WGU UFC1 Wild Managerial Accounting

Compute the break-even point for a single product company.

A company's break-even point for a period is the sales volume at which total revenues equal total costs. To compute a break-even point in terms of sales units, we divide total fixed costs by the contribution margin per unit. To compute a break-even point in terms of sales dollars, divide total fixed costs by the contribution margin ratio.

Explain controllable costs and responsibility accounting.

A controllable cost is one that is influenced by a specific management level. The total expenses of operating a department often include some items a department manager does not control. Responsibility accounting systems provide information for evaluating the performance of department managers. A responsibility accounting system's performance reports for evaluating department managers should include only the expenses (and revenues) that each manager controls.

Prepare a flexible budget and interpret a flexible budget performance report.

A flexible budget expresses variable costs in per unit terms so that it can be used to develop budgeted amounts for any volume level within the relevant range. Thus, managers compute budgeted amounts for evaluation after a period for the volume that actually occurred. To prepare a flexible budget, we express each variable cost as a constant amount per unit of sales (or as a percent of sales dollars). In contrast, the budgeted amount of each fixed cost is expressed as a total amount expected to occur at any sales volume within the relevant range. The flexible budget is then determined using these computations and amounts for fixed and variable costs at the expected sales volume.

Explain and illustrate a hybrid costing system.

A hybrid costing system contains features of both job order and process costing systems. Generally, certain direct materials are accounted for by individual products as in job order costing, but direct labor and overhead costs are accounted for similar to process costing.

Compute cost of goods sold for a manufacturer.

A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold.

Prepare production and manufacturing budgets.

A manufacturer must prepare a production budget instead of a purchases budget. A manufacturing budget shows the budgeted production costs for direct materials, direct labor, and overhead.

Describe a master budget and the process of preparing it.

A master budget is a formal overall plan for a company. It consists of plans for business operations and capital expenditures, plus the financial results of those activities. The budgeting process begins with a sales budget. Based on expected sales volume, companies can budget purchases, selling expenses, and administrative expenses. Next, the capital expenditures budget is prepared, followed by the cash budget and budgeted financial statements. Manufacturers also must budget production quantities, materials purchases, labor costs, and overhead.

Define and prepare a process cost summary and describe its purposes.

A process cost summary reports on the activities of a production process or department for a period. It describes the costs charged to the department, the equivalent units of production for the department, and the costs assigned to the output. The report aims to (1) help managers control their departments, (2) help factory managers evaluate department managers' performances, and (3) provide cost information for financial statements. A process cost summary includes the physical flow of units, equivalent units of production, costs per equivalent unit, and a cost reconciliation. It reports the units and costs to account for during the period and how they were accounted for during the period. In terms of units, the summary includes the beginning goods in process inventory and the units started during the month. These units are accounted for in terms of the goods completed and transferred out, and the ending goods in process inventory. With respect to costs, the summary includes materials, labor, and overhead costs assigned to the process during the period. It shows how these costs are assigned to goods completed and transferred out, and to ending goods in process inventory.

Identify and assess advantages and disadvantages of the plant-wide overhead and departmental overhead rate methods.

A single plant-wide overhead rate is a simple way to assign overhead cost. A disadvantage is that it can inaccurately assign costs when costs are caused by multiple factors and when different products consume different amounts of inputs. Overhead costing accuracy is improved by use of multiple departmental rates because differences across departmental functions can be linked to costs incurred in departments. Yet, accuracy of cost assignment with departmental rates suffers from the same problems associated with plant-wide rates because activities required for each product are not identified with costs of providing those activities.

Identify and assess advantages and disadvantages of activity-based costing.

ABC improves product costing accuracy and draws management attention to relevant factors to control. The cost of constructing and maintaining an ABC system can sometimes outweigh its value.

Compute unit cost under both absorption and variable costing.

Absorption cost per unit includes direct materials, direct labor, and all overhead, whereas variable cost per unit includes direct materials, direct labor, and only variable overhead.

