing overhead (top) manufacturing supplies inventory (below)

Volume-Based Cost Driver for Overhead Application

Manufacturing overhead includes various indirect manufacturing costs that vary greatly in their relationship to the production process If a single, volume-based cost driver (activity base) is used in calculating the predetermined overhead rate, it should be some productive input that is common across all of the firm's products When selecting a volume-based cost driver, the goal is to choose an input that varies in a pattern most similar to pattern with which overhead costs vary Products that indirectly cause large amounts of overhead costs also should require large amounts of the cost driver, and vice versa During periods when cost driver is at a low level, overhead costs incurred should be low → should be a correlation between incurrence of overhead costs and use of cost driver

Manufacturing-Overhead Costs Incurred (Journal Entry)

Manufacturing overhead: Prepaid rent on factory building Accumulated Depreciation--equipment Accounts payable (utilities and property taxes) Prepaid insurance

Professional Organizations

Many managerial accountants and members of corporate finance and accounting team are Certified Public Accountants and members of American Institute of CPAs CPA designation = primarily to assure competence of those working outside of companies and passing judgments about reliability of accounting reports for the "public," particularly investors and regulators To focus on best practices and new developments in accounting and finance inside of companies, managerial accounting profession has its own certifications and organizations Institute of Management Accountants (IMA) has >80,000 members and published a practitioner-oriented journal about managerial accounting practice entitled Strategic Finance Other professional organizations in which managerial accountants hold membership include Financial Executives International (for senior financial executives), the Institute of internal Auditors, and the American Accounting Association (for academics) Primary professional association for managerial accountants outside of the U.S. = Chartered Institute of Management Accountants (CIMA)

Direct Material

Material consumed in the manufacturing process, is physically incorporated in the finished product, and can be traced to products relatively easily

IMA Statement of Ethical Professional Practice

Members of IMA shall behave ethically a commitment to ethical professional practice indluces overarching principles that express our values and standards that guide our conduct

Product Costing in Nonmanufacturing Firms

Merchandising companies include the costs of buying and transporting merchandise in their product costs Nonmanufacturing producers of inventoriable goods, such as those in mining, oil and gas, and agriculture, also record the costs of producing their goods -- the role of product costs is identical to that in manufacturing firms The production output of service firms and nonprofit organizations consists of services that are consumed as they are produced Although services can't be stored as inventory and sold later like manufactured goods, such organizations need info about the costs of producing services

Account-Classification Method (Account Analysis)

Method of cost estimation that involves careful examination of organization's ledger accounts Cost analysis classifies each cost item in ledger as a variable, fixed, or semivariable cost -- is based on analyst's knowledge of organization's activities and experience with the organization's costs Once costs have been classified, cost analyst estimates cost amounts by examining job-cost records, paid bills, labor time cards, or other source documents -- this examination of historical source documents is combined with other knowledge that may affect costs in the future

Integrity

Mitigate actual conflict of interest; regularly communicate with business associates to avoid apparent conflicts of interest; advise all parties of any potential conflicts Refrain from engaging in any conduct that would prejudice carrying out duties ethically Abstain from engaging in or supporting any activity that might discredit the profession

Proration

More accurate and complicated procedure to dispose of under or overapplied overhead -- recognizes that underestimation or overestimation of the predetermined overhead rate affects not only COGS but also WIP and FGI When proration is used, underapplied or overapplied overhead is allocated among WIP, FGI, and COGS Entry = WIP (top), FGI (top), COGS (top), manufacturing overhead (below) Used if there is such a large amount to be adjusted at the inventory and COGS accounts would be materially misstated if the adjustment were not made Used by small number of firms required to do so under rules specified by federal agency, Cost Accounting Standards Board (CASB) -- develops mandatory cost-accounting standards for large government contractors, but apply only to firms receiving multi-million dollar government contracts

Evaluation of High-Low Method

More objective than visual-fit method -- leaves no room for the cost analyst's judgment Suffers from a major weakness -- only two data points are used to estimate the cost behavior pattern -- the remainder of the data points are ignored In this regard, the visual-fit method is superior to the high-low method, since the former approach uses all of the available data

Managerial Accounting and the Ethical Climate of Business

Most purely accounting issues in unethical cases involve financial accounting (external reporting) rather than managerial accounting (internal reporting) 2002 -- Congress passed Sarbanes-Oxley Act in 2002 = requires companies to establish, assess, and regularly report on internal controls over financial reporting Public Company Accounting Oversight Board (PCAOB) = establish auditing standards and provide for an audit quality review process

