Final Accounting Block
Cash Budget
- a detailed plan showing how cash resources will be aquired and used - combo of sales budget, production budget, manufacturing costs (DM budget, DL budget, MOH budget), combined with sales budget and selling and admin budget - 4 major sections= *Receipts Section- cash inflows except financing, major source is sales *Disbursements Section-all cash payments planned for budget period including equipment purchases and *Cash Excess of Deficiency Section-if exisit, must borrow funds *Financing Section-borrowings and repayments
Continuous or Perpetual Budget
- a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed - one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close - keeps managers focused at least one year ahead
Standard Costs
- a benchmark or "norm" for measuring performance - in managerial accounting, relate to the quantity and cost (or acquisition price) of inputs used in manufacturing good or providing services - set by the expertise of everyone who has responsibility for purchasing and using inputs - designed to encourage future operations, not a repetition of the past - Advantages *simplify book keeping *fit naturally in an integrated system of responsibility accounting *key element in management by exception - Disadvantages *prepared monthly but dont come out till weeks, months later *insensitive managers who use variance reports as club, morale will suffer (be positivie) *favorable can be worse than unfavorable variances *too much emphasize on meeting standards (which may not be efficient enough) - first introduced in Japan
Self-Imposed/Participative Budget
- a budget that is prepared with the full cooperation and participation of managers at all levels - all levels seen as a team - often more accurate and reliable than estimates prepared by top managers - more motivation and commitment - no excuse for an unrealistic or impossible to meet budget - however, may have too much budgetary slack so top management should review - all levels in the organization should work together to produce the budget (lower level= day to day, upper level=more strategic) - typically, upper level management sets profit targets that are difficult to attain
Direct Cost
- a cost that can be easily and conveniently traced to a specified cost object
Avoidable/Differential Cost
- a cost that can be eliminated in whole or in part by choosing one alternative over another - relevant costs - identify relevant, avoidable costs 1. eliminate costs and benefits that do not differ between alternatives (sunk costs and future costs that do not differ between alternatives) 2. use remaining differential/avoidable costs to make decision
Indirect Cost
- a cost that cannot be easily and conveniently traced to a specific cost object - to be traced to a cst object such as a particular product, the cost must be caused by the cost object
Sunk Costs
- a cost that has already been incurred and cannot be avoided regardless of what a manager decides - always the same no matter what alternatives are being considered - they are irrelevant and should be ignored when making decisions
Sunk Costs
- a cost that has already been incurred and that cannot be changed by any decision made now or in the future - not differential costs - can and should be ignored
Fixed Cost
- a cost that remains constant, IN TOTAL, regardless of changes in the level of activity - not affected by changes in activity - rent, straight-line depreceiation, insurance, property taxes, supervisor salaries, administrative salaries, and advertising - the average cost PER UNIT increases and decreases inversely with changes in activity (more units increase, the price drops smaller and smaller)
Variable Cost
- a cost that varies, in TOTAL, in direct proportion to changes in the level of activity - units produced, units sold, miles driven, beds occupied, lines of print, hours of work - direct materials, shipping costs, sales commisions, some MOH such as lubricants, direct labor, COGS, billing costs - cost is constant if expressed on a PER UNIT basis - low=public utility - high= manufacturing company
Sell or Process Further Decision
- a decision as to whether a joint product should be sold at the split-off point or sold after further processing - it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the split off - joint costs already incurred up to split-off ALWAYS irrelevant in decisions concerning what to do from the split off forward
Make or Buy Decision
- a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier
Sales Budget
- a detailed schedule showing the expected sales for the budget period - key to entire budgeting process - all other parts of the master budget depend on this - helps determine how many units need to be produced - starting point in preparing the mater budget - constructed by multiplying budgeted unit sales by the selling price
Traceable Fixed Costs
- a fixed cost that is incurred because of the existence of the segment - if the segment never existed, the fixed costs would not have been incurred - and if the segment were eliminated, the fixed cost would disappear - salary of the Fritos product manager at PepsiCo.is a fixed cost tracebale to the Fritos business segment of PepsiCo. - maintenance cost for the building in which Boeing 747s are assembled is a fixed cost traceable to the 747 business segment of Boeing
Common Fixed Cost