Absorption cost: Cost that includes fixed and variable product costs

Absorption cost: Cost that includes fixed and variable product costs

Analyze expense planning using activity-based budgeting.

Activity-based budgeting requires management to identify activities performed by departments, plan necessary activity levels, identify resources required to perform these activities, and budget the resources.

Analyze changes in sales from expected amounts.

Actual sales can differ from budgeted sales, and managers can investigate this difference by computing both the sales price and sales volume variances. The sales price variance refers to that portion of total variance resulting from a difference between actual and budgeted selling prices. The sales volume variance refers to that portion of total variance resulting from a difference between actual and budgeted sales quantities.

Record the transfer of completed goods to Finished Goods Inventory and Cost of Goods Sold.

As units complete the final process and are eventually sold, their accumulated cost is transferred to Finished Goods Inventory and finally to Cost of Goods Sold.

Determine adjustments for overapplied and underapplied factory overhead.

At the end of each period, the Factory Overhead account usually has a residual debit (underapplied overhead) or credit (overapplied overhead) balance. If the balance is not material, it is transferred to Cost of Goods Sold, but if it is material, it is allocated to Goods in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

Compute and interpret break-even volume in units.

Break-even volume in units is defined as total fixed costs divided by contribution margin per unit. The result gives managers a unit goal to achieve break even; if the goal is surpassed, the company earns income.

Compute the break-even point for a multiproduct company.

CVP analysis can be applied to a multiproduct company by expressing sales volume in terms of composite units. A composite unit consists of a specific number of units of each product in proportion to their expected sales mix. Multiproduct CVP analysis treats this composite unit as a single product.

Describe important features of job order production.

Certain companies called job order manufacturers produce custom-made products for customers. These customized products are produced in response to a customer's orders. A job order manufacturer produces products that usually are different and, typically, produced in low volumes. The production systems of job order companies are flexible and are not highly standardized.

Mixed costs:

Combination of fixed and variable costs

Cost Volume Profit (CVP) Formulas:

Contribution margin = Sales - Variable expenses (manufacturing and non-manufacturing) Net operating income = Contribution margin - Fixed expenses (manufacturing and non manufacturing) Contribution margin ratio = Contribution margin / Sales Break even point (units) = Fixed expenses / Unit contribution margin Break even point (dollar sales) = Fixed expenses / CM ratio Units sales to attain target profit = (Fixed expenses + Target profit) / Unit contribution margin Dollar sales to attain target profit = (Fixed expenses + Target profit) / Contribution margin ratio Margin of safety = Total budgeted or actual sales - Break even sales Margin of safety percentage or margin of safety ratio = Margin of safety / Total budgeted or actual sales Degree of operating leverage = Contribution margin / Net operating income

Compute the contribution margin and describe what it reveals about a company's cost structure.

Contribution margin per unit is a product's sales price less its total variable costs. Contribution margin ratio is a product's contribution margin per unit divided by its sales price. Unit contribution margin is the amount received from each sale that contributes to fixed costs and income. The contribution margin ratio reveals what portion of each sales dollar is available as contribution to fixed costs and income.

Describe different types of cost behavior in relation to production and sales volume.

Cost behavior is described in terms of how its amount changes in relation to changes in volume of activity within a relevant range. Fixed costs remain constant to changes in volume. Total variable costs change in direct proportion to volume changes. Mixed costs display the effects of both fixed and variable components. Step-wise costs remain constant over a small volume range, then change by a lump sum and remain constant over another volume range, and so on. Curvilinear costs change in a nonlinear relation to volume changes.

Job order cost:

Cost of a batch of specially made goods

Cost per unit:

Cost of a single unit of product

Process cost:

Cost of similar goods made in large quantities on an assembly line

Direct cost:

Cost that you can trace to a specific product

Indirect cost:

Cost that you can't easily trace to a specific product

Describe several applications of cost-volume-profit analysis.

