BUS 215 Exam #1

Transfer of product costs

- When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. - Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. - Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. - When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

Contribution margin income statement

- is for managers and is not GAAP

Predetermined Overhead Rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period.

Examples of selling costs

Advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.

Product costs

All costs that are involved in acquiring or making a product, product costs attach to a unit of product as it is purchased or manufactured and stay attached as long as it remains in inventory awaiting sale

Administrative costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

are selling and administrative costs indirect or direct?

CAN BE EITHER!

What are the classifications of manufacturing costs?

Direct materials, direct labor and manufacturing overhead

Overhead Applied

POHR x Amount of the allocation base incurred by the job

indirect materials

Raw materials that do not physically become part of the finished product or for which it is impractical to trace to the finished product because their physical association with the finished product is too small.

what does the Contribution margin income statement include?

Sales Variable expenses contribution margin fixed expenses net operating income

Matching principle

The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized

Contribution Margin

The amount remaining from sales revenues after all variable expenses have been deducted.

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior is strictly linear are valid.

Y = a + bX

Y = Total mixed cost a = total fixed cost b = variable cost per unit of activity X = the level of activity

Should opportunity costs be included when making decisions?

Yes, even though they are not usually found in accounting records

direct cost & example

a cost that can be easily and conveniently traced to a specified cost object EX: direct material and direct labor

indirect cost & example

a cost that cannot be easily and conveniently traced to a specified cost object EX: manufacturing overhead

differential costs

a difference in cost between two alternatives - can be fixed or variable

activity base (cost driver)

a measure of whatever causes the incurrence of a variable cost

For a cost to be variable, it must be variable with respect to something. That something is its _______ ____.

activity base

Manufacturing Overhead

all manufacturing costs except direct materials and direct labor that cannot be easily traced to specific products

period costs

all the costs that are not product costs (selling and administrative expenses)

raw materials

any materials that go into the final product

cost object

anything for which cost data are desired

What happens to avg. fixed cost per unit as activity level rises?

becomes progressively smaller

what are the two types of fixed costs?

committed fixed costs and discretionary fixed costs

finished goods cost

consists of completed units of product that have not yet been sold to customers

work in process

consists of units of product that are only partially complete and will require further work before they are ready for sale

variable cost per unit is ____

constant

common cost

cost that is incurred to support a number of cost objects but cannot be traced to them individually

fixed expense

cost that remains constant in total regardless of changes in the level of activity

selling costs

costs necessary to secure the order and deliver the product

sunk costs

costs that have already been incurred and cannot be changed now or in the future

What are other things that are included in manufacturing overhead?

depreciation of manufacturing equipment, utility cost, property taxes, insurance premiums incurred to operate a manufacturing facility ** ONLY THE INDIRECT COSTS ASSOCIATED WITH OPERATING THE FACTORY**

What is relevant to decision making?

differential costs and differential revenue

examples of allocation bases

direct labor hours, direct labor dollars, or machine hours

examples of activity bases

direct-labor hours, machine hours, units produced, units sold

How to calculate predetermined overhead rate?

estimated total manufacturing overhead cost for the coming period/estimated total units in the allocation base for the coming period

examples of administrative costs

executive compensation, general accounting, secretarial, public relations

indirect material example

glue used to make an Ethan Allen Chair

When are period costs expensed?

in the period they are incurred

examples of indirect labor

janitors, supervisors, materials handlers, maintenance workers, night security guards

direct labor

labor costs that can be easily traced to individual units of product

committed fixed costs

long-term, cannot be significantly reduced in the short term

Factory burden is a synonym for ______ ______

manufacturing overhead

discretionary fixed costs

may be altered in the short term by current managerial decisions

direct materials

raw materials that become an integral part of the product and that can be conveniently traced directly to it - the finished product of one company can become the raw materials of another company

What are the manufacturing product costs?

raw materials, work in process, finished goods costs

Indirect Labor

refers to employees that play an essential role in running a manufacturing facility, but the cost of compensating these people cannot be easily or conveniently traces to specific units of product

cost behavior

refers to how a cost will react to changes in the level of activity

nonmanufacturing costs

selling costs and administrative costs

Conversion cost

sum of direct labor and manufacturing overhead B/C both these costs are incurred to convert direct materials into finished products

prime cost

sum of direct materials and direct labor

differential revenue

the difference in revenue between two alternatives

as volume of units increase what happens to fixed expenses per unit?

the fixed cost per unit declines

opportunity cost

the potential benefit that is given up when one alternative is selected over another

Should sunk costs be considered in decision making?

they should be IGNORED

allocation base

used to assign manufacturing overhead to individual jobs

as volume of units increase what happens to variable expenses per unit?

variable costs increase

variable expenses

varies, in total, in direct proportion to changes in the level of activity