Managerial Accounting -Chapters 1-3
Behavioral Costs
-costs behave in response to change in activity 1. Variable Costs 2. Fixed Costs TC= VC + FC
Underapplied Manufacturing Overhead Clearing Account
if overhead applied to Work in Progress is Less than the actual overhead costs incurred -debit balance exists in Manufacturing Overhead
Step- Variable Costs
total cost increases to a new higher cost for the next higher range of activity totals cost remains constant within fairly wide range of activity
Closed out to Cost of Goods Sold
Cost of Goods Sold Manufacturing overhead (close out immaterial underapplied overhead) Manufacturing Overhead Cost of Goods Sold (close out immaterial overapplied overhead) -if underapplied (debit balance) manufacturing overhead must be credited to close out account
Sunk Costs
Costs that already has been incurred and cannot be changed by any decision made now or in the future -never differential costs and should always be ignored when making decisions
Direct Materials Indirect Materials
D - can be easily (physically and conveniently) traced to finished product I - not easily (physically and conveniently) traced to finished product
Direct Labor Indirect Labor
D - labor cots that can be easily (physically and conveniently) traced to individuals units of product I - costs that can NOT be easily (physically and conveniently) traced to individual units of production
Discretionary fixed costs
Fixed Costs: -altered in short-term by current managerial decisions (advertising, research, development) -easier to modify
Committed Costs
Fixed Costs: -long term cannot be reduced in short term (depreciation on buildings and equipment) -difficult to adjust
Standards of Ethical Conduct
IMA Guidelines for ethical behavior -Competence, Creditability, Confidentiality, Integrity
Cost Behavior Classifications
In Total: Variable - varies directly with activity level Fixed - remains constant Per Unit: Variable- remains constant Fixed- varies directly with activity level
To record actual overhead costs
Manufacturing Overhead Various Accounts
Direct Costs
can be easily and conveniently traced to a particular cost object (direct material and direct labor)
Indirect Costs
cannot be easily and conveniently traced to cost object manufacturing overhead
Manufacturing Overhead
consists of all manufacturing overhead costs except direct materials and direct labor : indirect materials, indirect labor, other manufacturing costs such as factory rent, factory utilities ect.
Conversion Costs
consists of direct labor plus manufacturing overhead (used to categorize manufacturing costs)
Prime Costs
consists of direct materials plus direct labor (used to categorize manufacturing costs)
Differential Costs
cost between two alternatives -only differential costs are relevant in making a choice between two alternatives
Nonmanufacturing Costs
costs involved with selling and administrative activities
Job- Ordering Costing -traceable
direct materials, direct labor are conveniently traceable -manufacturing overhead is Not conveniently traceable -manufacturing overhead must be applied to job using predetermined overhead rate
Overapplied Manufacturing Overhead Clearing Account
if overhead applied to Work in Progress Exceeds the amount of overhead cost actually incurred, then overhead has ben overapplied -credit balance exists in Manufacturing Overhead
Relevant Ranges
rang of activity within particular straight line is valid approximation to the curvilinear line -range of activity within the assumptions about cost behavior can be considered valid
Direct Materials v. Indirect Materials
raw materials that are traced directly to jobs are direct materials- debited to Work In Progress Inventory Raw materials that are not directly traced to jobs are classified as indirect materials - debited to "clearing" account - Manufacturing Overhead
Fixed Costs
remain constant in total amount (depreciation, supervisory salaries and rent)
Balance Sheet for Manufacturing Companies
three inventory accounts: -Raw materials -Work in Progress -Finished Goods
Job-ordering Costing
used in situations where many different products (individual and unique products) or services are produced each period -special order (customized) -products typically produced in small batches -two or three sofas of a particular design might be made in one batch- batch known as job
Least Squares Regression Method
uses all of the data to separate a mixed costs from its variable and fixed costs -regression line (y= m+bx) is fitted to the data -computes the regression line tat minimizes the sum of theses squared errors
Predetermined Overhead Rate
-computed before the year begins and based entirely on estimated date -used to apply overhead to jobs
Income Statement
-contains a Cost of Goods Manufactured BI+Add= Avail- ending= withdrawals from inventory
Record raw materials purchased on credit
Raw Materials Accounts Payable
Direct Materials
Raw materials used in production - indirect materials included in manufacturing overhead
Inventory Liquidation
additions < withdrawals -credits larger then debits
Inventory Build-ups
additions > withdrawals -debits larger then credits
Contribution Margin
amount remaining from sales revenues after all variable expenses have been deducted -contributes toward fixed expenses and then toward profit
Disposing of immaterial under/over- applied overhead
- at end of period 1.Closed Out to Cost of Goods Sold if amount is immaterial (insignificant) 2. Allocated among the Work In Progress, Finished Goods, and Cost of Goods Sold, in proportion to the overhead applied during the current period in ending balances
Overhead Costs to Manufacturing overhead
-Actual Overhead cost -> debits -Applied Overhead cost -> credit
