Chapter 2 Reading
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This 0 page Class Notes was uploaded by Shannon Panagopoulos on Monday January 4, 2016. The Class Notes belongs to ACC at DePaul University taught by Nancy Hill in Winter 2016. Since its upload, it has received 16 views.
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Date Created: 01/04/16
CostTerminology cost a resource sacrificed or forgone to achieve a specific objective usually measured as the monetary amount that must be paid to acquire goodsservices actual cost the cost incurred historicalpast cost budgeted cost predicted or forecasted cost future cost cost object anything for which a measurement of costs is desired managers usually need to know both types of costs to make decisions comparing budgeted to actual costs helps managers evaluate how well they didlearn how to improve in the future How a cost system determines the costs of various objects Typically 2 basic stages 1 cost accumulation the collection of cost data in some organized way by means of an accounting system 2 Assignment managers and management accountants then assign these accumulated costs to designated cost objects How do managers use this info 1 Make decisions 2 Implement decisions by influencing and motivating employees to act and learn Direct amp Indirect Costs Direct cost of a cost object related to the particular cost object and can be traced easily and costeffectively lndirect cost of a cost object related to the particular cost object but cannot be easily traced costeffectively Cost allocation used to describe the assignment of indirect costs to a particular cost object Cost assignment general term that encopasses 1 tracing direct costs to a cost object 2 allocating indirect costs to a cost object 3 Factors affecting directindirect cost classifications The materiality of the cost in question 1 the smaller the amount of the cost the more immaterial the cost is the less likely it is economically feasible to trace that cost to a particular cost object Available infogathering technology 1 improvements in the infogathering technology make it possible to consider more and more costs as direct costs 1 ex bar codes allow manufacturing plants to treat certain lowcost materials clipsscrews that used to be indirect costs as direct costs of products Design of operations 1 classifying a cost as direct is easier if a company s facility or part of it is used exclusively for a specific cost object such as a specific product or a particular customer a specific cost may be both a direct cost of one cost object and an indirect cost of another cost object therefore indirectdirect classification depends on the choice of the cost object CostBehavior Patterns Variable Costs and Fixed Costs Variable cost changes in total in proportion to changes in the related level of total activity or volume Fixed cost remains unchanged in total for a given time period Cost Drivers Cost driver a variable such as the level of activity or volume that causes costs over a given time span there is a causeandeffect relationship between change in the level of activity or volume and a change in the level of total costs cost driver of a variable cost is the level of activity or volume whose change causes proportionate changes in the variable cost costs that are fixed in the short run have no cost driver in the short run but may have a cost driver in the long run Relevant Range Relevant range the range of normal activity level or volume in which there is a specific relationship between the level of activity of volume and the cost in question the basic assumption of the relevant range also applies to variable costs outside the relevant range variable costs may not change proportionally with changes in production volume Unit Costs total manufacturing cost of units manufactured Price per unit Cost of goods sold on IS 480000 units X 80unit 38400000 Ending Inventory on BS 20000 units X 80unit 1600000 Total manufacturing costs of 50000 units 40000000 use unit costs cautiously managers should think in terms of total costs rather than unit costs Manufacturing Merchandising and ServiceSector Companies Manufacturingsector companies purchase materials and components and convert them into various finished goods automotive co cell phone producers textile co Merchandisingsector companies purchase and then sell tangible products without changing their basic form retail Servicesector companies provide intangible products services to their customers law firms Types of Inventory lnventoriable Costs and Period Costs DM inventory direct materials in stock and awaiting use in the manufacturing process WlP inventory goods partially work on but not yet completed Finished goods inventory goods completed but not yet sold merchandisingsector companies purchase tangible products and then sell them wo changing their basic form only have one type of inventory Merchandise lnventory Ml DM costs the acquisition costs of all materials that eventually become part of the cost object WlP gt finished goods and can be traced to the cost object easily include freightin charges sales taxes and custom duties Direct Manufacturing Labor Costs include the compensation of all manufacturing labor that can be traced to the cost object WlP gt finished goods easily wages fringe benefits paid to machine operators et Indirect Manufacturing Costs all manufacturing costs that are related to the cost object WlP gt Finished goods but cannot be easily traced to that cost object supplies indirect materials compensation of plant managers lnventoriable Costs all costs of a product that are considered as assets in the balance sheet when they are incurred and become COGS when the product is sold for manufacturingsector companies all manufacturing costs are inventoriable costs Period costsall costs in the IS other than COGS treated as expenses f the accounting period in which they are incurred because they are expected to benefit revenues in that period and not benefit revenues in future periods Prime costs all the direct manufacturing costs direct materials costs direct manufacturing costs Conversion costs all manufacturing costs other than DM costs direct manufacturing labor costs MOH costs Overtime Premium the wage rate paid to workers for indirect and direct labor in excess of their straighttime wage rates usually considered to be a part of the indirect costs or overhead Different Meanings of Product Costs Pricing and productmix decision Contracting w gov t agencies Preparing financial statements for external reporting under GAAP
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