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UB / Management Accounting / MGA 202 / What are a physical part of the finished product and their costs can b

What are a physical part of the finished product and their costs can b

What are a physical part of the finished product and their costs can b

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School: University at Buffalo
Department: Management Accounting
Course: Intro to Management Accounting
Professor: W xu
Term: Fall 2015
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Cost: 50
Name: MGA 202 Exam 1 study guide
Description: This is a study covering chapters 1-6 except 5 which will be on the midterm.
Uploaded: 03/07/2017
10 Pages 495 Views 2 Unlocks
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What companies use Job-Order Costing?




What is the average cost?




What is the total cost?



 Chapter 1 Cost Concepts  1. Categorize costs by role  • Manufacturing costs vs Nonmanufacturing costs  Manufacturing costs are all costs that incur inside the factory affiliated with transforming  raw materials into finished products Three aspects  • Direct Materials  • Direct labors  • Manufacturing overhead  Total manufacturing costs= Direct Materials + Direct Labor + ManDon't forget about the age old question of State the 2 ways to display distribution.
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ufacturing overhead Nonmanufacturing costs include a company’s other costs  • Selling costs  • Administrative costs  Manufacturing Costs  • Direct materials- Are a physical part of the finished product and their costs can  be independently and conveniently traced to the finished product Example: Hard  drive in a computer  • Direct Labor- the labor that can be directly traced to the goods or services being  produced. The most common direct labor is the wages of chefs in a restaurant  • Manufacturing overhead- includes all manufacturing costs that are not direct  materials and direct labor, includes: • Indirect materials- glue, oil, and nails • Indirect labor- wages of a manager, janitor, and supervisor  • Warehouse utilities, Warehouse rent, and Warehouse insurance  • Depreciation on Warehouse   Nonmanufacturing costs  • Selling costs- costs needed to market, distribute, and service a product or  service. Examples: Salaries and commissions of sales people, Advertising  • Administrative costs- costs affiliated with the general management of the  company. Examples: General Accounting, Top Executive salaries  Among Manufacturing Costs Prime cost = Direct Materials + Direct Labor  Conversion Cost= Direct Labor + Manufacturing overhead (cost of converting raw  materials into a finished product)  Product Costs vs Period Costs Product costs include: Direct Materials, Direct Labor, and Manufacturing overhead  (Also Manufacturing costs) Period cost include all selling and administrative costs (Nonmanufacturing costs)  2. Categorize costs by behavior  Variable vs Fixed Costs  Variable costs • Total variable costs change in direct proportion to changes in activity level  • Variable cost per unit does not change as activity level increases  Fixed costs • Total fixed costs remain the same, regardless of activity level • Fixed cost per unit decreases as activity level increases   Total Cost and Average Cost Total cost = Total fixed cost + Total variable cost = Total fixed cost + (Variable cost per  unit x Number of units) Average Cost = Total cost/Number of units  Example:  Fixed costs = $30,000  Variable cost per unit = $60 per unit  Number of units = 150  What is the total cost? Total cost = $30,000 + (60 x 150) = $39,000 What is the average cost?  Average cost =$39,000/150 units = $260 per unit   3. Categorize costs in relation to cost objects   Direct Costs vs. Indirect Costs Cost object- any item for which costs are measured and assigned  • Examples: Costumers, Departments, Regions  Direct Costs- costs that can be easily and accurately traced to a cost object (Direct  Materials, Direct Labor)  Indirect Costs- costs that cannot be easily to a cost object (Manufacturing overhead).  4. Categorize costs for Decision Making Differential cost and Revenue- costs and revenues that differ among alternatives  Example: You have a job where you live where you can earn $3,000 a month. You also  have a job in a city an hour away that pays $3,400 a month, however commuting cost to  that city is $200 a month. Differential Revenue is: $3,400- $3,000= $400 Differential cost is $200 Opportunity cost- the potential benefit is given up when one choice is selected over  the other Example: Choosing to attend college instead of working  Sunk cost- costs that have already incurred and can’t be changed in the present or  future. Ignore these costs when making decisions Example: You buy a computer for  $1,000 but now it is on sale for $800. Should you wait until the computer is sold out or  sale is over before selling it? You probably would even though the $1,000 purchase is a  sunk cost.  Chapter 2: Job Order Costing   What companies use Job-Order Costing? • Products that are manufactured to order  • Various products that are produced each other • The distinct nature of each order requires tracing or allocating costs to each job, and  marinating cost records for each job. • Companies who use Job-order costing: Bechtel International, Walt Disney Studios,  and Boeing   Manufacturing Overhead: Cannot trace: Allocate/Apply  • In addition to DM and DL, manufacturing overhead costs also occur during production • Managers use an allocation base, such as direct labor hours, direct labor dollars, or  machine hours, to assign manufacturing overhead to individual jobs  Manufacturing Overhead Application: Three-Step Procedure  1. Select a cost allocation base, example: direct labor hours, direct labor dollars, or  machine hours. Ideally, the allocation base is a cost driver that causes overhead. 2. Compute the POHR (predetermined overhead rate) POHR = Estimated total  manufacturing cost for the coming period/Estimated total units in the allocation base  for the coming period. (Determined before the period occurs) 3. Apply MOH to jobs. MOH applied = POHR x Actual Activity  About Applying MOH using POHR • Pro: Using a predetermined rate makes it possible to estimate total job costs sooner.  