Job-Costing and Labor
-Direct labor- labor time spent directly on specific jobs -Indirect labor- spent working on supportive tasks- (supervision. maintenance, janitorial) Work In Progress (direct Labor) Manufacturing Overhead (indirect labor) Salaries and Wages Payable
Manufacturing Overhead Clearing Account
-amount of overhead accost applied to Work in Process will differs from amount of actual overhead cost incurred -Underapplied or Overapplied Actual Overhead costs - overhead costs applied to work in process = underapplied
Costs of Good Manufactured
-amount transferred from Work in Progress to Finished Goods -includes manufacturing costs associated with the goods that were finished during the period
Mixed Variables
-cost that contains both variable and fixed costs y= a = bx total mixed cost =fixed cost+(variable cost*activity level) analyzed : 1. account analysis 2. engineering approach 3. high-low method 4. regression methods
Manufacturing Costs (Production Cost)
-costs involved in making a product 1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead
when completed products are sold
-costs transferred from finished goods to cost of goods Cost of Goods Sold Finished Goods
High-Low Method
-estimates of variable and fixed elements of a mixed cost on the data at its highest and lowest levels of activity variable cost per unit of activity =change in cost/ (Variable rate) change in activity -rate ten used to estimate fixed costs: fixed cost = total cost at high activity level- variable rate at high activity level -quick but not reliable -based on costs for only two periods
Period Cost
-for purpose of external financial reports - Income statement- expense in period incurred (selling and administrative costs) ( sales commissions, advertising, executive salaries, public relations0
Product Costs
-for purpose of external financial reports -until sold product costs considered assets - inventory on balance sheet (inventorial costs) -Income Statement - expense only when units are sold (direct materials, direct labor, mfg overhead) (depreciation of equipment, wages of machine operators, insurance on factory equip)
Need For a Predetermined Rate
-makes it possible to estimate total job costs sooner 1. actual overhead for the period is not known until end of period 2. actual overhead is an indirect cost 3. actual overhead is mixed behavior
Allocated between accounts
-more accurate than closing out (find percentages- 100% total overhead applied) -assigns overhead costs to where they would have gone has the estimates included in the predetermined overhead rate matched the actual amounts Work in Progress Finished Goods Cost of Goods Sold Manufacturing Overhead (to allocate underapplied overhead (debit balance) material)
Contribution Approach
-preparation of income statement emphasizes cost behavior - sales - variable expenses = contribution margin - fixed costs = net operating income -useful in internal reports - important in planning, budgeting, controlling, and evaluation not GAAP
Finished Goods
-products that are completed and ready for sale (not yet sold) -in finished warehouse -when sold transferred to Cost of Goods Sold
Managers
-run organizations -carry out three major activities 1. Planning 2. Directing and Motivating 3. Controlling
Process Costing
-used in situations where a single homogenous product, such as bricks, are produced for long periods of time -costing system
Variable Costs
-vary in total, direct proportion to changes in level of activity (direct materials, direct labor, commissions to salespersons and costs of goods sold)
to record cost of good manufactured
-when jobs are completed Finished Goods Work In Progress
Differences Between Managerial & Financial Accounting Managerial:
1. provides data for Internal Users (mangers) 2. emphasis on Future 3. emphasis on Relevance and Flexibility 4. emphasis on Segments of organization (v. whole) 5. Not governed by GAAP & other regulatory reporting standards 6. Not Mandatory 7. No established Record- Keeping Requirements
Computing Predetermined Overhead Rate
1.POHR= (estimated total manufacturing overhead cost for the coming period) / (estimated total units in the activity base for the coming period) 2. Overhead applied = POHR * Actual Activity
Raw materials used in production
=Beginning Raw Materials Inventor + Purchases of raw material - ending raw materials inventory
Unadjusted Cost of goods sold
=beginning finished goods inventory + cost of goods manufactured- ending finished good inventory
Total manufacturing Costs
=direct materials + direct labor + manufacturing overhead( applied to work in process)
Cost of Goods Manufactured
=total manufacturing costs + beginning work in process inventory - ending work in process inventory
Actual Overhead Costs
Not charged to Work In Progress -charged to Manufacturing overhead clearing account
Record the raw materials issued to production
Work In Progress (direct materials) Manufacturing Overhead (indirect materials) Raw Materials -when a job is started materials are withdrawn from raw materials inventory
to record Applied Overhead
Work in Progress Manufacturing Overhead
Work in Progress
inventory consists of unfinished products- factory- being converted -when products are finished, costs are transferred to finished good account -direct labor and manufacturing overhead are put into account
Raw Materials
materials on hand in stockrooms that will be used to make products- products that go into final product -direct and indirect materials -stored in warehouse -when used transferred to work in progress account
Opportunity Costs
potential benefit given up by selecting one alternative over another -not recorded in accounting records