Managerial Accounting Chapter 2
Inventorial Products Cost Merchandiser
+ Purchase price from suppliers + Cost to get ready for sale + Freight-in + Import duties or tariffs
Income Statement-Manufacturer
+ Sales - Cost of goods sold ______________________ = Gross profit - Operating expenses = Operating income
Income Statement-Merchandiser
+ Sales - Cost of goods sold _______________________ = Gross profit - Operating expenses _______________________ = Operating income
Cost Of Goods Sold Calculation- Manufacturer
+Beginning finished goods inventory + Cost of goods manufactured __________________________ = Cost of goods available for sale - Ending finished goods inventory _________________________ = Cost of goods sold
Direct Materials Used
+Beginning inventory + Direct materials purchased plus freight-in ______________________________________ = Direct materials available for use - Ending inventory _________________________________ = Direct materials used
Examples of a service company
Advertising agencies Banks Law firms Insurance companies
Period Costs for a Service Company
All costs across the value chain?
Income statement for a service company
All costs are period costs in this statement
Period Costs For a Manufacturing Company
All other costs across the value chain?
Period costs For a Merchandising Company
All other costs across the value chain?
Direct Labor
Although many manufacturing facilities are highly automated, most still require some ______ to convert raw materials into a finished product.
Cost Subject
Anything for which managers want a separate measurement of cost
Variable Cost Example
As the sales go up, so do the total sales commissions.
Attaching
Assigning a cost simply means that you are ______a cost to the cost object.
Allocated
Because indirect costs cannot be traced to specific units, they are ______ to the cost objects, and per-unit costs are more of an estimate.
Inventory
Because merchandising sell tangible products, they have _____.
One Inventory or Merchandiser Inventory
Because the entire inventory is ready to sell, a merchandisers balance sheet usually reports ____ inventory account called _______ or ______.
Service companies
Because these companies sell services, they generally don't have inventory or cost of goods sold accounts (which makes it fairly easy to calculate operating income).
Direct Materials Used-Manufacturer
Beginning raw materials inventory + Purchases of raw materials + Freight in _________________________ = Materials available for use - Ending raw materials inventory _________________________ = Direct materials used
Calculation of Goods Manufactured Calculation - Manufacturer
Beginning work in process inventory + Direct materials used + Direct labor + Manufacturing overhead _______________________ = Total manufacturing costs to account for - Ending work in process inventory _______________________ = Cost of goods manufactured
Primary Costs
DM+DL
Cost Object
Direct Cost and Indirect Cost
Manufacturing Companies Inventoriable Product Costs
Direct Materials Direct Labor Manufacturing Overhead
Direct Cost
Direct Materials and Direct Labor are
Tracing
Direct costs are assigned by _____ these costs to specific units.
No
Do service companies have inventory?
Period Costs For a Accounting Treatment
Expense in period incurred as "Operating Expenses" or "Selling, General, and Administrative Expenses."
Manufacturing Companies Inventory Accounts- Finished Goods Inventory
Finish Goods Inventory ______________________________________________________ +Beginning inventory I - Cost of Goods +Cost of Goods Manufactured I Sold _______________________________________________________ =Ending Inventory
Cost to be included in Inventory
Freight Taxes etc.
Merchandiser
Have only one inventory account
All Direct and Indirect
If a company wants to know the total cost attributable to a cost object, it must assign ______ and ______ to the cost object
the cost object.
If a company wants to know the total cost attributable to a cost object, it must assign all direct and indirect costs to _____
Service Company
In a _________, all costs are period costs. There is no inventory, and operating income is the arithmetic difference between service revenue generated and operating expenses.
develop new services, advertise, and provide customer service.
In addition to labor costs, service companies incur costs to ______.
Operating Income
In general, "______" is simply the company's earnings before interest and income taxes.
Manufacturing Overhead
Indirect costs related to manufacturing that are not direct materials or direct labor
MOH
Indirect materials Indirect labor Other indirect manufacturing costs
Examples of a Cost Object
Individual units (a specific, custom-ordered Prius) • Different models (the Prius, Rav4, and Corolla) • Alternative marketing strategies (sales through dealers versus built-to-order Web Sales • Geographic segments of the business (United States, Europe, Japan) • Departments (human resources, R&D, legal) • A "green" initiative (developing fuel cells)
Raw Materials, WIP, Finish Goods Inventory
Inventory Accounts for a Manufacturer?