Production Process: Batch

Multiple products Low volume High product diversity Some customization EX: Caterpillar (batch production of heavy equipment)

Batch-Level Activities

Must be performed for each batch of products, rather than each unit (ex: setup, purchasing, material handling, quality assurance, and packing/shipping activity cost pools)

Manufacturing-Overhead Costs

Not easily traced to jobs -- it's a heterogeneous pool of indirect production costs, such as indirect material, indirect labor, utility costs, and depreciation Costs often bear no obvious relationship to individual jobs or units of product, but must be incurred for production to take place → legitimately part of cost of production and it's necessary to assign manufacturing-overhead costs to jobs in order to have a complete picture of product costs

Evaluation of Least-Squares Regression Method

Objective method of cost estimation that makes use of all available data Regression line has desirable statistical properties for making cost predictions and drawing inferences about the relationship between cost and activity Requires considerably more competitive than visual-fit or high-low method but computer programs are readily available to perform least-squares regression

Overhead Application (Overhead Absorption)

Process of assigning manufacturing-overhead costs to production jobs For product-costing information to be useful, must be provided to managers on a timely basis and fairly represent costs incurred to help create products or services whose cost is being measured and reported → leads to two main challenges First, suppose the cost-accounting department waited until the end of an accounting period so the actual costs of manufacturing overhead could be determined before applying overhead costs to the firm's products Result would be very accurate overhead application but information might be useless because it wasn't available to managers for planning, control, and decision making during the period

Cost Accounting System

One part of the overall accounting system -- accumulates data about the costs of producing goods and services → these data are used in both managerial and financial accounting Production cost data typically are used in helping managers evaluate the pricing of different products or services (managerial) + used to value inventory on a manufacturer's balance sheet (financial)

Plantwide Overhead Rate

Only one overhead rate is used

Strategic Cost Management

Overall recognition of the importance of cost relationships among the activities in the value chain and the process of managing those cost relationships to the firm's advantage

Summary of Overhead Accounting

Overhead is budgeted at the beginning of the accounting period (and calculation of predetermined overhead rate), it is applied during the period, and actual overhead is measured at the end of the period

Who sets an organization's goals/generally helps with management?

Owners, directors, or trustees Board of directors are usually elected by company's stockholders

Large Payments

Payments for some overhead costs are not spread evenly throughout the year, causing some production periods to have higher actual costs than others EX: companies can sometimes negotiate a better deal if they will agree to pay a lease on a quarterly or annual basis, rather than monthly → actual costing would cause products or services produced in payment months to appear more costly and less profitable than those produced in the "off" months

Gross Profit (Gross Margin)

Portion of revenues left after deducting costs that have been classified as cost of sales (COGS), without considering any other costs of operating the company Provides a view of profitability specified to the production process: how much money are we receiving for our goods + services after covering costs of producing them?

Collecting ABC Data: Storyboarding

Procedure used to develop a detailed process flowchart, which visually represents activities and the relationships among the activities Involves all or most of the employees who participate in the activities oriented toward achieving a specific objective Facilitator helps employees identify key activities involved in their jobs → activities are written on small cards and placed on board in order accomplished Relationships among activities are shown by order and proximity of cards Other info about activities is recorded on cards, such as amount of time and other resources expended on each activity + events that trigger the activity Provides a powerful tool for collecting + organizing data needed in an ABC project

Managerial Accounting

Process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals Provides tools and perspectives that help managers create value for the organization by managing resources, activities, and people to achieve organization's goals effectively and efficiently

Product and Service Costing: Financial Accounting

Product costs are needed to value inventory on the balance sheet and to compute cost-of-goods-sold expense on the income statement Under generally accepted accounting principles, inventory is valued at its cost until it is sold → cost of the inventory becomes cost of goods sold, an expense of the period in which it's sold Services are inventoried like products are but their costs still appear on the income statement and are matched to the corresponding sales revenues A product-costing system is used to accumulate the costs of services delivered, which are then recorded on the income statement as cost of services

Normal Costing

Product-costing system used when direct material and direct labor are added to WIP at their actual amounts, but overhead is applied to WIP using a predetermined overhead rate Takes its name from the use of a predetermined overhead rate that is normalized over a fairly long period