Cost-volume-profit analysis can be used to predict what can happen under alternative strategies concerning sales volume, selling prices, variable costs, or fixed costs. Applications include "what-if" analysis, computing sales for a target income, and break-even analysis.

Expense:

Costs deducted from revenues on the income statement

Product costs:

Costs needed to make goods; considered part of inventory until sold

Period costs:

Costs not needed to make goods; recorded as expenses when incurred

Opportunity costs:

Costs of income lost because you chose a different alternative

Describe and record the flow of labor costs in job order cost accounting.

Costs of labor flow from clock cards to the Factory Payroll account and then to either job cost sheets or the Indirect Labor account in the factory overhead ledger.

Describe and record the flow of materials costs in job order cost accounting.

Costs of materials flow from receiving reports to materials ledger cards and then to either job cost sheets or the Indirect Materials account in the factory overhead ledger.

Define product and period costs and explain how they impact financial statements.

Costs that are capitalized because they are expected to have future value are called product costs; costs that are expensed are called period costs. This classification is important because it affects the amount of costs expensed in the income statement and the amount of costs assigned to inventory on the balance sheet. Product costs are commonly made up of direct materials, direct labor, and overhead. Period costs include selling and administrative expenses.

Incremental costs:

Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs

Variable costs:

Costs that change in direct proportion with activity level

Irrelevant costs:

Costs that don't change depending on which alternative you choose

Fixed costs:

Costs that don't change with activity level

Controllable costs:

Costs that you can change

Noncontrollable costs:

Costs that you can't change

Sunk costs:

Costs you've already paid or committed to paying

Distinguish between direct and indirect expenses and identify bases for allocating indirect expenses to departments.

Direct expenses are traced to a specific department and are incurred for the sole benefit of that department. Indirect expenses benefit more than one department. Indirect expenses are allocated to departments when computing departmental net income. Ideally, we allocate indirect expenses by using a cause-effect relation for the allocation base. When a cause-effect relation is not identifiable, each indirect expense is allocated on a basis reflecting the relative benefit received by each department.

Conversion costs:

Direct labor and overhead

Record the flow of direct labor costs in process cost accounting.

Direct labor costs are initially debited to the Factory Payroll account. The total amount in it is then assigned to the Goods in Process Inventory account pertaining to each process.

Define and compute equivalent units and explain their use in process cost accounting.

Equivalent units of production measure the activity of a process as the number of units that would be completed in a period if all effort had been applied to units that were started and finished. This measure of production activity is used to compute the cost per equivalent unit and to assign costs to finished goods and goods in process inventory. To compute equivalent units, determine the number of units that would have been finished if all materials (or labor or overhead) had been used to produce units that were started and completed during the period. The costs incurred by a process are divided by its equivalent units to yield cost per unit.

Cost driver:

Factor thought to affect costs

Income statement formulas:

Gross profit = Net sales - Cost of goods sold Operating profit = Gross profit - Operating expenses Operating or commercial expenses = Selling or marketing expenses + General or administrative expenses Per unit gross profit = Gross profit / No. of units sold Per unit net profit = Net profit / No. of units sold Percentage of GP to sales = (Gross profit / Net sales) × 100 Percentage of net profit to sales = (Net profit / Net sales) × 100

Historical cost:

How much you originally paid for something

Finished goods cost:

How much you paid for goods completed but not yet sold

Work-in-process cost:

How much you paid for goods that are started but not yet completed

Describe trends in managerial accounting.

Important trends in managerial accounting include an increased focus on satisfying customers, the impact of a global economy, and the growing presence of e-commerce and service-based businesses. The lean business model, designed to eliminate waste and satisfy customers, can be useful in responding to recent trends. Concepts such as total quality management, just-in-time production, and the value chain often aid in application of the lean business model.

Explain job cost sheets and how they are used in job order cost accounting.

In a job order cost accounting system, the costs of producing each job are accumulated on a separate job cost sheet. Costs of direct materials, direct labor, and overhead are accumulated separately on the job cost sheet and then added to determine the total cost of a job. Job cost sheets for jobs in process, finished jobs, and jobs sold make up subsidiary records controlled by general ledger accounts.

