Managerial Accounting Chapter 2

Inventoriable Product Costs

All costs of a product that GAAP requires companies to treat as an asset (inventory) for external financial reporting. These costs are not expensed until the product is sold. (Costs incurred during the "production or purchases" stage of the value chain)

Manufacturing Overhead (MOH)

All manufacturing costs other than direct materials and direct labor; also called factory overhead and indirect manufacturing costs.

Other Indirect Manufacturing Costs

All manufacturing overhead costs aside from indirect materials and indirect labor.

Raw Materials Inventory

All raw materials (direct materials and indirect materials) not yet used in manufacturing.

Periodic Method

An inventory system in which Cost of Goods Sold is calculated at the end of the period, rather than every time a sale is made.

Perpetual Inventory

An inventory system in which both Cost of Goods Sold and Inventory are updated every time a sale is made.

Cost Object

Anything for which managers want a separate measurement of costs.

Period Costs

Costs that are expensed in the period in which they are incurred; often called "operating expenses" or "selling, general and administrative expenses" (SG&A). Always expensed in the period in which they are incurred and never become part of an inventory account.

Controllable Costs

Costs that can be influenced or changed by management.

Uncontrollable Costs

Costs that cannot be changed or influenced in the short run by management. (Ex: Taxes)

Variable Costs

Costs that change in total in direct proposition to changes in volume.

Fixed Costs

Costs that stay constant in total despite wide changes in volume.

Distribution

Delivery of products or services to customers.

Design

Detailed engineering of products and services and the processes for producing them.

Inventoriable Product Costs (manufacturing costs) in Manufacturer include:

Direct materials, direct labor, and manufacturing overhead.

Operating Income

Earnings generated from the company's primary ongoing operations; the company's earnings before interest and taxes.

Work in Process Inventory

Goods that are partway through the manufacturing process but not yet complete.

3 Components of Manufacturing Overhead

Indirect materials, indirect labor, and other indirect manufacturing costs.

Indirect Labor

Labor costs that are difficult to trace to a specific product. Includes the cost of all employees IN THE PLANT other than those employees directly converting the raw materials into the finished product. (Ex: salaries, wages, and benefits of plant forklift operators, plant security officers, plant janitors, and plant supervisors.)

Types of Manufacturer Inventory

Raw materials inventory, work in process inventory, finished goods inventory.

Research and Development (R&D)

Researching and developing new or improved products or services or the processes for producing them.

Production or Purchases

Resources used to produce a product or service, or to purchase finished merchandise intended for resale.

Life-cycle assessment (LCA)

Studying the environmental and social impacts of a product or service over its entire life, from "cradle to grave".

Customer Service

Support provided for customers after the sale.

Value Chain

The activities that add value to a firm's products and services: Includes R&D, design, production or purchases, marketing, distribution, and customer service.

Conversion Costs

The combination of direct labor and manufacturing overhead costs. Costs of converting raw materials into finished goods.

Prime Costs

The combination of direct material and direct labor costs.

Total Costs

The cost of all resources used throughout the value chain.

Direct Labor (DL)

The cost of compensating employees who physically convert raw materials into the company's products; labor costs that are directly traceable to the finished products.

Cost of Goods Manufactured

The cost of manufacturing the goods that were finished during the period.

Marginal Cost

The cost of producing one more unit.

Differential Cost

The difference in cost between two alternative courses of action.

Average Cost

The total cost divided by the number of units.

Greenwashing

The unfortunate practice of overstating a company's commitment to sustainability.

Trace

To assign a direct cost to a cost object.

Allocate

To assign an indirect cost to a cost object.

Assign

To attach a cost to a cost object.

Average Cost per Unit Equation

Total Cost / Number of units

Total Cost Equation

Total Fixed Cost + (Variable cost per unit x Number of units)

Direct Materials (DM)

Primary raw materials that become a physical part of a finished product and whose costs are traceable to the finished product.

Marketing

Promotion and advertising of products or services.

Inventoriable Product Costs in Merchandiser include:

Cost of merchandise itself, Freight-In, and Customs/Duties.

Calculation of Cost of Goods Sold for Manufacturer

1.) Calculate the cost of the direct materials used during the year. (Beg. Raw Materials + Direct Materials purchased during the year and freight-in and import duties - End Raw Materials) 2.) Calculate the cost of goods manufactured. (Beg. Work in Process Inventory + Manufacturing costs incurred during the year (DM, DL, MOH) - End Work in Process Inventory) 3.) Calculate the cost of goods sold. (Beg Finished Goods Inventory + Cost of Goods Manufactured - End Finished Goods Inventory)

Merchandising Company

A company that resells tangible products previously bought from suppliers. Includes retailers and wholesalers.

Service Company

A company that sells intangible services rather than tangible products.

Manufacturing Company

A company that uses labor, plant, and equipment to convert raw materials into new finished products.

Direct Cost

A cost that can be traced to a cost object.

Sunk Cost

A cost that has already been incurred.

Indirect Cost

A cost that relates to the cost object but cannot be traced to it.

Biomimicry

A means of product design in which a company tries to mimic, or copy, the natural biological process in which dead organisms (plants and animals) become the input for another organism or process.

Finished Goods Inventory

Completed goods that have not yet been sold.

Indirect Materials

Materials whose costs are difficult to trace to specific products. (Ex: janitorial supplies, oil and any physical components of the finished product that are very inexpensive.)

Wholesaler

Merchandising companies that buy in bulk from manufacturers, mark up the prices, and then sell those products to retailers.

Retailer

Merchandising company that sells to consumers.