- a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment - even if a segment were entirely eliminated, there would be no change in a true common fixed cost - salary of the CEO of GM is a common fixed cost of the various divisions of GM - cost of heating a Safeway or Kroger grocery store is a common fixed cost of the store's various departments-groceries, produce, bakery, meat
Constraint
- a limited resource of some type restricts the companys ability to satisfy demand - managers must decide which products or services make the best use of the constrained resource - fixed costs are usually unaffected by such choices, so the course of action that will maximize the companys total contribution margin should ordinarily be selected - favor the products with the highest contribution margin per unit of the constrained resource
Bottleneck
- a machine or some other part of a process that limits the total output of the entire system - the constraint - if the plant as a whole cannot produce any more units, some machine or process must be operating at capacity - divide contribution margin per unit by bottleneck to get the contribution margin per unit of the constrained resource - cannot just look at unit contribution margins alone - INCREASE BY: 1. working overtime on the bottleneck 2. subcontracting some of the processing that would be done on bottleneck 3. investing in additional machines at the bottleneck 4. shifting workers from processes that are not bottleneck to processes that is the bottleneck 5. focusing business process improvement efforts such as Six Sigma on the bottleneck 6. reducing defective units
Responsibility Accounting
- a manager should be held responsible for those items, and only those items, that the manager can actually control to a significant extent - personalizes accounting information by holding individuals responsible for revenues and costs - make sure nothing falls through the cracks, and when it does, react quickly to it
Special Order
- a one-time order that is not considered part of the companys normal ongoing business - only the incremental costs and benefits are relevant - a special order is profitable if the incremental revenue from the special order exceeds the incremental costs of the order
Segment
- a part or activity of an organization about which managers would like cost, revenue, or profit data - drill down capability that helps managers identify the sources of strong or weak overall financial performance
Budget
- a quantiitative plan for acquiring and using resources over a specified time - once established, actual spending is comapred to make sure the plan is being followed - communicate managements plans throughout the organization - force managers to think about and plan for the future - provides a means of allocating resources to those parts of the company where they can be used most effectively - uncover potential bottlenecks - coordinate the activities of the entire organization by integrating the plans of its various parts - define goals and objectives that can serve as benchmarks - shouldnt be used as negative pressure - management should be enthusiastic about it - highly achievable level - recieve bonuses if plan is achieved
Period Costs
- all the costs that are not product costs - selling and administrative espenses - expensed on income statement in period in which they are incurred - advertising, executive salaries, sales commissions, PR, and other nonMOH costs
Cost Object
- anything for which cost data are desired, including products, customers, jobs, and organizational subunits - products or departments
Labor Efficiency Variance (Quantity/Productivity)
- attempts to measure the productivity of direct labor - most closely watched - increasing direct labor productivity is vital to reducing costs - unfavorable= poorly trained or motivated workers, poor quality materials, requiring more labor time, faulty equipment, work interruptions, inaccurate standards - also insufficient demand for the companys products *accept an unfavorable efficiency variance or *build inventory (dont want too much) - PRODUCTION manager in control
Margin
- calculated as net operating income divided by sales - ordinarily improved by increasing sales or reducing operating expenses - do NOT want high operating expenses
Turnover
- calculated as sales divided by average operating assets - incorporates a crucial area of a managers responsibility- the investment in operating assets - do NOT want excessive funds tied up in operating asets
Ideal Standards
- can be attained only under the best circumstances - allow for no machine breakdowns or other work interruptions and they call for a level of effort that can be attained only by the most skilled and efficient employees working at peak effort 100% of the time - rarely meet the standards, strive for perfection - few companies use - do not allow for normal inefficiencies and result in unrealistic forcasts
Flexible Budget Performance Report
- combines the activity variances with the revenue and spending variances - easier to interpret what happened during the period - variances appear between the amounts being compared rather than after them - provides a more valid assessment of performance than simply comparing static planning budget costs to actual costs because actual costs are compared to what costs should have been at the actual level of activity - apples are compared to apples - fixed costs are easier to control and change as opposed ti variable costs - nonprofit organizations have difference of receiving significant amounts of funding from sources other than sales (revenue= fixed and variable elements) - cost centers, for departments of large companys, have NO revenue and NO net income on reports - more than one variable used=more accurate
