Managerial Accounting Exam 1

Direct Cost

A cost that can be easily and conveniently traced to a specified object ex. Direct materials, direct labor

Indirect Cost

A cost that cannot be easily and conveniently traced to a specified cost object ex. manufacturing overhead

Sunk Cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future

Common Cost

A cost that is incurred to support a number of cost object but cannot be traced to them individually A type of indirect cost

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of activity Examples include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising Not affected by changes in activity Remain constant unless influenced by some outside force The average fixed cost per unit varies inversely with changes in activity (decreases as the activity level rises and increases as the activity level falls)

Differential Cost

A difference in costs between any two alternatives Also known as incremental cost Fixed or variable

Differential Revenue

A difference in revenues (usually just sales) between any two alternatives

Incremental Cost

A differential cost is also known as this, although technically a __________ should refer only to an increase in cost from on alternative to another

Bill of Materials

A document that lists the type of quantity of each type of direct material needed to complete a unit of product

Materials Requisition Form

A document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials (controls the flow of materials into production and also makes entries into the accounting records)

Cost Driver

A factor, such as machine hours, beds occupied, computer time, or flight hours, that causes overhead costs Direct labor is the most common

Activity Base

A measure of whatever causes the incurrence of a variable cost Sometimes referred to as a cost driver Common types are direct labor-hours, machine-hours, units produced, and units sold Total volume of goods and services provided by the organization (assume this)

Allocation Base

A measure such as direct labor hours (DLH) or machine hours (MH) that is used to assign overhead costs to products and services ex. DLH, MH, Direct Labor cost, and units of product

High-Low Method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in the cost between the high and low activity levels Based on the rise over run formula for the slope of a straight line

Plantwide Overhead Rate

A single predetermined overhead rate for an entire factory

Cost of Goods Sold (Example)

Accounts Receivable 225,000 Sales 225,000

Independent Variable

Activity is the ___________ because it causes variations in the cost X, horizontal axis

Absorption Costing

All manufacturing costs, both fixed and variable, are assigned to units of product - units are said to fully absorb manufacturing costs

Period Costs

All the costs that are not product costs All selling and administrative expenses Sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative officers are all _______ Expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting Do not flow through inventories on the balance sheet; they are recorded as expenses on the income statement in the period incurred

Account Analysis

An account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves

Time Tickets

An hour-by-hour summary of the employees' activities throughout the day (bar codes)

Cost Object

Anything for which cost data are required including products, customers, jobs, and organizational subunits

Normal Cost System

Applies overhead to jobs by multiplying a POHR by the actual amount of the allocation base incurred by the jobs

Unadjusted Cost of Goods Sold

Beginning Finished Goods Inventory + CGM - Ending Finished Goods Inventory

Raw Materials Used in Production

Beginning Raw Materials Inventory + Purchases of raw Materials - Ending Raw Materials Inventory

Underapplied Overhead (Example)

CGS 5,000 Manufacturing Overhead 5,000 MOH has a debit balance so MOH must be credited to close out the account Increases CGS

Manufacturing Companies

Companies that separate their costs into two broad categories - manufacturing and non manufacturing costs Separate their costs into two direct cost categories, direct materials and direct labor, and one indirect cost category, manufacturing overhead

Predetermined Overhead Rate (POHR)

Computed by dividing the total estimated MOH cost for the period by the estimated total amount of the allocation base Computed before the period begins ________ = estimated total MOH cost / estimated total amount of the allocation base

Finished Goods

Consist of completed units of product that have not yet been sold to customers The amount transferred from WIP to __________ is referred to as the Cost of Goods Manufactured As goods are sold, their costs are transferred from _______ to CGS

Direct Labor

Consists of labor costs that can be easily traced to individual units of product Sometimes called touch labor because direct labor workers typically touch the product while it is being made ex. assembly line workers ex. wages paid to automobile assembly workers

Work in Process

Consists of units of product that are only partially complete and will require further work before they are ready for sale for the customer Direct labor costs are added directly to __________ and do not flow through raw materials inventory Manufacturing Overhead costs are applied to ___________ by multiplying the POHR by the actual quantity of the allocation base consumed by each job

Schedule of Cost of Goods Sold

Contains 3 elements of product costs - direct materials, direct labor, and manufacturing overhead - and it summarizes the portions of those costs that remain in ending FG inventory that are transferred out of FG into CGS

Schedule of Cost of Goods Manufactured

Contains 3 elements of product costs - direct materials, direct labor, and manufacturing overhead - and it summarizes the portions of those costs that remain in ending WIP inventory and that are transferred out of WIP into FG

Mixed Cost

Contains both variable and fixed cost elements Also known as semi variable costs Very common

Linear

Cost behavior is considered _______ whenever a straight line is a reasonable approximation for the relation between cost and activity

Step-Variable Costs

Cost behavior patterns such as salaried employees Can often be adjusted quickly as conditions change

Dependent Variable

Cost is the ______________ because the amount of cost incurred during a period depends on the level of activity for the period Y, vertical axis

Total Manufacturing Costs

Direct Materials + Direct Labor + MOH Applied to WIP

Multiple Predetermined Overhead Rate

Each production department may have its own predetermined overhead rate More accurate but complex

Y = a + bx

Expresses the relationship between a mixed cost and the level of activity

Cost of Goods Manufactured (Example)