Key Costs Related to Managerial Accounting

In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions.

Overhead:

Indirect materials, indirect labor, and other miscellaneous costs needed to make products

Compute cycle time and cycle efficiency, and explain their importance to production management.

It is important for companies to reduce the time to produce their products and to improve manufacturing efficiency. One measure of that time is cycle time (CT), defined as Process time + Inspection time + Move time + Wait time. Process time is value-added time; the others are non-value-added time. Cycle efficiency (CE) is the ratio of value-added time to total cycle time. If CE is low, management should evaluate its production process to see if it can reduce non-value-added activities.

Apply job order costing in pricing services.

Job order costing can usefully be applied to a service setting. The resulting job cost estimate can then be used to help determine a price for services.

Describe variances and what they reveal about performance.

Management can use variances to monitor and control activities. Total cost variances can be broken into price and quantity variances to direct management's attention to those responsible for quantities used and prices paid.

Explain manufacturing activities and the flow of manufacturing costs.

Manufacturing activities consist of materials, production, and sales activities. The materials activity consists of the purchase and issuance of materials to production. The production activity consists of converting materials into finished goods. At this stage in the process, the materials, labor, and overhead costs have been incurred and the manufacturing statement is prepared. The sales activity consists of selling some or all of finished goods available for sale. At this stage, the cost of goods sold is determined.

Compute materials and labor variances.

Materials and labor variances are due to differences between the actual costs incurred and the budgeted costs. The price (or rate) variance is computed by comparing the actual cost with the flexible budget amount that should have been incurred to acquire the actual quantity of resources. The quantity (or efficiency) variance is computed by comparing the flexible budget amount that should have been incurred to acquire the actual quantity of resources with the flexible budget amount that should have been incurred to acquire the standard quantity of resources.

Record the flow of direct materials costs in process cost accounting.

Materials purchased are debited to a Raw Materials Inventory account. As direct materials are issued to processes, they are separately accumulated in a Goods in Process Inventory account for that process.

Explain the role of variable costing in pricing special orders.

Over the short run, fixed production costs such as cost of maintaining plant capacity do not change with changes in production levels. When there is excess capacity, increases in production levels would only increase variable costs. Thus, managers should accept special orders as long as the order price is greater than the variable cost. This is because accepting the special order would increase only variable costs.

Describe and record the flow of overhead costs in job order cost accounting.

Overhead costs are accumulated in the Factory Overhead account that controls the subsidiary factory overhead ledger. Then, using a predetermined overhead rate, overhead costs are charged to jobs.

Distinguish between the plant-wide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

Overhead costs can be assigned to cost objects using a plant-wide rate that combines all overhead costs into a single rate, usually based on direct labor hours, machine hours, or direct labor cost. Multiple departmental overhead rates that include overhead costs traceable to departments are used to allocate overhead based on departmental functions. ABC links overhead costs to activities and assigns overhead based on how much of each activity is required for a product.

Compute overhead variances.

Overhead variances are due to differences between the actual overhead costs incurred and the overhead applied to production. An overhead spending variance arises when the actual amount incurred differs from the budgeted amount of overhead. An overhead efficiency (or volume) variance arises when the flexible overhead budget amount differs from the overhead applied to production. It is important to realize that overhead is assigned using an overhead allocation base, meaning that an efficiency variance (in the case of variable overhead) is a result of the overhead application base being used more or less efficiently than planned.

Materials:

Physical things you need to make products

Describe the importance and benefits of budgeting and the process of budget administration.

Planning is a management responsibility of critical importance to business success. Budgeting is the process management uses to formalize its plans. Budgeting promotes management analysis and focuses its attention on the future. Budgeting also provides a basis for evaluating performance, serves as a source of motivation, is a means of coordinating activities, and communicates management's plans and instructions to employees. Budgeting is a detailed activity that requires administration. At least three aspects are important: budget committee, budget reporting, and budget timing. A budget committee oversees the budget preparation. The budget period pertains to the time period for which the budget is prepared such as a year or month.