Manufacturing Cycle Efficiency (MCE)
- computed as value-added time (process time) divided by throughput time (manufacturing cycle) - any non-value-added time results in an MCE of less than 1 - compue MCE then subtract it by 100% to find percentage spent on non-value-added activities
Master Budget
- consists of a number of seperate but interdependent budgets that formally lay out the companys sales, production, and financial goals - culumates in a cash budget, a budgeted income statement, and a budgeted balance sheet - sales budget, production budget, cash budget - profit planning by preparing a number of budgets that together form an integrated business plan
Balanced Scorecard
- consits of an integrated set of performance measures that are derived from and support the companys strategy - top management translates its strategy into performance measures that employees can understand and influence - Performance Measures 1. Financial 2. Customer 3. Internal Business Processes 4. Learning and Growth - idea underlying these groupings is that learning is necessary to improve internal business processes; improving business processes in necessary to improve customer satisfaction; and improving customer satisfaction is necessary to improve financial results - should be integrated with non financial measure as well to focus on the future and to assign different responsibilities - keep performance measures consistent with company strategy - performance measures should be understandable and controllable - there should not be too many performance measures - company and personal scorecards - linked together on a cause and effect basis - feed back is received! - tie bonuses into performance measures for employees - IMPROVEMENT - theory about how specific actions taken by various people in the organization will further the organizations objectives
Profit Center
- control over both costs and revenue, but not over the use of investment funds - evaluated by comparing actual profit to targeted pr budgeted profit
Ending Finished Goods Inventory
- cost of unsold units
Relevant Costs
- costs that differ between alternatives - distinguish between relevant and irrelevant costs and benefits - ignore irrelevant decisions (save decision makers tremendous amount of time and effort) - bad decisions can easily result from erroneously including irrelevant costs and benefits when analyzing alternatives - two costs are NEVER relevant in decisions 1. sunk costs 2. future costs that do not differ between alternatives - beneficial to differentiate between relevant and irrelevant costs because rarely enough info will be available to construct full income statement and the mix of the two types of costs creates confusion
Decentralized Organization
- decision-making authority is spread throughout the organization rather than being confined to a few top executives - delegating day to day problems, managers can concentrate on bigger issues - lower-level managers have most detailed and up to date information about day to day operations - eliminate layers of decision making allowing organizations to respond more quickly to customers and changes in operating environment - helps train lower level managers for higher positions - increase job satisfaction and motivation - however, may make decisions without fully understanding the bigger picture - coordination may also be lacking - lower level managers may have objectives that clash with the objectives of the entire organization - spreading innovative ideas may be difficult
Direct Materials Budget
- details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories *RM needed to meet the production schedule *Add desired endining inventory of RM *Total RM needs *Less beginning inventory of RM *RM to be purchased - Beginning and Ending Inventory is the same as the total year, it is not the sum
Activity Variances
- difference between a revenue or cost item in the static planning budget and the same item in the flexible budget - due solely to the difference between the level of activity assumed in the planning budget and the actual level of actiity in the flexible budget - planning vs. flexible - what should have happened at the BUDGETED level of activity vs. what should have happened at the ACTUAL level of activity - even when sales increase, fixed costs do not - because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity (leverage affect) - % change in NOI usually larger than % increase in activity - get favorable AV for NOI= take actions to increase (client-visits)
Standard Rate Per Hour (DL)
- direct labor standard - for direct labor, includes wages, employment taxes, and fringe benefits
Standard Hours Per Unit (DL)
- direct labor standard - for direct labor, time required to complete a unit of production - include allowances for breaks, personal needs of employees, cleanup, and machine downtime - single most difficult measure to determine
Standard Quantity Per Unit (DM)
- direct materials standard - for direct materials, should reflect the amount of material required for each unit of finished product as well as an allowance for unavoidable waste
Standard Price Per Unit (DM)
- direct materials standard - for direct materials, should reflect the final, delivered cost of the materials, net (less) of any discounts taken
Variable MOH Overhead Efficiency Variance (Quantity)