There are none
Inventory Accounts for a Service Company?
Merchandise Inventory
Inventory for a Merchandiser Account?
Indirect Cost
MOH
Conversion Costs
MOH+Direct Labor
Controllable Costs
Management can influence or change cost
Uncontrollable Costs
Management cannot change or influence cost in the short run
DM
Manufacturers convert raw materials into finished products.
labor and other inputs (including plant and equipment) to convert
Manufacturing companies use __________ raw materials into finish products
Three inventory accounts in manufacturing
Raw Materials inventory, Work in Process Inventory, and Finish Goods Inventory
Six major activities of the value chain
Research and Development, Design, Production, Marketing, Distribution Customer Service.
Merchandiser
Resell products purchased from suppliers
Income Statement- Manufacturer
Sales minus cost of goods sold minus operating expenses equals operating income.
None
Service Companies Inventoriable Product Costs
Service Company Income Statement
Service Revenues - Operating Expenses _______________________ Operating Income
Irrelevant Cost
The amount you paid for your old car is an _______ and considered a sunk cost
Finish Goods Inventory T account
The finished goods inventory account starts with a beginning inventory balance, if items were left unsold from a prior period.
Cost Of Goods Manufactured Calculation- Manufacturer
The manufacturer starts by buying direct materials, which are stored in raw materials inventory until they are needed for production. Only those direct materials used in production are transferred out of raw materials inventory and into work in process inventory. During production, the company uses direct labor and manufacturing overhead to convert these direct materials into a finished product. All units currently being worked on are in work in process inventory. When the units are completed, they are moved out of work in process inventory into finished goods inventory. The amount transferred into finished goods inventory during the year is the cost of goods manufactured.
MOH
The third production cost
cost of goods manufactured
This is the manufacturer's cost to obtain new finished goods that are ready to sell. Thus, it is the counterpart to the merchandiser's purchases.
add or subtract nonoperating income and expenses, such as interest, and subtract income taxes.
To determine the Net income of a service company we would ______
Accounting Treatment Inventoriable Product Costs
Treated as inventory until product is sold. When sold, expense as "Cost of Goods Sold"
False: because it would be adding direct labor twice.
True/False: You add conversion costs to prime costs.
Manufacturers
Use labor and other inputs to convert raw materials into finished products
Behavioral Costs
Variable Cost and Fixed Costs are?
Examples of a Merchandiser
Walmart Best Buy Amazon.com
Service, Merchandiser, Manufacturers
What are the three types of companies?
Merchandising companies pay freight-in charges to get the goods to their place of business (plus import duties if the goods were manufactured overseas). These charges become part of the cost of their inventory.
Why does the cost of their inventory include freight-in charges?
Manufacturing Companies Inventory Accounts Work in Process Inventory
Work In Process Inventory ______________________________________________________ +Beginning inventory I - Cost of goods +Materials Used from Raw Materials I manufactured + Direct Labor I and sent to + MOH I finished goods ______________________________________I____________ Ending Inventory I
Direct Cost Example
a steering wheel used in the production of a car would be a ?
A manufacturing company's inventoriable product costs
consists of direct materials, direct labor, and manufacturing overhead?
Inventoriable Product costs
costs include freight-in costs and import duties or tariffs, if the products were purchased from overseas.
Distribution
costs of delivering the car to the customer (delivery of products or services to customers)
Customer Service
costs of providing warranty service to the purchaser of the car (support provided for customers after the sale)
Other indirect manufacturing costs
include insurance and depreciation on the plant, plant equipment depreciation, plant property taxes, plant repairs and maintenance, and plant utilities.
Merchandiser
include wholesalers and retailers
The Value Chain
includes all activities from the inception of a product idea through the final delivery to the customer.
Work In Process
includes all goods that are partway through the manufacturing process but not yet complete (raw materials plus some labor and manufacturing overhead).
MOH
includes all manufacturing costs other than direct materials and direct labor. In other words, it includes all indirect manufacturing costs.
Raw Materials Inventory
includes all raw materials used in manufacturing or building a product. No labor is included in raw materials.
