ACG2071 EXAM 1
indirect costs
Costs that cannot be easily and conveniently traced to a unit of product ex. manufacturing overhead -> indirect costs with manufacturing ex. electricity cannot be traced to particular product
traditional format income statement
Sales (-) Cost of goods Sold = Gross Margin (-) Selling & Admin Expenses = Net Operating Income ** used primarily for external reporting ( also known as full absorption cost )
if your fixed monthly utility charge is $140, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?
Y = a + bX Y = $140 + (0.03 x 2000) Y = $100
activity base / cost driver
a measure of what causes the incurrence of a variable cost -units produced -machine hours -miles driven -labor hours
product costs
all costs that are involved in acquiring or making a product ex. attach a unit of product as it is purchased or manufactured and they stay attached to each unit of product as it remains awaiting sale
administrative costs
all executive, organizational, and clerical costs ex. president salary, HR department (non-manufacturing and can't be traced to product)
absorption costing
all manufacturing costs, fixed and variable are assigned to units of product
plantwide overhead rate
allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours estimated manufacturing overhead / estimated total direct labor - hours = plantwide predetermined overhead rate
financial accounting
concerned with reporting financial info (external parties, stockholders, creditors, regulators)
mixed costs
contains both variable and fixed cost elements (Y = a + bX) Y = total mixed cost a = total fixed costs (vertical intercept of line) b = variable cost per unit of activity (slope of line) X = level of activity
selling costs
costs necessary to secure the order and deliver ex. costs to send sales people around to sell products
direct costs
costs that can be easily traced to a unit of product ex. direct material and direct labor (wages paid)
how estimated overhead is calculated
determined before the period begins estimated total manufacturing overhead cost for the coming period / estimated total units in the allocation base for the coming period
conversion costs
direct labor and manufacturing overhead - raw material to finished product - these are used to convert product to final product
cost of job
direct materials + direct labor + predetermined overhead rate x direct labor cost ex. 4,000 (direct materials) + 5,000 (direct labor) + 120% (predetermined overhead rate) x 5,000 = 15,000
prime costs
direct materials and direct labor - main share of cost of product ex. wood for chair vs. nuts and bolts (smaller cost)
material requisition forms
document that specifies the type and quantity of materials to be drawn from the store room and identifies the job that will be charged for the cost of materials
bill of materials
documents that list the quantity of each type of direct material needed to complete a unit of product
predetermined overheard rate
estimated total manufacturing overhead cost / estimated total amount of the allocation base
fixed cost stays constant in total but varies in unit
ex. -committed - long term, cannot be significantly reduced in the short run (property taxes, depreciation expense) -discretionary - may be altered in the short term by current managerial decisions (advertising)
manufacturing overhead
includes indirect materials (nuts/bolts/glue in chairs) that cannot be traced and indirect labor (upkeep of products (technicians)) that cannot be traced ex. - depreciation of manufacturing equipments - utility costs - property taxes - insurance premiums incurred to operate a manufacturing facility ** only indirect costs associated with operating the factory are included in manufacturing overhead
common costs
indirect costs incurred to support a number of cost objects (cannot be traced to individual object)
costs classifications for preparing financial statements
inventory costs of goods sold | sale->. | balance sheet. income statements ** product costs include direct materials, direct labor and manufacturing overhead
job order costing
job order costing systems are used when 1. many different products are produced each period 2. products are manufactured to order 3. the unique nature of each order require tracing or allocating costs to each job and maintaining cost records for each job ex. companies that used job order costing 1. boeing (aircraft manufacturing) slight my different parts for planes 2. bechtel international (large scale construction) different construction jobs 3. walt disney studios (movie production) different movies
problem
job xyz has a total manufacturing cost of $600. if the markup percentage is 40%, the job will sell for $840 ex. $600 + ($600 x 40%) = $840
cost driver
machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs
raw materials
part of product but not processed or changed
relevant range and fixed costs
pertains to fixed costs as well as variable costs ex. assume office space is available at a rental rate for 30,000 per yr in increments of 1000 sq ft (fixed cost would increase in a step fashion at a rate of 30,000 for each additional 1000 sq ft)
overhead applied to a particular job
predetermined overhead rate x amount of the allocation base incurred by the job
managerial accounting
providing info to managers within an organization to formulate plans, control operations and make decisions
contribution format income statement
sales - variable expenses = contribution margin - fixed expenses = net operating income ** used primarily by management
how allocation base is determined
the allocation base is a cost driver that caused overhead they are direct labor hours, direct labor dollars, or machine hours, used to assign manufacturing overhead to individual jobs
opportunity cost
the potential benefit that is given up when one alternative is selected over another
Smith, Inc. uses a job-order costing system with the predetermined overhead rate of $12 per machine-hour. The job cost sheet for Job #42A listed $12,000 in direct labor cost, $18,000 in direct materials cost, 1,200 direct labor-hours and 1,100 machine hours. The total cost of job #42A is $______________.