- exactly the same as the direct labor efficiency variance except the rate that is used to translate the variance into dollars - multiplied by the variable overhead rate - if direct labor efficiency variable is favorable then so will MOH efficiency variance, the same goes for if it is unfavorable - depends solely on how efficiently direct labor was used (AH x SR) - (SH x SR) SR(AH-SH)
Investment Center
- has control over cost, revenue, and investments in operating assets - most powerful - corporate headquarters - evaluated by using return on investment (ROI) or residual income measures
Cost Center
- has control over costs, but not over revenue or the use of investment funds - accounting, finance, general administration, legal, personel, manufacturing - expected to minimize costs while providing the level of products and services demanded by other parts of the organization - do not generate significant revenues by themselves - evaluated by standard cost variances and flexible budget variances
Variance Analysis Cycle
- highlight the variances, which are the differences between actual results and what should have occured according to standards 1. Prepare standard cost performance sheet 2. Analyze variances 3. Identify questions 4. Receive Explanations 5. Take Corrective Actions 6. Conduct next period's operations - goal= improve operations, no blame
Omission of Costs
- hinderance to proper cost assignment - to avoid having to maintain two costing systems and to provide consistency between internal and external reports, many companies also use absorption costing for their internal reports such as segmented income statememnts - as a result, such companies omit from their profitability analysis part or all of the "upstream" costs in the value chain, which consist of reseach & development and product design, and the "downstream" costs which consist of marketing, distribution, and customer service - these nonmanufactuing costs are just as essential in determining product profitability
Inappropriate Methods for Assigning Tracebale Costs
- hindrance to proper cost asignment - incorrectly handle trancebale fixed expenses on segmented income statement - they do not trace fixed expenses to segmented when it is feasible to do so - they use inappropriate allocation bases to allocate traceable fixed expenses to segments (should only do this when the allocation base actually drives the cost being allocated or is very highly correlated the real cost driver)
Arbitrarily Dividing Common Costs among Segments
- hindrance to proper cost assignment - practice of assigning nontraceable costs to segments when should be common costs - this pratice often justified on the grounds that "someone" has to cover the common costs - improperly assigned to semgemnts that may have otherwise been profitable - additionally, these common costs should be the responsibility of higher-level managers
Administrative Costs
- include all costs associated with the general management of an organization rather than with manufacturing or selling - executive compensation, general accounting, secretarial, PR, general administration as a whole - nonmanufacturing costs - period costs
Selling Costs
- include all costs that are incurred to secure custmer orders and get the finished product to the customer - order getting and order filling costs - advertising, shipping, sales travel, sales commisions, sales salaries, cost of finished goods warehouses - nonmanufacturing costs - period costs
Operating Assets
- includes cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes - used in ROI formula as the average of the operating assets between the beginning and end of the year - use the net book value (Cost-AD=BV) - using net book value in the calcualtion of average operating assets results in a predictable pattern of increasing ROI over time as accumlated depreciation grows and discourages replacing old equipment with new udated equpiment - old equipment w/ depreciation= ROI increase - new equpiment= ROI decrease - alternative to net book value is gross cost of the asset - most companies use net book value, consistent
Net Operating Income
- income before interest and taxes (EBIT) - used in ROI formula because the base consists of operating assets
Relaxing (or Elevating) the Constraint
- increase the capacity of the bottleneck - leads to increase in production and sales - if bottleneck exists, want products with the highest contribution margin per unit of the constrained resource - managers should focus on the bottleneck
Planning
- involves developing goals and preparing various budgets to achieve those goals
Control
- involves the steps taken by management to increase the likelihood that all parts of the organization are working together to achieve the goals set at the planning stage
Manufacturing Overhead Standards (MOH)
- like direct labor, price and quantity standards expressed in terms of rate and hours - rate represents the variable portion of the predetermined overhead rate - the hours relate to the activity base that is used to apply overhead to units of product
Manufacturing Overhead Budget
- lists all costs of production other than direct matierals and direct labor - variable and fixed - depends on direct labor - fixed costs are the costs of supplying capacity to make products, process purchase orders, handle customer calls, etc - add variable and fixed expenses - subtract any noncash MOH - find predetermined overhead rate (total MOH/budgeted DL hrs)
