Accounting for Managers - Ch. 13 PP

Direct Costs

can be easily and conveniently traced to a unit of product or other cost objective. - Direct costs would not be incurred if the product or activity were discontinued

Predetermined Overhead Application Rate =

Estimated Total Overhead Cost / Estimated Total Labor Hours

Product Costs viewed as transactions in the horizontal model:

- Product Costs are recorded in the inventory account as assets in the balance sheet. - When products are sold, product costs are transferred to Cost of Goods Sold, an expense on the income statement.

Period Costs

are recognized as expenses in the income statement as soon as they're incurred. - non-product costs such as selling expense, advertising expense, and interest expense are recognized as expenses when incurred

Cost Accumulation and Assignment

- A cost object may represent a job, a machine, a product line, a service activity, a department, a plant, a customer, a sales territory, a division of the corporation, or any other organizational reference point where a need to understand cost exists. - Cost accumulation is the process of collecting and recording transaction data through the accounting information system. ---> These systems can be highly automated and provide a real-time view of cost information to allow timely decisions as the activity is occurring. ---> The total amount of cost accumulated by the system is then logically categorized in different ways, such as by the production department. This classification of cost emphasizes the managerial point of reference and is referred to as a cost pool. - Cost assignment is the process of attributing an appropriate amount of cost in the cost pool to each cost object.

Cost Accounting System

- A manufacturing cost accounting system involves three inventory accounts: Raw Materials, Work in Process, and Finished Goods. - Raw Materials Inventory holds the cost of parts, assemblies, and materials that will be used in the manufacturing process. - Work in Process Inventory is used to accumulate all of the manufacturing costs, including raw materials, direct labor, and manufacturing overhead while the product is being manufactured. - Finished Goods Inventory holds the total cost of items manufactured that are now complete and available for sale. - Most cost systems apply overhead to production by using a single surrogate measure of overhead behavior. ---> The assumption is that overhead is incurred because products are being made, and the number of direct labor hours (or other base) used on a particular production run is a fair indicator of the overhead incurred for that production run. - Estimated total overhead cost is divided by the estimated total direct labor hours (or other base) to get a predetermined overhead application rate per direct labor hour (or other base).

Relationship of Cost Accounting to Financial Accounting and Managerial Accounting:

- In financial accounting, the focus is on external reporting. ---> In managerial accounting, the focus is on internal reporting. ---> In cost accounting, the focus is on cost accumulation and assignment. - Cost accounting system reports the cost of goods manufactured and sold, as well as the cost of goods manufactured and not sold—inventory valuation—along with other costs that are carried in the accounts of a manufacturing company. - Cost accounting is a subset of both financial and managerial accounting that relates primarily to the accumulation and determination of product, process, or services costs.

Manufacturer versus Merchandiser

- Merchandisers buy and sell finished goods. --->. Manufacturers buy raw materials to produce finished goods, which are then sold to customers. - The cost of the product is recorded and reported as an asset (inventory) until the product is sold, at which point the cost is transferred to the income statement (cost of goods sold) as an expense to be matched with the revenue that resulted from the sale.

Product Costs

- Product costing for a manufacturing firm is more complex than for a merchandising firm because making a product is more complex than buying an already finished product. - The cost of the product is recorded and reported as an asset (inventory) until the product is sold, at which point the cost is transferred to the income statement (cost of goods sold) as an expense to be matched with the revenue that resulted from the sale. - The cost associated with each of the manufacturing inputs is classified as raw materials, direct labor, or manufacturing overhead.

Value Chain

is the sequence of functions and related activities that, over the life of a product or service, can ultimately create a "value" difference for the customer. - The sequence of functions that compose the value chain is as follows: research and development, design, production, marketing, distribution, and customer service. - The desired ROI is the goal of the value chain functions.

Cost Management

the process of using cost information from the accounting system to manage the activities of the organization.

Indirect Costs

cannot be easily and conveniently traced to a unit of product or other cost object. - Indirect costs would be incurred even if the product or activity were discontinued. - some costs are commonly treated as indirect costs even though they could be theoretically treated as direct costs.

Product Costs of Making a Car

- Raw materials are the ingredients of the product—the materials that are put into the production process and from which the finished product is made. ---> For example, corn is the raw material of a corn processor, and one of the processor's finished products may be corn syrup. The candy manufacturer uses the corn syrup as a raw material of its products. - Direct labor is the effort provided by workers who are directly involved with the manufacture of the product. ---> For example, workers who perform machine operations on raw materials, workers who operate or control raw material conversion equipment (e.g., melters, mixers, heat treaters, coolers, and evaporators), and workers who assemble or package the product are directly involved in manufacturing activities. - Manufacturing overhead, or overhead, includes all manufacturing costs except those for raw materials and direct labor. ---> Examples of overhead costs include factory utilities, indirect materials (e.g., nails, thread, glue) for the product, maintenance and housekeeping costs (both materials and labor), depreciation expense for the factory building and production equipment, and compensation of production managers and supervisors.