total cost of job #42A = direct materials + direct labor + predetermined overhead rate x actual machine hours ex. $18,000 + $12,000 + ($12 per machine hour x 1100 machine hours) = $43,200
why estimated over used
used bc actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period
job order costing
used where many different products each with individual and unique features are produced
differential costs
- difference in alternatives - difference in revenue between two alternatives is called differential revenue - both always relevant - either fixed or variable costs
cost flow 2
- direct costs - direct materials and direct labor - indirect costs - manufacturing overhead - job #1, 2, 3 ** manufacturing overhead, including indirect materials and indirect labor are allocated to all jobs rather than directly traced to each job
cost flow 1
- direct materials - job #1 - job #2 - job #3 - direct labor - job #1 - job #2 - job #3 -charge direct material and direct labor costs to each job as work is performed
sunk costs
- have already been incurred and cannot be changed now or in the future - ignored for decision making
manufacturing product costs
- raw materials- any materials that go into final product - work in process - consist of units of product that are only partially complete and will require further work before finished (units started but not completed) - finished goods costs - consists of completed units of product that have not yet been sold (awaiting purchase)
which of the following costs would be variable w respect to the number of ice cream cones sold at a baskin robbins?
- the cost of ice cream and the cost of napkins for customers
suppose you are trying to decide whether to drive or take the train to portland to attend a concert. you have ample cash to do either but you don't want to waste money. is the cost of the train ticket relevant in the decision?
- yes the cost is relevant
classifications of manufacturing costs
-direct materials -direct labor -manufacturing overhead (all are product costs)
direct materials
-radio installed in a car -steel in automobile -wood for desk
behavior of costs
-variable costs in total - increase and decrease proportionally to changes in activity level -variable costs per unit - remains constant -fixed costs in total - not affected by changes in activity level within relevant range -fixed costs per unit - decrease as activity level rises and increases as activity level falls
direct labor
-wages paid to automobile assembly workers
transfer or product costs
-when direct materials are used to production, their costs are transferred from raw materials to work in process -direct labor and manufacturing overheard costs are added to W I P to convert direct materials to finished goods -once units of product are completed, their costs are transferred from W I P to finished goods - when manufacturer sells it finished goods to customers, the costs are transferred from finished goods to cost of goods
The Company applies all of its overhead costs to jobs based on direct labor hours. at the beginning of the year it made the following estimates : direct labor hours required to support estimated output: 32,000 fixed overhead cost: 448,000 variable overhead cost per direct labor hour: 1.00
1. Compute POR 1a. Find the estimated total overhead cost y = 448,000 + 1.00 per direct labor hour x 32,000 direct labor hours = 480,000 2a. Find POR 480,000/32,000 = 15.00 2. Compute Mr. Wilkes total job cost direct materials: 609 direct total cost 166 direct labor hours used: 5 overhead applied = 15.00 per DLH x 5 DLH = $75 609 + 166 + 75 = 850 -> total cost assigned 3. If speedy established selling prices using a markup of 50% total job cost, how much would it have charged Mr.Wilkes 850 x 50% = 425 850 + 425 = 1275 which is the selling price
purposes of cost classification
1. assigning costs to cost objects 2. accounting for costs in manufacturing companies 3. preparing financial statements 4. predicting cost behavior in response to changes in activity 5. making decisions