Selling and Administrative Expense Budget
- lists the budgeted expenses for areas other than manufacturing - large company= compilation of many smaller, individual budgets submitted by department heads and other persons responsible for S&A expenses - variable and fixed components
Production Budget
- lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory - used to help determine DM, DL, MOH budgets *Budged Sales *Add desired ending inventory of FG *Total Needs *Less begining inventory of FG *Required Production - Beginning and Ending Inventory is the same as the total year, it is not the sum
Throughput Time
- the amount of time required to turn raw materials into completed products - manufacturing cycle time - made up of process time, inspection time, move time, and queue time - process time only one that adds value, try and eliminate others
Return on Investment (ROI)
- measure investment center's performance - net operating income divided by average operating assets - margin multiplied by turnover - want higher, indicates greater the profit earned per dollar invested in the segments operating assets - improve ROI 1. increase sales 2. reduce operating expenses 3. reduce operating assets - Problems with ROI *managers may not know how to increase ROI *may be inconsistent with the comapny strategy (good in short run but bad in long run( *manager who takes over a business segment typically inherits many committed costs over which the manager has no control *manager may reject anything below companys minimum return on investment (ROI), which could lead to bad decisions for company as a whole
Residual Income
- measure investment centers performance - the net operating income that an investment center earns above minimum required return on its operating assets - net operating in come minus (average operating assets multiplied by minimum required rate of return) - Economic Value Added (EVA) is an adaption of this that many companies use to modify their accounting principles in various ways - onjective is to MAXIMIZE the total amount of RESIDUAL INCOME, NOT maximize ROI - make better decisions - accept anything ABOVE companys minimum rate of return because it will increase residual income - disadvantage= CANNOT be used to compare performance of divisions of different size - larger the size= more residual income - focus on percent change rather than amount change
Materials Quantity Variance
- measures the difference between the quantity of materials used in production and the quantity that should have been used according to the standard (AQ x SP) - (SQ x SP) SP(AQ-SQ) - look at STANDARD - favorable=negative variance - unfavorable=positive variance - isolate when DM used in production because provides an opportunity to correct any developing problem - PRODUCTION manager in control
Materials Price Variance
- measures the difference between what is paid for a given quantity of materials and what should have been paid according to the standard (AQ x AP) - (AQ x SP) AQ(AP-SP) - look at ACTUAL - favorable=negative variance - unfavorable=positive variance - isolate "red flags" of variances and fix them - PURCHASING manager in control
Segment Margin
- obtained by deducting traceable fixed costs of a segment from the segments contribution margin - represents the margin available after a segment has covered all its own costs - best gauge of long run profitability of a segment - major decisions (contribution margin= short-term decisions) - have to be big to cover common costs of company
Planning Budget
- prepared before the period begins and is valid for only the planned level of activity - static is suitable for planning but inappropriate for evaluating how well costs are controlled - if actual level of activity differs from what was planned, it would be misleading to compare actual costs to the static, unchanged planning budget - hard to compare to actual results, like apples and oranges because different activity levels
Labor Rate Variance (Price)
- price variance for direct labor - measures any deviation from standard in the average hourly rate paid to direct labor workers (AH x AR) - (AH x SR) AH(AP-SR) - wage rate usually predictable - unfavorable= skilled workers given duties with little skill, inefficient low paid workers, overtime - favorable= workers who are paid at lower rate complete tasks - PRODUCTION manager in control
Contribution Margin
- sales minus variable expenses - tells us what happens to profits as volume changes, holding a segments capacity and fixed costs constant - most useful in DECISIONS, especially involving temporary uses (typically only involving variable costs and revenues)
Merchandising Purchases Budget
- shows the amount of goods to be purchased from suppliers during the period - same format as Production Budget
Direct Labor Budget
- shows the direct labor hours required to satisfy the production budget - companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times *Required production *(X) Direct labor-hours per case *Total direct labor hours needed *(X) Direct labor cost per hour *Total direct labor cost
Standard Cost Card
- shows the standard quantities and costs of the inputs required to produce a unit of a specific product - consists of DM, DL, MOH
Quantity Standards
- specify how much of an input should be used to make a product or provide a service - compare to actual quantities - responsibility of the production manager
Price Standards