Finished Goods 158,000 Work in Process 158,000

Product Costs

Include all costs involved in acquiring or making a product These costs consist of direct material, direct labor, and manufacturing overhead They "attach" to units of product as the goods are purchased or manufactured and they remain attached as the goods go into inventory awaiting sale Also known as inventoriable costs Recorded as expenses in the period in which the related products are sold Flow through inventories on the balance sheet and then onto CGS in the income statement

Cost of Goods Manufactured

Includes the manufacturing costs associated with the goods that were finished during the period

Engineering Approach

Involves a detailed analysis of what cost behavior should be, based on the industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production efficiency, power consumption, and so on

Indirect Labor

Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience Treated as part of manufacturing overhead Includes the labor cost of janitors, supervisors, materials handlers, and night security guards

x

Level of activity

Committed Fixed Costs

Long-term Represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes Examples include investments in facilities and equipment, as well as real estate taxes, insurance expenses, and salaries of top management

Manufacturing Overhead Costs (Example)

Manufacturing Overhead 40,000 Accounts Payable 40,000

Direct Materials

Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product ex. A radio installed in an automobile

Discretionary Fixed Costs

May be altered in the short-term by current managerial decisions Usually arise from annual decisions by management to spend on certain fixed cost items Examples include advertising, research, public relations, management development programs, and internships for students Also known as managed fixed costs

Administrative Costs

One type of nonmanufacturing costs that includes all costs associated with the general management of an organization rather than with manufacturing or selling Direct or indirect Examples include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole

Selling Costs

One type of nonmanufacturing costs that includes all costs that are incurred to secure customer orders and get the finished product to the customer Sometimes called order-getting and order-filling costs Direct or indirect Examples include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses Can either be direct or indirect costs

Traditional Format Income Statement

Prepared primarily for external reporting purposes; organizes costs into 2 categories: cost of goods sold and selling and administrative expenses Sales - CGS = Gross Margin and Gross Margin - Selling and Administrative Expenses = net operating income EXTERNAL

Contribution Approach

Provides managers with an income statement that clearly distinguished between fixed and variable costs and therefore aids planning, controlling, and decision making

Contribution Format Income Statement (Contribution Approach)

Provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision-making INTERNAL

Purchase and Issue of Materials (Example)

Raw Materials 60,000 Accounts Payable 60,000

Job Cost Sheet

Records the materials, labor, and manufacturing overhead costs charged to that job

Cost Behavior

Refers to how a cost reacts to changes in the level of activity The most common classifications are variable costs, fixed costs, and mixed costs

Selling and Administrative Expenses

Report all period costs that have been expensed as incurred

Cost of Goods Sold

Reports the product costs attached to the merchandise sold during the period CGS = Beginning Merchandise Inventory + Purchases - Ending Merchandise Inventory

Variable Portion of Mixed Costs

Represents the cost incurred for accrual consumption of the service

Fixed Portion of Mixed Costs

Represents the minimum cost of having a service ready and available for use

Nonmanufacturing Costs (Example)

Salaries Expense 30,000 Salaries and Wages Payable 30,000

Indirect Materials

Small items of material such as solder and glue and are included as part of manufacturing overhead May be an integral part of a finished product but whose costs cannot be easily or conveniently traced

Contribution Margin

The amount remaining from sales revenue after variable expenses have been deducted This amount contributes toward covering fixed expenses and then toward profits for the period _______________ = sales - variable expenses

Underapplied or Overapplied Overhead

The difference between the overhead cost applied to WIP and the actual overhead costs of a period If there is a debit balance in the MOH account of X dollars, then overhead is underapplied by X dollards If there is a credit balance in the MOH account of Y dollars, then overhead is overapplied by Y dollars

Raw Materials

The materials that go into the final product Refers to any materials that are used in the final product; and the finished product of one company can become the _____________ of another company May include both direct and indirect materials When raw materials are used in production, their costs are transferred to the Work in Process inventory account as direct materials

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another Virtually any alternative involves an _____________

Overhead Application

The process of assigning overhead cost to jobs _______________ to a particular job = POHR x amount of allocation base incurred by job

Relevant Range

The range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

Cost Structure

The relative proportion of each type of cost in an organization

Conversion Cost

The sum of direct labor cost and manufacturing overhead cost The term is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product

Prime Cost

The sum of direct materials cost and direct labor cost

Manufacturing Overhead

The third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor Includes indirect materials, indirect labor, maintenance and repairs on production equipment, and heat and light, property taxes, depreciation, and insurance on manufacturing facilities Only costs associated with operating the factory are included in _____________ Synonyms for the term include indirect manufacturing cost, factory overhead, and factory burden Operates as a clearing account

Cost of Goods Manufactured

Total Manufacturing Costs + Beginning WIP Inventory - Ending WIP Inventory

a

Total fixed cost (vertical intercept of the line)

Y

Total mixed cost

Job-Order Costing

Used in situations where many different products are produced each period; costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at the average cost per unit Used extensively in service industries ex. hospitals, law firms, movie studios, etc.

Least-Squares Regression Method

Uses all of the data to separate a mixed cost into its fixed and variable components More accurate than high-low method

b

Variable cost per unit of activity (slope of the line)

Variable Cost

Varies, in total, in direct proportion to changes in the level of activity Examples included cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs Variable cost per unit may be constant

Labor Costs (Example)

Work in Process 60,000 Manufacturing Overhead 15,000 Accounts Payable 75,000