Finish Goods Inventory
includes completed goods that have not yet been sold. Although most manufacturers sell their ___________to merchandisers, some manufacturers sell their products directly to consumers. (Finished goods inventory includes all costs associated with the product.)
Indirect Material
includes materials used in the plant that are not easily traced to individual units (for example, janitorial supplies). Although it may be possible to trace the __________such as glue used in a product, it would not be economically feasible.
Indirect Labor
includes the cost of all employees in the plant other than those employees directly converting the raw materials into the finished product (for example, plant supervisor and janitors).
Manufacturing overhead has three components
indirect materials, indirect labor, and other indirect manufacturing costs.
Direct cost
is a cost that can be traced directly to a cost object
Indirect Cost
is a cost that cannot be directly traced to the cost object
MOH
is also referred to as factory overhead because all of these costs relate to the factory.
MOH
is made up of costs that cannot be traced to specific units; however, they are costs related to manufacturing operations.
The cost of merchandise inventory
is the cost merchandisers pay for the goods plus all costs necessary to get the merchandise in place and ready to sell.
Direct Labor
is the cost of compensating employees who physically convert raw materials into the company's products.
Service Firms
now make up the largest sector of the U.S. economy.
Wholesalers
often referred to as "middlemen," buy products in bulk from manufacturers, mark up the prices, and then sell those products to retailers.
Inventory First
product costs are placed in _______ and then expensed when the sale is made.
Research and Development
research costs associated with developing a fuel-efficient and safe car (researching and developing new or improved products or services and the processes for producing them)
Manufacturers
sell their products to retailers or wholesalers at a price that is high enough to cover their costs and generate a profit
Retailers
sell to consumers such as you and me
Production (manufacturer) or Purchases (Merchandiser)
sheet metal used to build the car and the assembly-line worker's wages to build the car (resources used to produce a product or service or to purchase finished merchandise intended for resale)
Fixed Cost
stay constant in total over a wide range of activity levels.
Indirect Cost Example
the cost of lubricants used in the manufacture of a car. Another example would be a plant manager's wages. These wages would not be traceable to a single product.
Uncontrollable Costs
the cost of property tax and insurance of its existing plants.
Relevant Cost Example
the cost of repairs to your old car, trade-in value of your old car, the cost of the new car, and any other cost that would differ between the two alternatives.
Controllable Costs
the cost of research and development, design, and advertising
Example of a variable cost
the cost of the engines; as more cars are manufactured, more engines are used, so the total engine cost will go up. Manufacture one car, engine cost is $1,000. Two cars, engine cost is $2,000, and so on.
MOH
the costs incurred to turn materials into finished product.
Example of a fixed cost
the rent on the factory. It doesn't matter if the company makes 1 car or 1,000 cars, the rent will stay the same.
Total Fixed Cost Example
the salary does not change with sales volume.
Design
the specifications for the dimensions and engine characteristics for the car (detailed engineering of products and services and the processes for producing them)
Examples of Manufacturers
Procter & Gamble General Mills Dell Computer
Service Company
Provide Service only
Manufacturer Companies Inventory Account for Raw Materials
Raw Materials Inventory ________________________ I___________________ + Beginning Inventory I -Material Used In + Purchases and Freight I Work Process __________________________________________ =Ending Inventory I
Merchandising Companies Inventoriable Product Costs
Cost of Merchandise Itself Freight In Import Duties and Customs
Cost of Goods Sold- Manufacturer
Cost of goods sold for a manufacturing company uses the same formula as in a merchandising company, substituting cost of goods manufactured for cost of goods sold.
not-for-profits and governmental agencies
Organizations other than _____and ______ are in business to generate profits for their owners.
Marketing
advertising and promotion costs (promotion and advertising of products or services. The goal of marketing is to create consumer demand for products and services.)
Relevant
are costs that differ between alternatives; they are differential costs
Irrelevant Cost
are costs that do not differ between alternatives; they are referred to as "sunk" costs.
Sunk Costs
are costs that have already been incurred.
Service Company
are in business to sell intangible services—such as health care, insurance, and consulting—rather than tangible products.
DM
are the primary raw materials that become a physical part of the finished product
Variable Cost
change in total in direct proportion to changes in volume.