Cost of Goods Manufactured and Sold Statement Formulas:

Prime Cost = Direct Materials Cost + Direct Labor Cost Total Factory Cost or Manufacturing Cost = Direct Materials + Direct Labor Cost + Factory Overhead Conversion Cost = Direct Labor Cost + Factory Overhead Cost Cost of Goods Manufactured (COGM) = Total Factory Cost + Opening Work in Process Inventory - Ending Work in Process Inventory Or Cost of Goods manufactured = Direct materials cost + Direct labor cost + Factory overhead cost + Opening work in process inventory - Ending work in process inventory Cost of goods sold (COGS) = Cost of goods manufactured + Opening finished goods inventory - Ending finished goods inventory Or Cost of goods sold = Direct materials cost + Direct labor cost + Factory overhead cost + Opening work in process inventory - Ending work in process inventory + Opening finished goods inventory - Ending finished goods inventory Number of units manufactured = Units sold + Ending Finished Goods units - Opening finished goods units Per unit cost of goods manufactured = Cost of goods manufactured / Units manufactured Materials used or consumed = Opening inventory or materials + Net purchases of materials - Ending inventory of materials

Compare process cost accounting and job order cost accounting.

Process and job order manufacturing operations are similar in that both combine materials, labor, and factory overhead to produce products or services. They differ in the way they are organized and managed. In job order operations, the job order cost accounting system assigns materials, labor, and overhead to specific jobs. In process operations, the process cost accounting system assigns materials, labor, and overhead to specific processes. The total costs associated with each process are then divided by the number of units passing through that process to get cost per equivalent unit. The costs per equivalent unit for all processes are added to determine the total cost per unit of a product or service.

Explain process operations and the way they differ from job order operations.

Process operations produce large quantities of similar products or services by passing them through a series of processes, or steps, in production. Like job order operations, they combine direct materials, direct labor, and overhead in the operations. Unlike job order operations that assign the responsibility for each job to a manager, process operations assign the responsibility for each process to a manager.

Avoiding Pitfalls on Managerial Accounting Exams: Some concepts are easily misunderstood and therefore difficult to address correctly on exams, so:

Read the last sentence first. Management accounting questions often provide a lot of data, but not all of that information is needed to answer the question. Test item writers refer to that data as distractors. If you start at the top and read down, you read a lot of unneeded data. Read the last sentence first. That strategy gets you to what the question is truly asking. Then you can read the rest of the question — and pull out only the data you need to answer the question.

Contribution margin:

Sales less variable costs

Define standard costs and explain how standard cost information is useful for management by exception.

Standard costs are the normal costs that should be incurred to produce a product or perform a service. They should be based on a careful examination of the processes used to produce a product or perform a service as well as the quantities and prices that should be incurred in carrying out those processes. On a performance report, standard costs (which are flexible budget amounts) are compared to actual costs, and the differences are presented as variances. Standard cost accounting provides management information about costs that differ from budgeted (expected) amounts. Performance reports disclose the costs or areas of operations that have significant variances from budgeted amounts. This allows managers to focus attention on the exceptions and less attention on areas proceeding normally.

Explain and illustrate the accounting for production activity using FIFO.

The FIFO method for process costing is applied and illustrated to (1) report the physical flow of units, (2) compute the equivalent units of production, (3) compute the cost per equivalent unit of production, and (4) assign and reconcile costs.

Cost of goods sold:

The cost of making goods that you sold

Cost of goods manufactured:

The cost of the goods completed during a period

Graph costs and sales for a single product company.

The costs and sales for a company can be graphically illustrated using a CVP chart. In this chart, the horizontal axis represents the number of units sold and the vertical axis represents dollars of sales or costs. Straight lines are used to depict both costs and sales on the CVP chart.

Record the flow of factory overhead costs in process cost accounting.

