Principles of Accounting (203) Exam 1

Indirect Costs

Cannot be easily and cost-beneficially traced to a single cost object.

Finished Goods Inventory

Consists of completed products ready for sale. Similar to merchandise inventory owned by a merchandising company.

Fixed Cost

Costs that do not change with change in the volume of activity (within a range of activity known as an activity's relevant range). For example, straight-line depreciation on equipment is a fixed cost.

Prime Costs

Expenditures directly associated with the manufacture of finished goods. Ex: Direct material costs and direct labor costs

Conversion Costs

Expenditures incurred in the process of converting raw materials to finished goods. Ex: Direct labor costs and overhead costs

Process Cost Summary

Prepared separately for each process or production department. Three reasons for the summary are to 1) help department managers control and monitor their departments. 2) help factory managers evaluate department manager's performance, and 3) provide cost information for financial statements. A process cost summary achieves these purposes by describing the costs charged to each department, reporting the equivalent units of production achieved by each department, and determining the costs assigned to each department's output.

Direct Labor

Refers to the efforts of employees who physically convert materials to finished products. Direct labor costs are the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods.

Direct Material

Tangible components of a finished product. Direct material costs are the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods

Underapplied Overhead

When less overhead is applied than is actually incurred, the remaining debit balance in the Factory Overhead account is called underapplied overhead

Materials Requisition

When materials are needed in production, a production manager prepares a materials requisition and sends it to the materials manager. For direct materials, the requisition shows the job number, the type of material, the quantity needed, and the production manager's signature.

Overapplied overhead

When more overhead is applied than is actually incurred, the resulting credit balance in the Factory Overhead account is called overapplied overhead.

Job Cost Sheet

A cost record maintained for each job.

Cost Accounting System

Accumulates production costs and then assigns them to products and services. Timely information about inventories and costs is especially helpful in manager's efforts to control costs and determine selling prices. The two basic types of cost accounting systems are job order costing and process costing.

Sunk Cost

Arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions. An example is the cost of computer equipment previously purchased by a company. This cost is not relevant to the decision of whether to replace the computer equipment. Likewise, depreciation of the original cost of plant (and intangible) assets is a sunk cost. Most of a company's allocated costs, including fixed overhead items such as depreciation and administration expenses, are sunk costs.

Goods in Process Inventory (Work in Process Inventory)

Consists of products in the process of being manufactured but not yet complete. The amount of work in process inventory depends on the type of production process.

Variable Cost

Costs that change in proportion to changes in the volume of activity. Sales commissions computed as a percent of sales revenue are variable costs.

Factory Overhead Costs

Factory overhead (or manufacturing overhead) consists of all manufacturing costs that are not direct materials or direct labor. Factory overhead costs cannot be separated or readily traced to finished goods. Ex: maintenance, supervision of employees, utilities, property taxes, etc...

Materials Ledger

In nearly all job order cost systems, materials ledger cards (or digital files) are perpetual records that are updated each time materials are purchased and each time materials are issued for use in production.

Process Cost Accounting System

Measures unit costs at the end of a period (for example, a month) by combining the costs per equivalent unit from each separate department. In process costing, the cost object is the process.

Period Costs

Non production costs and are usually associated more with activities linked to a time period than with completed products. Common examples of period costs include salaries of the sales staff, wages of maintenance workers, advertising expenses, and depreciation on office furniture and equipment. Period costs are expensed in the period when incurred either as selling expenses or as general and administrative expenses.

Clock Card

Not in the book

General Accounting System

Not in the book

Raw Materials Inventory

The goods a company acquires to use in making products. Companies use raw materialism two ways: directly and indirectly. Raw materials that are possible and practical to trace to a product are called direct materials; they are included in raw materials inventory. Raw materials that are either impossible or impractical to trace to a product are classified as indirect materials (such as solder used for welding); they often come from factory supplies or raw materials inventory.

Process Manufacturing

The mass production of products in a continuous flow of steps. Unlike job order production, where every product differs depending on customer needs, process operations are designed to mass-produce large quantities of identical products. Also called process operations or process production.

Equivalent Units of Production

The number of units that could have been started and completed given the costs incurred during the period. Ex: 100,000 tennis balls that are 60% through the production process is equivalent to 60,000 tennis balls that completed the entire production process. This means that the cost to put 100,000 units 60% of the way through the production process is equivalent to the cost to put 60,000 units completely through the production process. Knowing the costs of partially completed goods allows us to measure production activity for the period.

Contribution Margin Ratio

The percent of a unit's selling price that exceeds total unit variable cost. It is interpreted as the percent of each sales dollar that remains after deducting the unit variable cost. Contribution margin ratio = contribution margin per unit/selling price per unit

Opportunity Cost

The potential benefit lost by taking a specific action when two or more alternative choices are available.

Job

The production activities for a customized product. A key feature of job order production is the diversity, often called heterogeneity, of the products produced. Each customer order differed from another customer order in some important respect. These differences can be large or small.

Job Order Manufacturing (Job Order Production)

The production of products in response to special orders. Many companies produce products individually designed to meet the needs of a specific customer. Each customized product is manufactured separately and its production is called job order production. Also referred to as job order production or customized production

Predetermined Overhead

This rate is used during the period to apply estimated overhead to jobs, based on eachh job's actual usage of the activity. Some companies use multiple predetermined jobs, based on each job's actual usage of the activity. Some companies use multiple predetermined overhead rates for different types of products and services. This rate requires an estimate of total overhead cost and activity base such as total direct labor cost before the start of the period. Predetermined overhead rate = Estimated overhead costs / Estimated activity base

Product Costs

Those costs necessary to create a product and consist of: direct materials, direct labor, and factory overhead. Overhead refer to production costs other than direct materials and direct labor. Product costs are capitalized as inventory during and after completion; they are recorded as cost of goods sold when those products are sold.

Time Ticket

To assign direct labor costs to individual jobs, companies use time tickets to track how each employee's time is used and to record how much time they spent on each job. This process is often automated.

Job Order Cost Accounting System

Used to determine the cost of producing each job or job lot. In the case of a job lot, the system computes the cost per unit. The accounting system must include separate records for each job or job lot to accomplish this. Measures cost per unit upon completion of a job by dividing the total cost for that job by the number of units in that job. Job cost sheets accumulate the costs for each job. In a job order system, the cot object is a job.

Job Lot

When a job involves producing more than one unit of a custom product. Although these orders involve more than one unit, the volume of production is typically low.