Managerial Accounting Chapter 2

Period Cost are often called

"Operating Expenses" or "selling, general, and administrative expenses" (SG&A) on the company's income statement. -ALWAYS expensed in the period in which they are incurred and NEVER become part of the inventory account

Service Companies:

-Provide customers with intangible services -Have NO inventories on the balance sheet

Merchandising Companies:

-Resell tangible products purchased ready-made from suppliers -Have only on category of Inventory

Merchandisers Balance Sheet:

-has just one inventory account called INVENTORY or MERCHANDISE INVENTORY

Raw materials inventory:

All raw materials used in manufacturing. -Ex. steel, glass, tires, upholstery fabric, engines, and other automobile components

Cost Object

Anything for which managers want a separate measurement of cost

Allocate

Assigning indirect costs among a collection of products. This results in a less precise cost figure being assigned to each product.

Inventoriable product costs of Manufacturing Companies

Direct Materials Direct Labor Manufacturing Overhead

Work in process inventory:

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

Service company:

In business to sell intangible services; generally no inventory -EX. health care, insurance, banking, and consulting

Inventoriable Product Cost

Include only the costs incurred during the "production or purchases" stage of the value chain. Inventoriable Product Costs are treated as an asset (inventory) until the product is sold.

Other Indirect Manufacturing Costs

Include such plant-related costs as depreciation on the plant and plant equipment, plant property taxes and insurance, plant repairs, and maintenance, and plant utilities

Total Costs

Include the costs of ALL Resources used throughout the value chain.

Manufacturing Overhead

Includes ALL manufacturing costs other than direct materials and direct labor. Also referred to as factory overhead because all of the costs relate to the factory.

Indirect Labor

Includes the cost of all employees IN THE PLANtT other than those employees directly converting the raw materials into the finished product. -Ex. salaries, wages, and benefits of plan forklift operators, plant security officers, plant janitors, and plant supervisors

Cost Objects include:

Individual units, Different models, Alternative marketing strategies, Geographic segments of the business, Departments, A "green initiative"

In the long run most costs are Controllable meaning:

Management is able to influence or change them. -Ex. Toyota could replace existing production facilities with different-sized plants in different areas of the world that might cost less to operate, but that would take time.

Prime Costs

Refer to the combination of direct materials and direct labor

Differential Cost

Refers to the difference in sot between two alternatives.

Costs of Goods Manufactured

Represents the cost of those goods that were completed and moved to FINISHED GOODS INVENTORY during the period

Merchandising companies:

Resell tangible products they buy from suppliers; HAVE Inventory -EX Walmart and Best Buy resell tangible products they buy from suppliers

Three basic business models:

Service companies, Merchandising companies, Manufacturing companies

Assigning ( a cost)

Simply means that you are attaching a cost to the cost object

Direct Materials

The PRIMARY materials that become a physical part of the finished product. -Ex. steel, tires, engines, upholstery, carpet dashboards

Value Chain:

The activities that add value to the company's products and services. -R&D, Design, Production and Purchases, Marketing, Distribution, Customer Service

Direct Labor

The cost of compensating employees who physically convert raw materials into the company's products.

Marginal Cost

The cost of making ONE MORE UNIT. -Ex. Fixed costs will not change when Toyota makes one more Prius unless the plant is operating at 100% capacity and simply cannot make one more unit. If that is the case Toyota will need to incur additional costs to expand the plant. So, the marginal cost of a unit is simply its VARIABLE COST.

Accounting Treatment of Inventoriable Product Costs:

Treat as inventory until product is sold . When sold, expense as "Cost of Goods Sold".

Manufacturing Companies:

Use labor, plant, and equipment to transform raw materials into new finished products.

Periodic Inventory:

Used to account for breakage, theft, input errors, or obsolescence that occurred during the year.

Biomimicry

means that 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

Life-Cycle assessment

means the company analyzes the environmental impact of a product, from cradle to grave, in an attempt to minimize negative environmental consequences throughout the entire lifespan of the product.

Triple Bottom Line

notion in which the company's performance is evaluated not only in terms of profitability, but also in terms of its impact on people and the planet.

Wholesalers:

often referred to as "middle men"; buy products in bulk from manufacturers, mark up the prices, and then sell those products to retailers

Conversion Costs

refer to the combination of direct labor and manufacturing overhead. These are the costs of converting raw materials into finished goods

Merchandising companies include:

retailers and wholesalers

Retailers:

sell to consumers

The cost of inventory includes:

the cost merchandisers pay for the goods plus cost necessary to get the merchandise in place and ready to sell, such as FREIGHT-IN costs, IMPORT DUTIES and TARIFFS

Greenwashing

the unfortunate pro act of OVERSTATING a company's commitment to sustainability, can ultimately backfire as investors and consumers learn the truth about the company operations.

Manufacturing companies:

use labor, plant, and equipment to convert raw materials into new finished products

Examples of Manufacturing companies:

Procter and Gamble General Mills Dell Computer Toyota

Period Costs

R&D, Design, marketing, distribution, and customer service

Three Categories of inventory:

Raw Materials Work in Process Inventory Finished Goods inventory

Inventoriable product costs of Merchandising Companies

Cost of merchandise itself Freight-in Import Duties and customs (if any)

Direct Cost

A cost that can be traced to the cost object

Indirect Cost

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

What costs should be assigned to cost objects:

Both direct and indirect costs are assigned to cost objects. Direct costs are traced to cost object, where as indirect costs are allocated to cost objects

In the short run costs are Uncontrollable Costs meaning:

Companies are "locked in" to certain costs arising from previous decisions. -Ex. Toyota has little or no control over property tax and insurance costs of its existing plants

Finished goods inventory:

Completed goods that have not yet been sold.

Tracing

Connecting a cost with a specific cost object. This results in a very precise cost figure , giving managers great confidence in the cost's accuracy.

Indirect Materials

Materials used in the plant that are not easily traced to individual units. -Ex. invoice sticker, glue - the cost of tracing the sticker to the vehicle outweighs the benefit management receives from the increased accuracy of the information

Inventoriable product costs of service companies:

None