The different factory overhead items are first accumulated in the Factory Overhead account and are then allocated, using a predetermined overhead rate, to the different processes. The allocated amount is debited to the Goods in Process Inventory account pertaining to each process.

Analyze changes in sales using the degree of operating leverage.

The extent, or relative size, of fixed costs in a company's total cost structure is known as operating leverage. One tool useful in assessing the effect of changes in sales on income is the degree of operating leverage, or DOL. DOL is the ratio of the contribution margin divided by pretax income. This ratio can be used to determine the expected percent change in income given a percent change in sales.

Describe the four types of activities that cause overhead costs.

The four types of activities that cause overhead costs are: (1) unit level activities, (2) batch level activities, (3) product level activities, and (4) facility level activities. Unit level activities are performed on each unit, batch level activities are performed only on each group of units, and product level activities are performed only on each product line. Facility level activities are performed to sustain facility capacity and are not caused by any specific product. Understanding these types of activities can help in applying activity-based costing.

Explain how balance sheets and income statements for manufacturing and merchandising companies differ.

The main difference is that manufacturers usually carry three inventories on their balance sheets—raw materials, goods in process, and finished goods—instead of one inventory that merchandisers carry. The main difference between income statements of manufacturers and merchandisers is the items making up cost of goods sold. A merchandiser adds beginning merchandise inventory to cost of goods purchased and then subtracts ending merchandise inventory to get cost of goods sold. A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold.

Prepare a manufacturing statement and explain its purpose and links to financial statements.

The manufacturing statement reports computation of cost of goods manufactured for the period. It begins by showing the period's costs for direct materials, direct labor, and overhead and then adjusts these numbers for the beginning and ending inventories of the goods in process to yield cost of goods manufactured.

Budgets that Go into Creating a Master Budget A master budget is a plan created to manage a company's manufacturing and sales activity to meet profit and cash flow goals. Creating a master budget requires careful coordination of several smaller budgets covering all parts of the organization; that way, the master budget is realistic but not complacent.

The master budget contains the following elements: •Sales budget •Production budget •Direct materials budget •Direct labor budget •Manufacturing overhead budget •Selling and administrative budget •Capital acquisitions budget •Cash budget •Budgeted financial statements

Link both operating and capital expenditures budgets to budgeted financial statements.

The operating budgets, capital expenditures budget, and cash budget contain much of the information to prepare a budgeted income statement for the budget period and a budgeted balance sheet at the end of the budget period. Budgeted financial statements show the expected financial consequences of the planned activities described in the budgets.

Allocate overhead costs to products using the plant-wide overhead rate method.

The plant-wide overhead rate equals total budgeted overhead divided by budgeted plant volume, the latter often measured in direct labor hours or machine hours. This rate multiplied by the number of direct labor hours (or machine hours) required for each product provides the overhead assigned to each product.

Explain the purpose and nature of, and the role of ethics in, managerial accounting.

The purpose of managerial accounting is to provide useful information to management and other internal decision makers. It does this by collecting, managing, and reporting both monetary and nonmonetary information in a manner useful to internal users. Major characteristics of managerial accounting include (1) focus on internal decision makers, (2) emphasis on planning and control, (3) flexibility, (4) timeliness, (5) reliance on forecasts and estimates, (6) focus on segments and projects, and (7) reporting both monetary and nonmonetary information. Ethics are beliefs that distinguish right from wrong. Ethics can be important in reducing fraud in business operations.

Prepare each component of a master budget and link each to the budgeting process.

The term master budget refers to a collection of individual component budgets. Each component budget is designed to guide persons responsible for activities covered by that component. A master budget must reflect the components of a company and their interaction in pursuit of company goals.

Prepare and analyze an income statement using absorption costing and using variable costing.