- specify how much should be paid for each unit of the input - compare to actual costs - responsibility of purchasing manager
Management by Exception
- standards are set for various activities, with actual results compared to these standards - significant deviations from standards, managers investigate the discrepancy to find the cause of the problem and eliminate it - variance analysis and performance reports are important elements - dont investigate every discrepency - investigate all variances that are more than X standard deviations from zero (not too big and not too small)
Practical Standards
- standards that are "tight buy attainable" - allow for normal machine downtime and employee rest periods, and they can be attained through reasonable, though highly efficient, efforts by the average worker - signal abnormalities - used in forecasting cashflows and planning inventory
Flexible Budget
- take into account how changes in activity affect costs - an estimate of what revenues and costs should have been, given the actual level of activity for the period - when used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than the static planning budget - if adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs - SHOULD BE - activity and revenue and spending variances
Standard Quantity Allowed or Standard Hours Allowed
- the amount of input that should have been used to produce the actual output of the period
Delivery Cycle Time
- the amount of time from when a customer order is received to when the completed order is shipped - make time as short as possible - wait time plus throughput time
Spending Variance
- the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost - actual cost is greater than what the cost should have been, the variance is labeled as unfavorable - actual cost is less than what the cost should have been, the variance is labeled as favorable - flexible vs. actual
Quantity Variance
- the difference between how much of an input was actually used and how much should have been used and is stated in dollar terms using the standard price of the input - computed the same for DM, DL, MOH - input=AQ, output= SQ (or SH) allowed for actual output
Price Variance
- the difference between the actual price of an input and its standard price, multiplied by the actual amount of the input purchased - computed the same for DM, DL, MOH
Revenue Variance
- the difference between what the total revenue should have been, given the actual level of activity for the period, and the actual total revenue - if actual revenue exceeds what the revenue should have been, the variance is labled favorable - if actual revenue is less than what the revenue should have been, the variance is labeled unfavorable - favorable if average selling price is greater than expected - unfavorable if average selling price is less than expected - flexible vs. actual - get favorable R&SV=managers must take actions to protect selling proces, increase operating efficiency, and reduce the price of inputs
Split-Off Point
- the point in the manufacturing process at which the joint products can be recognized as separate products - separating process
Operational Cost
- the potential benefit that is given up when one alternative is selected over another
Conversion Cost
- the sum of direct labor cost and manufacturing overhead cost - DL cost + MOH cost= conversion cost - convert into the finished product
Prime Cost
- the sum of direct materials cost and direct labor cost - DM cost + DL cost= Prime Cost
Joint Products
- two or more products that are produced from a common input
Responsibility Center
- used for any part of an organization whose manager has control over and is accountable for cost, profit, and investments
Standard Cost Per Unit
- used to compute DM, DL, MOH - standard quantity allowed per unit of the output is multiplied by the standard price
Joint Cost
- used to describe the costs incurred up to the split off point - product plus separation process - common costs that are incurred to simultaneously produce a variety of end products - traditionally allocated among the different products at the split off point - misleading for decision making - irrelevant in decisions regarding what to do with a product from the split off point forward - relevent for WHOLE operation, irrelevent for specific product
Budget Committe
- usually responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself - consists of president, vice presidents of departments - approves the final budget - disputes errupt over which departments get what money - need interpersonal and technical skills
Variable MOH Overhead Rate Variance (Price)
- very similar to direct labor because uses direct labor-hours as the base for allocating overhead cost to units of product - difference in standard hourly rate being used (AH x AR) - (AH x SR) AH(AR-SR)
Vertically Integrated
- when a company is involved in more than one activity in the entire value chain - very common - control all of the activities in the value chain - less dependent on suppliers, smoother flow of parts and materials, control quality better by making own parts, company can realize is profits - disadvantage= external supplier may be able to enjoy economies of scale
Product Costs
include all costs in aquring or making a product - direct labor, direct material, manufacturing overhead - "attached" to units - go directly into inventory accounts as they are incurred (first into WIP and then into FG) rather than going into expense accounts - only expensed once completed and sold goods