UO ACTG 213 Ch. 1, 2, and 4
What is another name for NONMANUFACTURING COSTS?
"Selling, general, and administrative costs (SG&A)" or just "Selling and administrative costs"
Cost Per Equivalent Unit (Weighted-Average Method)
*A Separate calculation is made for each cost category in each processing department)* Cost Per EU = (Cost of Beg. WIP Inv. + Cost added) / (EUs of production)
Variable Cost
-Varies in total, in direct proportion to changes in the level of activity. -Constant per-unit cost
Sunk Cost
A cost THAT HAS ALREADY BEEN INCURRED and that cannot be changed by any decision made now or in the future. *Because these costs cannot be changed, they are NOT differential costs.*
Direct Cost
A cost that CAN be easily and conveniently traced to a specified cost object.
Indirect Cost
A cost that CANNOT be easily and conveniently traced to a specified cost object.
Common Cost
A cost that is incurred to support a number of cost objects but cannot be traced to them individually. It is a type of indirect cost.
Differential Cost
A difference in costs between any two alternatives.
Differential Revenue
A difference in revenues between any two alternatives.
Bill of Materials
A document that lists the type and 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. The form is used to control the flow of materials into production and also for making entries in the accounting records.
Cost Driver
A factor, such as machine-hours, that causes overhead costs.
Activity Base (a.k.a. "cost driver")
A measure of whatever causes the incurrence of a variable cost.
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.
Plantwide Overhead Rate
A single POHR that is used throughout a plant.
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 are treated as period costs). For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs. Period costs are not included as part of the cost of either purchased or manufactured goods. Instead, period costs are expensed on the income statement in the period in which they are incurred, using the usual rules of accrual accounting. *The period in which a cost is incurred is not necessarily the period in which cash changes hands. For example, the costs of liability insurance are spread across the periods that benefit from the insurance-regardless of the period in which the insurance premium is paid.*
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. For example, direct materials would be classified as variable, and a building lease cost would be classified as fixed, because of the nature of those costs.
Time Ticket
An hour-by-hour summary of the employee's activities throughout the day.
Processing Department
An organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product.
Incremental Cost
Another name for a "differential cost"---although this should only refer to an INCREASE in cost from one alternative to another; DECREASES in cost should be referred to as *Decremental Costs*
Cost Object
Anything for which cost data are desired--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.
COGS in Traditional Format Income Statement
COGS = (Beg. Inventory)+(Purchases)-(End. Inv.)
Cost & Activity-which variable?
COST is known as the *Dependent Variable*, because the amount of cost incurred during a period depends on the level of activity for the period. ACTIVITY is known as the *Independent Variable*, because it causes variations in the cost. On a scattergraph: Cost behavior is considered *Linear*, whenever a straight line is a reasonable approximation for the relation between cost and activity.
What are the two categories of fixed costs?
Committed and discretionary
Finished Goods
Consists of completed units of product that have not yet been sold to customers.
Direct Labor
Consists of labor costs that can be easily (i.e., physically or conveniently) traced to individual units of product. *Direct Labor is sometimes called TOUCH LABOR because direct labor workers typically touch the product while it is being made. Examples of direct labor include assembly-line workers at Toyota, carpenters at the home builder KB Home, and electricians who install equipment on aircraft at Bombardier Learjet.*
Work in Process
Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.
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 Finished Goods inventory and that are transferred out of FG to COGS.
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 to Finished Goods.
Mixed Cost (a.k.a. semivariable costs)
Contains both variable and fixed cost elements. The equation for a straight line can be used to express the relationship between a mixed cost and the level of activity: Y= a + bX Y=The total mixed cost a= The total fixed cost (vertical intercept) b= The variable cost per unit of activity (slope) X= The level of activity
Conversion Cost
Direct Labor Cost + MOH Cost
What are the 2 classifications of costs?
Direct and Indirect
What are the 3 categories of manufacturing costs?
Direct materials, direct labor, manufacturing overhead
Product Costs
For financial accounting purposes, these include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. These costs "attach" to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. They are initially assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales revenue. Because these costs are initially assigned to inventories, they are known as INVENTORIABLE COSTS. *These costs are not necessarily treated as expenses in the period in which they are incurred. Rather, they are treated as expenses in the period in which the related products ARE SOLD.*
Administrative Costs
Includes all costs associated with the GENERAL MANAGEMENT of an organization rather than with manufacturing or selling. *Examples of administrative costs 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
Includes all costs that are incurred to secure customer orders and get the finished product to the consumer. These costs are sometimes called "Order Getting" and "Order-filling Costs". *Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.*
Manufacturing Overhead (A.K.A. "Indirect Manufacturing Cost", "Factory Overhead", and "Factory Burden")
Includes all manufacturing costs except direct materials and direct labor. Includes items such as indirect materials, indirect labor, maintenance & repairs on production equipment, heat & light, property taxes, depreciation, and insurance on manufacturing facilities. *(A company also incurs costs for heat & light, property taxes, insurance, depreciation, etc. associated with its SELLING & ADMINISTRATIVE FUNCTIONS, but these costs are not included as part of manufacturing overhead. Only those costs associated with OPERATING THE FACTORY are included in manufacturing overhead).*
Indirect Materials (Included as part of manufacturing overhead)
Includes items that are not worth the effort to trace the costs of to the end product (relatively insignificant materials). *EX: the solder used to make electrical connections in a Sony TV, or the glue used to assemble an Ethan Allen chair.*
Cost of Goods Manufactured
Includes the manufacturing costs associated with the goods that were finished during the period.