Actual overhead for the period is not known until the end of the period. • Con: Creates complication: Actual MOH does not equal applied MOH. Need to do end  of period adjustment for underapplied or overapplied MOH.  End of Period Adjustment for Under or Overapplied Overhead • When using POHR to apply to MOH products, actual overhead will probably not equal  to overhead applied to products  • MOH applied vs MOH actual. If MOH applied > MOH actual, then MOH was  overapplied. If MOH applied < MOH actual, then MOH was underapplied.  Chapter 3: Activity Based Costing   Assigning Overhead Costs to Products:  Job-Order Costing uses a Plantwide Overhead Rate- A single overhead rate used  throughout an entire factory.Machining Department, Assembly Department, Shipping Department  This may not be proper since the allocation base depends on the nature of the work  performed in each department.  In the machining department, overhead may be based on machine-hours, but in the  assembly department, overhead may be based on labor-hours  • Plantwide overhead rate was used when cost systems were developed in thew 1800s,  because back then the emphasis was on simplicity  • Costs and activity data had to be collected by hand and all calculations were done  with paper and pencil. Direct labor information was already being recorded.  Computers make more records available  • Most companies produced a limited variety of similar products, so there was little  difference in the overhead costs consumed by each product. Complexity of products  and production has increased  • Managers believed direct labor and overhead costs were highly correlated. Many  MOH costs have been found to not correlate with direct labor  • Direct labor was a large component of product costs. DL costs have decreased as  percentage of total costs; MOH costs have increased  • Using a single plantwide overhead rate is no longer suitable for MOH allocation in  today’s business environment  • Need a more refined allocation system to better match the overhead resources with  the products that consume those resources, and avoid cost distortion   Activity Based Costing (ABC)• ABC uses multiple allocation bases which we call activities to assign cots to products  these activities are the real cause of the overhead. • Activity- an event that causes the consumption of overhead resources • Activity Cost Pool- A “cost bucket” in which costs related to a particular activity are  accumulated  • Activity Measure- Expresses how much of the activity is carried out and is used as  the allocation base for applying overhead costs  • Activity Rate- A predetermined overhead rate for each activity cost pool.   Steps for Designing an ABC system  1. Identify and define activities  2. Accumulate costs to activity costs pools  3. Calculate activity rates  4. Assign MOH to products 5. Prepare management reports   Benefits of ABC • Improves accuracy of product costing  • Increasing the number of cost pools used to accumulate overhead costs • Using activity cost pools that are more homogenous than departmental cost pools  • Assigning overhead costs using activity measures that cause those costs, rather than  relying solely on direct labor hours.  Limitations of ABC: costly!  Chapter 4: Process Costing  Process Costing • A company that produces many units of a single product  • One unit of product is indstinguishable from other units of product  • The identical nature of each unit enables assigning the same average cost per unit  • Companies who use process costing: Coca-Cola, Reynolds Aluminum, and  Weyerhaeuser   Similarities and Differences between Job-Order and Process Costing Similarities: • Both systems assign material, labor, and overhead costs to products and they provide  a mechanism for computing unit product costs  • Both systems use the same manufacturing accounts, including Manufacturing  Overhead, Raw materials, Work in Process, and Finished Goods  • The Flow of costs through the manufacturing accounts is basically the same in both  systems  Differences: • Process costing is used when a single product us produced on a continuing basis.  Job-Order costing used when many different jobs having different production  requirements are worked on  • Process costing accumulates costs by departments. Job-Order costing accumulates  costs by individual jobs  • Process costing computes unit costs by department. Job-order costing system  computes unit cots by job on the cost sheet   Processing Departments  Any unit in an organization where materials, labor or overhead are added to the product • The activities performed in a processing department are performed uniformly on all  units of production. The output of a processing department are homogenous. Products  flow in a sequence from department to another   Complication: Partially Completed Units  • A department usually has some partially completed units in its beginning and ending  inventory • Complicate the determination of a department’s output for a given period, and the unit  cost that should be assigned to that departments output  Equivalent Units Two half-completed products are equivalent to one compete product  Equivalent units = # of partially completed units X percentage completion of those units  Equivalent units of production for a department = the # of units completed and  transferred out + the equivalent units in ending work in process inventory   Chapter 6: Variable Costing • Only those manufacturing costs that vary with output are treated as product costs:  Direct materials, Direct labor, Variable portion of manufacturing overhead  • Fixed MOH is not treated as a product costs, but as a period cost • The unit product cost in inventory or COG under variable costing does not contain any  fixed MOH cost   Key Formulas  • Absorption unit product cost = (DM + DL + VOH) per unit + FMOH/units produced  • Variable unit product cost = (DM + DL + VOH) per unit  • COGS = unit product cost x unites sold • Gross Margin = Sales - Absorption COGS  • Contribution Margin = Sales - Variable COGS - VSA Expenses  • Sales = units sold x price per unit  • Absorption period cost = Total SA expenses + Variable SA + Fixed SA  • Variable period cost = Total SA expenses + FMOH • Absorption NOI = Gross Margin - Total SA expenses  • Variable NOI = Contribution margin - FMOH - Fixed SA expenses

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