Consumption Ratio

Proportion of an activity consumed by a particular product

Relevant Range

Range of activity within which management expects the company to operate Managerial accountants often use a semivariable-cost behavior pattern to approximate a curvilinear cost but it is important to limit this approximation to the range of activity in which its accuracy is acceptable

Three primary costs to be concerned with when producing products

Raw materials, direct labor, manufacturing overhead

Cost Behavior

Relationship between cost and activity Is relevant to the management functions of planning, control, and decision making Cost behavior patterns = cost functions

Fixed Cost

Remains unchanged in total as level of activity (or cost driver) varies Facilities costs, which include property taxes, depreciation on buildings and equipment, and the salaries of maintenance personnel As activity level increases, unit fixed cost declines -- preferable in any cost analysis to work with total fixed cost

Out-of-Pocket Costs

Require the payment of cash or other assets as a result of their incurrence Studies by behavioral scientists and economists have shown that many people have a tendency to ignore or downplay the importance of opportunity costs

Facility-Level Activities

Required in order for the entire production process to occur (ex: plant management salaries, plant depreciation, property taxes, plant maintenance, and insurance)

Committed Cost

Results from an organization's ownership or use of facilities and its basic organization structure; management can change committed costs only through relatively major decisions that have long-term implications Property taxes, depreciation on buildings and equipment, costs of renting facilities or equipment, and the salaries of management personnel

Scatter Diagram

Results from using the visual-fit method; helps the analyst visualize the relationship between cost and the level of activity (or cost driver) Cost analyst can visually fit a line to these data by laying a ruler on the plotted points -- the line is positioned so that roughly equal numbers of plotted points lie above and below the line The scatter diagram provides little or no information about the cost relationship outside the relevant range

Directing Operational Activities

Running the organization on a day-to-day basis How many cashiers should be on duty each morning? How much food should be ordered each day? How much cash will be needed to meet the payroll, pay utility bills, and buy maintenance supplies next month?

Product Costs and the Income Statement

Selling and admin costs are always period costs on any type of company's income statement Costs of manufactured inventory (all costs incurred in manufacturing finished products are stored in inventory until the time period when the products are sold → product costs of the inventory sold become cost of goods sold, an expense on the income statement) Costs of acquiring merchandise inventory (classified as inventory until the time period during which the merchandise is sold → then these costs become cost of sales (COGS))

Selling And Administrative Costs

Selling and administrative costs are period costs -- since these are not manufacturing costs, they are not added to the WIP but instead treated as expenses of the accounting period in which they are incurred Entry = selling and administrative expenses Wages payable Accounts payable Prepaid rent Office supplies inventory

High-Low Method

Semivariable-cost approximation is computed using exactly two data points -- high and low activity levels are chosen from the available data set These activity levels, together with their associated cost levels, are used to compute the variable and fixed cost components: Difference between costs corresponding to highest and lowest activity levels/Difference between highest and lowest activity levels Variable cost x low activity = total variable cost Total cost at lowest activity - total variable cost = fixed-cost estimate High and low activity levels are used to choose the two data points -- they need not necessarily coincide with the high and low cost levels in the data set

Non-Manufacturing Production Costs

Service industry firms and many nonprofit organizations are also engaged in production -- service is consumed as it is produced, whereas a manufactured product can be stored in inventory Service firms can have direct material and direct labor costs just as manufacturing firms do -- these costs can be traced to the company's service outputs, so they comprise part of the Operating Expenses that match with the Operating Revenues from the sale of services Not product costs, instead are period costs → reason? → services can't be inventoried for future sale like a tangible product, so their costs don't flow through the WIP and FGI like products do Cost analysis is used in pricing banking and health care services, selecting car-rental agency locations, setting enrollment targets in universities, and determining cost reimbursements in hospitals

Operating Expenses

Service industry firms generally refer to the costs of producing services as operating expenses -- treated as period costs Southwest Airlines includes costs such as employee wages, aviation fuel, and aircraft maintenance in operating expenses for the period

Value Chain

Set of linked, value-creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services Different companies define their value chains in different ways, depending on their strategies, but the bottom line is this: Customers must "value" the activities in the value chain, because unless customers are willing to pay the cost of these activities plus an appropriate amount of profit, the company will fail Securing raw materials and other resources → research and development → product design → production → marketing → distribution → customer service