What are the two common methods for determining unit product costs?
Job-Order Costing and Process Costing.
Indirect Labor (Included as part of manufacturing overhead)
Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience. *Includes the labor costs of janitors, supervisors, materials handlers, and night security guards. (Although the efforts of these workers are essential, it would be either impractical or impossible to accurately trace their costs to specific units of product.*
Direct Materials
Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. *EX: the seats that Airbus purchases from subcontractors to install in its commercial aircraft and the tiny electric motor that Panasonic uses in its DVD players.*
Weighted-Average Method
Method of Process Costing that blends together units and costs from the current period with units and costs from the prior period.
Predetermined Overhead Rate
POHR = (Est. Total MOH Cost) / (Est. Total amount of allocation base) Y = a + bX Y = Estimated total manufacturing Overhead Cost a = Estimated total fixed MOH Cost b = Estimated variable MOH Cost per unit of allocation base X = Estimated Total amount of the allocation base *The POHR is used to apply overhead costs to jobs throughout the period.*
FIFO Method
Process Costing method in which equivalent units and unit costs relate only to work done during the current period.
Contribution Approach
Provides managers with an income statement that clearly distinguishes between fixed and variable costs, and therefore aids planning, controlling, and decision making.
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.
Fixed Cost
Remains constant in total, regardless of changes in the level of activity.
Committed Fixed Costs
Represent organizational investments with a MULTIYEAR planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized. *EX: Investments in facilities & equipment, as well as real estate taxes, insurance expenses, and salaries of top management.*
What are the 2 categories of NONMANUFACTURING COSTS?
SELLING COSTS and ADMINISTRATIVE COSTS
Contribution Margin
The amount remaining from sales revenues after variable expenses have been deducted. *(The amount CONTRIBUTES toward covering fixed expenses and then toward profits for the period).*
Raw Materials
The materials that go into the final product *The finished product of one company can become the raw materials of another company* *Raw materials may include both DIRECT and INDIRECT materials.*
Equivalent Units
The number of partially completed units and the percentage completion of those units with respect to the processing in the department. Equivalent Units = (Number of partially completed units) * (Percentage Completion)
Equivalent Units of Production (In the Weighted-Average Method)
The number of units transferred to the next department (or to finished goods), plus the equivalent units in the department's ending Work In Process Inventory. *A separate calculation is made for each cost category in each processing department* Equivalent Units of Production = (Units Transferred to the next department or finished goods) + (Equivalent units in ending WIP Inventory)
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another.
Overhead application
The process of assigning overhead cost to jobs. Overhead Applied to a particular job = (POHR) * (Amount of allocation base incurred by the 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 (fixed, mixed & variable).
Conversion cost
The sum of direct labor cost and manufacturing overhead cost. *The term "conversion cost" 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.
What do the high-low and least-squares regression methods do?
They estimate the fixed and variable elements of a mixed cost by analyzing past records of cost and activity data.
Engineering Approach
This approach to cost analysis involves a detailed analysis of what cost behavior should be, based on an 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.
Least-Squares Regression Method
Unlike the high-low method, uses all of the data to separate a mixed cost into its fixed and variable components. A REGRESSION LINE of the form Y=a+bX is fitted to the data, where "a" represents the total fixed cost and "b" represents the variable cost per unit of activity.
Process Costing
Used commonly in industries that convert raw materials into homogeneous products, such as bricks, soda, or paper, on a continuous basis.
Job-Order Costing
Used in situations where many *different* products are produced each period.
Discretionary Fixed Costs (a.k.a. managed fixed costs)
Usually arise from ANNUAL decisions by management to spend on certain fixed cost items. They can be cut for short periods of time with minimal damage to the long-run goals of the organization. *EX: advertising, research, public relations, management development programs, and internships for students.*
High-Low Method
Variable Cost = (Change in cost) / (Change in activity) Fixed cost = Total cost- (Variable Cost per unit * activity) VARIABLE COST = (Cost @ High activity - Cost at Low activity) / (High Activity Level - Low Activity Level)
What are the three categories of costs?
Variable, fixed, and mixed.
Multiple POHR's
Various POHR's used throughout a plant.
Overapplied Overhead
When the amount of overhead cost applied to WIP is *higher* than the actual overhead costs of that period.
Underapplied Overhead
When the amount of overhead cost applied to WIP is *lower* than the actual overhead costs of that period.