The variable costing income statement differs from the absorption costing income statement in that it classifies expenses based on cost behavior rather than function. Instead of gross margin, the variable costing income statement shows contribution margin. This contribution margin format focuses attention on the relation between costs and sales that is not evident from the absorption costing format. Under absorption costing, some fixed overhead cost is allocated to ending inventory and is carried on the balance sheet to the next period. However, all fixed costs are expensed in the period incurred under variable costing. Consequently, absorption costing income is generally greater than variable costing income if units produced exceed units sold, and conversely.

Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.

Three different methods used to estimate costs are the scatter diagram, the high-low method, and least-squares regression. All three methods use past data to estimate costs. Cost estimates from a scatter diagram are based on a visual fit of the cost line. Estimates from the high-low method are based only on costs corresponding to the lowest and highest sales. The least-squares regression method is a statistical technique and uses all data points.

Describe how absorption costing can result in over-production.

Under absorption costing, fixed overhead costs are allocated to all units including both units sold and units in ending inventory. Consequently, expenses associated with the fixed overhead allocated to ending inventory are deferred to a future period. As a result, the larger ending inventory is, the more overhead cost is deferred to the future, and the greater current period income is.

Prepare a contribution margin report.

Under variable costing, the total variable costs are first deducted from sales to arrive at contribution margin. Variable costs and contribution margin are also shown as ratios (after dividing by dollar sales).

Convert income under variable costing to the absorption cost basis.

Variable costing income can be adjusted to absorption costing income by adding the fixed cost allocated to ending inventory and subtracting the fixed cost previously allocated to beginning inventory.

Describe accounting concepts useful in classifying costs.

We can classify costs on the basis of their (1) behavior—fixed vs. variable, (2) traceability—direct vs. indirect, (3) controllability—controllable vs. uncontrollable, (4) relevance—sunk vs. out of pocket, and (5) function—product vs. period. A cost can be classified in more than one way, depending on the purpose for which the cost is being determined. These classifications help us understand cost patterns, analyze performance, and plan operations.

Prepare journal entries for standard costs and account for price and quantity variances.

When a company records standard costs in its accounts, the standard costs of materials, labor, and overhead are debited to the Goods in Process Inventory account. Based on an analysis of the material, labor, and overhead costs, each quantity variance, price variance, volume variance, and controllable variance is recorded in a separate account. At period-end, if the variances are material, they are allocated among the balances of the Goods in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. If they are not material, they are simply debited or credited to the Cost of Goods Sold account.

Allocate overhead costs to products using the departmental overhead rate method.

When using multiple departmental rates, overhead cost must first be traced to each department and then divided by the measure of output for that department to yield the departmental overhead rate. Overhead is applied to products using this rate as products pass through each department.

Explain cost flows for activity-based costing.

With ABC, overhead costs are first traced to the activities that cause them, and then cost pools are formed combining costs caused by the same activity. Overhead rates based on these activities are then used to assign overhead to products in proportion to the amount of activity required to produce them.

Allocate overhead costs to products using activity-based costing.

With ABC, overhead costs are matched to activities that cause them. If there is more than one cost with the same activity, these costs are combined into pools. An overhead rate for each pool is determined by dividing total cost for that pool by its activity measure. Overhead costs are assigned to products by multiplying the ABC pool rate by the amount of the activity required for each product.

Labor:

Work needed to make products

Cost-Volume-Profit Relationships for Managerial Accounting: Managerial accounting provides useful tools, such as cost-volume-profit relationships, to aid decision-making. Cost-volume-profit analysis helps you understand different ways to meet your company's net income goals. This image describes the relationship among sales, fixed costs, variable costs, and net income:

http://media.wiley.com/Lux/97/354897.image0.jpg •The bottom axis indicates the level of production — the number of units you make. •The left axis indicates value in dollars. •Where total sales equals total costs, the company breaks even (which is why that's called the break-even point). •The shaded area to the upper right of this break-even point is profit. •The shaded region to the lower left is net loss. •Total variable costs are a diagonal line because the higher the production, the greater the variable costs. •The total fixed costs line is horizontal because regardless of the production level, fixed costs stay the same. •Total costs equal the sum of total variable costs and total fixed costs.