Schedule of Cost of Goods Sold

Shows period of time cost of goods sold and details changes in FGI during month

Certified Management Accountant

Since 1972, the IMA has administered the Certified Management Accountant (CMA) program Requirements for becoming a CMA include meeting specified educational requirements and passing the rigorous CMA exam

Marginal Cost

Special case of the differential-cost concept -- is the incremental cost of producing one additional unit Typically differ across ranges of production quantities because the efficiency of the production process changes

Managerial Accountants

Specialists in using the tools of managerial accounting to help the organization and its managers run the operation effectively Rather than isolate managerial accountants in a separate department, companies usually locate them in the operating departments where they are working with other managers to make decisions and resolve operational problems

Multiple Regression

Statistical method that estimates a linear (straight-line) relationship between one dependent variable and two or more independent variables Y=a+b1X1+b2X2

Goodness of Fit

Statistical methods can be used to determine objectively how well a regression line fits the data upon which it is based → if a regression line fits the data well, a large proportion of the variation in the dependent variable will be explained by the variation in the independent variable

Activity-Based Costing (ABC)

System developed by managerial accountants for determining cost of producing goods or services -- helps management understand the causal linkages between activities and costs In an ABC system, costs of organization's significant activities are accumulated, then assigned to goods or services in accordance with how activities are used in production of those goods and services

Actual Costing

System in which direct material and direct labor are added to WIP at their actual amounts and actual overhead is allocated to WIP using an actual overhead rate computed at the end of each accounting period Even though an actual overhead rate is used, the amount of overhead assigned to each production job is still an allocated amount

Core Accounting System

System of procedures, personnel, and computers used to accumulate and store financial data in the organization Both financial and managerial accounting draw upon data from an organization's core accounting system

Costs and Benefits of Information

The accountant strives to communicate the cost information to the user in the most effective manner possible, and to structure the organization's accounting information system to record data that will be useful for a variety of purposes Another important task of the manager and the accountant is to weigh the benefits of providing information against the costs of generating, communicating, and using that information Some accountants, eager to show they have not overlooked anything, tend to provide managers with too much information When managers receive more data than they can utilize efficiently, information overload occurs → struggling to process large amounts of information, managers may be unable to recognize the most important facts

Applying Overhead Costs

The predetermined overhead rate is expressed per unit of the cost driver chosen (per direct-labor hour, per machine hour, etc.) → because of this, if we can observe the quantity of the cost driver required by a particular job, we can multiply it by predetermined overhead rate to determine amount of overhead cost applied to the job

Evaluation of Visual-Fit Method

The scatter diagram and visually fit cost line provide a valuable first step in the analysis of any cost item suspected to be semivariable or curvilinear Method is easy to use and to explain to others and provides a useful view of the overall cost behavior pattern Enables an experienced cost analyst to spot outliers in the data Significant drawback = lack of objectivity -- two cost analysts may draw two different visually fit cost lines but it's usually not a serious problem, esp if visual-fit method is combined with other, more objective methods

Product and Service Costing: Reporting to Interested Organizations

There is an ever-growing need for product cost information in relationships between firms and various outside organizations

Service Departments (Support Departments)

Those that do not work directly on manufacturing products but are necessary for the manufacturing process to occur, such as equipment-maintenance departments In some firms, departments are referred to as work centers

Idle Time

Time not spent productively by an employee due to such events as equipment breakdowns or new setups of production runs Unavoidable feature of most manufacturing processes -- is classified as overhead so it can be spread across all production jobs, rather than being associated with a particular one

Cost of Goods Manufactured

Total cost of direct material, direct labor, and manufacturing overhead transferred from WIP to FGI The costs then are stored in finished goods until the time period when the products are sold -- at that time, the costs of those products are transferred from finished goods to cost of goods sold, which is an expense of the period when the sale is made

Average Cost per Unit

Total cost, for whatever quantity is manufactured, divided by the number of units manufactured

Activity-Based Costing (ABC) System

Two-stage procedure to assign overhead costs to products First stage = identifies significant activities in the production of the three products and assigns overhead costs to each activity in accordance with the cost of the organization's resources used by the activity Activity cost pool = the overhead costs assigned to each activity Second stage = cost drivers appropriate for each cost pool are identified in stage two → overhead costs are allocated from each activity cost pool to each product line in proportion to the amount of the cost driver consumed by the product line

