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Ch 2 Reading

by: Shannon Panagopoulos

Ch 2 Reading ACC

Marketplace > DePaul University > ACC > Ch 2 Reading
Shannon Panagopoulos
GPA 3.52

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About this Document

Basic terms General subjects introduced
Managerial Accounting
Nancy Hill
Class Notes
25 ?




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This 3 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 10 views.


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Date Created: 01/04/16
Cost/Terminology  cost= a resource sacrificed or forgone to achieve a specific objective     ­usually measured as the monetary amount that must be paid to acquire goods/services actual cost= the cost incurred (historical/past 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 did/learn 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 & Indirect Costs Direct cost of a cost object= related to the particular cost object and can be traced easily and  cost­effectively  Indirect 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 direct/indirect 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  (clips/screws) 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 indirect/direct 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     (480,000 units X $80/unit)                $38,400,000 Ending Inventory on BS       (20,000 units X $80/unit)                   $1,600,000 _____________________________________________________________ Total manufacturing costs of 50,000 units                                     $40,000,000 *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, Inventoriable Costs, and Period Costs  DM inventory= direct materials in stock and awaiting use in the manufacturing process WIP 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 w/o changing  their basic form; only have one type of inventory: Merchandise Inventory (MI) DM costs= the acquisition costs of all materials that eventually become part of the cost object  (WIP→ 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 (WIP→ finished goods) easily (wages, fringe benefits paid to  machine operators, et) Indirect Manufacturing Costs= all manufacturing costs that are related to the cost object (WIP→  Finished goods) but cannot be easily traced to that cost object (supplies, indirect materials,  compensation of plant managers) Inventoriable 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 costs=all 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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