Unit Level Activity

Type of activity must be done for each production -- machine-related activity post pool since every product unit requires machine time

Treasurer

Typically responsible for raising capital and safeguarding organization's assets -- also responsible for management of organization's cash and investments, credit policy, and insurance coverage

Most common method for the disposition of underapplied or overapplied overhead at the end of an accounting period

Underapplied or overapplied overhead is closed into Cost of Goods Sold -- most companies use this approach because it's simple and the amount of underapplied or overapplied overhead is usually small Most firms wait until the end of the year to close underapplied or overapplied overhead into Cost of Goods Sold, rather than making the entry monthly Entry = cost of goods sold (top) manufacturing overhead (below) (underapplied)

Theoretical Capacity

Upper limit on production of goods or services if everything works perfectly

Capacity

Upper limit on the amount of goods or services an organization can produce in a specified period of time

Financial Accounting (Define)

Use of accounting information for reporting to parties outside the organization Users include current and prospective stockholders, lenders, investment analysts, unions, consumer groups, and government agencies

Job-Order Costing Systems

Used by companies with job-shop or batch-production manufacturing processes Job-shop environment: products are manufactured in very low volumes or one at a time EX: film production, custom house building, etc. Batch-production environments: multiple units of identical products are produced in a single production run (batch) of a different product EX: printing, commercial baking, and injection molding of plastic objects Service industry firms often produce large, individual client projects, such as consulting projects, building designs, tax filings, and lawsuits -- similar to jobs in a job-shop or batch-production manufacturing setting, in that the costs of a particular job can be accumulated and attributed to a single unit of output → most service industry firms use job-order costing

Material-Requirements Planning

Used in complex manufacturing operations, in which production takes place in several stages -- operations-management tool that assists managers in scheduling production in each stage of the manufacturing processes Ensures that, at each stage in the production processes, the required subassemblies, components, or partially processed materials will be ready for the next stage MRP systems, which are generally computerized, include files that list all of the component parts and materials in inventory and all of the parts and materials needed in each stage of the production process

Departmental Overhead Rates

Used in some production processes where relationship between overhead costs and firm's products differs substantially across production departments Usually results in more accurate assignment of overhead costs to firm's products

Visual-Fit Method

Used to plot recent observations of the cost at various activity levels when a cost has been classified as semivariable, or when the analyst has no clear idea about the behavior of a cost item

Activity-Based Management (ABM)

Using an activity-based costing system to improve the operations of an organization

Two-Stage Cost Allocation

When a company uses departmental overhead rates, the assignment of manufacturing overhead costs to production jobs is accomplished in two stages First = all manufacturing-overhead costs are assigned to the production departments, such as machining and assembly Second = overhead costs that have been assigned to each production department are applied to the production jobs that pass through the department

Cost Accountability

Whether a cost is a direct or an indirect cost of a department often depends on which department is under consideration EX: salary of a GE plant manager is an indirect cost of the plant's departments, the manager's salary is a direct cost of the plant he manages

Managerial Accounting in Different Types of Organizations

Whether they are profit-seeking or nonprofit enterprises and regardless of the activities they pursue → managerial accounting information is vital in all types of organizations

Application of Manufacturing Overhead (Journal Entry)

Work-in-process inventory (top) manufacturing overhead (below)

Equation Form of Least-Squares Regression Line

Y = a + bX X denotes activity level Independent variable -- variable upon which the estimate is based Y denotes estimated utilities cost for that level of activity Dependent variable -- estimate depends on independent variable A denotes intercept of the line on vertical axis b denotes slope of the line Within the relevant range, a is interpreted as an estimate of the fixed-cost component, and b is interpreted as an estimate of the variable cost per unit of activity

Key Issues with ABC

Years ago, a typical manufacturer produced a relatively small number of products that did not differ much in the amount and types of manufacturing support they required and labor was the dominant element in such a firm's cost structure -- today = opposite All these factors mean manufacturers must take a close look at their traditional, volume-based costing systems and consider a move toward a more sophisticated approach to product costing

Compute product cost per unit for each product line

activity cost for each product line/product line production volume = activity cost per unit of product

Compute pool rate for machine-related activity

activity cost pool/cost driver quantity = pool rate pool rate = the cost per unit of the cost driver for a particular activity cost pool