ACC 202 Chapter 2
ACC 202 Chapter 2 ACC 202
Popular in Managerial Accounting (202, Wilhelm)
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This 5 page Class Notes was uploaded by Marissa Sarlls on Sunday January 10, 2016. The Class Notes belongs to ACC 202 at University of Kentucky taught by Jana Wilhelm in Spring 2016. Since its upload, it has received 31 views. For similar materials see Managerial Accounting (202, Wilhelm) in Accounting at University of Kentucky.
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Date Created: 01/10/16
Chapter 2: Managerial Accounting and Cost Concepts Cost Classifications for Assigning Costs to Cost Objects Cost object—anything for which cost data are desired—including products, customers, jobs, and organizational subunits o Either direct or indirect o Direct cost—can easily and conveniently traced to a specified cost object o Indirect cost—can’t be easily traced so we don’t track it EX: manager’s salary when producing a bunch of soup…it’s a common cost but it is a direct cost of the manufacturing division P. 28 Exhibit 2-1 o Common cost—a cost that is incurred to support a number of cost objects but cannot be traced to them individually o For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s wage is caused by any one passenger taking the flight Manufacturing Costs Raw materials—any materials used in the final product o Direct materials—integral part and can be traced to finished product (ex: seats to install on plane) o Indirect materials—not worth the effort to trace; part of mnfg OH (ex: glue for a chair) Labor o Direct labor—consists of labor costs that can be traced to individual units of product; aka touch labor because workers typically touch the product while being made o Indirect labor—can’t be physically traced to particular products; also part of mnfg OH Ex: janitors, supervisors, material handlers, and night security o Manufacturing OH—includes all manufacturing costs except direct materials and direct labor Includes items such as indirect materials, indirect labor maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities Non-Manufacturing Costs (SG&A) Selling costs—all costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer o Advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses Administrative costs—all costs associated with the general management of an organization rather than with manufacturing or selling o Executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole Product or Period Costs Costs are recognized as expenses on the income statement in the period that benefits from the cost The matching principle is based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized Product costs—all costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and mnfg OH o Inventoriable costs—synonym for product costs o Productcost=DM+DL+MnfgOH Period costs—Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued o All S&A expenses are treated as period costs o Periodcost=Sellingexpenses+Administrativeexpenses Prime cost—the sum of DM and DL o Primecost=DM+DL Conversion cost—the sum of DL cost and mnfg OH cost; these costs are incurred to convert materials into the finished product o Conversioncost=DL+MnfgOH Predicting Cost Behavior Cost behavior—refers to how a cost reacts to changes in the level of activity Cost structure—the relative proportion of each type of cost in an organization Variable cost—a cost that varies, in total, in direct proportion to changes in the level of activity; it is constant per unit Activity base—a measure of whatever causes the incurrence of a variable cost. o Sometimes referred to as a cost driver Fixed cost—a cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity o Committed fixed cost—investments in facilities, equipment, and basic organization structure that cant be significantly reduced even for short periods of time without making fundamental changes o Discretionary fixed costs—aka managed; those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research Relevant range—the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid Cost behavior patterns such as salaried employees are often called step-variable costs Mixed cost—contains both variable and fixed cost elements; aka semivariable costs y=a+bX o Y is the total mixed cost o a is the total fixed cost (the vertical intercept of the line) o b is the variable cost per unit of activity (the slope of the line) o X is the level of activity EX: The cost of providing x-ray services to patients at Harvard Hospital --The fixed portion is the minimum cost of service ready & available --The variable portion is the cost incurred for actual consumption of service Analysis of Mixed Costs The fixed portion of a mixed cost represents the minimum cost of having a service ready and available for use The variable portion represents the cost incurred for actual consumption of the service Account analysis—a method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves Engineering approach—a detailed analysis of cost behavior based on an industrial engineer’s evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs Cost Behavior with a Scattergraph Plot Total maintenance cost, Y, is plotted on the vertical axis Cost is dependent variable Activity, X, is plotted on horizontal axis and is the independent variable Cost behavior is linear when in relevant range High-Low Method (for calculating mix) Based on the rise-over-run formula for the slope of the straight line Y 2−Y 1 Variable cost = slope of line = rise/run = X 2−X 1 Use periods with lowest & highest level of activity Costof high−Costof low change∈cost Highactivitylevel−Lowactivitylevel= change∈activity Fixed cost element = total cost – variable cost element Always use the costs at highest levels of activity Least-Squares Regression Method (most accurate) Least-squares regression method—uses all of the data to separate a mixed cost into its fixed and variable components A regression line of y=a+bX is fitted to the data Vertical deviations are called errors Traditional and Contribution Format Income Statements Traditional income statements are prepared primarily for external reporting purposes Two categories: COGS and S&A expenses o gross margin=sales−COGS o NOI=grossmargin−S∧Aexpenses o COGS reports the product costs; S&A expenses report period costs o COGS=beginmerch.inventory+purchases−S∧Aexpenses Contribution approach—an income statement format that organizes costs by their behavior. Costs are separate into variable and fixed categories rather than being separated into product and period costs for external reporting purposes o COGS is a variable cost o Emphasis on cost behavior aids cost-volume-profit analysis Contribution margin—the amount remaining from sales revenues after all variable expenses have been deducted o This amount contributes toward covering fixed expenses and then towards profits for the period Decision Making Differential cost—a difference in cost between two alternatives o Incremental cost—an increase in cost between two alternatives o Decreases in cost are decremental costs Differential revenue—the difference in revenue between two alternatives o Or marginal cost and marginal revenue Opportunity cost—the potential benefit that is given up when one alternative is selected over another Sunk cost—a cost that has already been incurred and that cannot be changed by any decision made now or in the future Appendix 2B: Cost of Quality Quality of conformance—the degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance o When a product is free of defects, meets needs, etc. Quality cost—costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units o Prevention cost—costs that are incurred to keep defects from occurring ; support activities whose purpose is to reduce the number of defects Quality circles—small groups of employees that meet on a regular basis to discuss ways of improving quality Statistical process control—a charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems o Appraisal costs—costs that are incurred to identify defective products before the products are shipped to customers ; AKA inspection costs o Internal failure costs—costs that are incurred as a result of identifying defective products before they are shipped to customers o External failure costs—costs that are incurred when a product or service that is defective is delivered to a customer (Ex: warranty repairs and replacements, recalls, etc) Appraisal can only find defects whereas prevention can eliminate them Exhibit 2B-2: Quality Cost Reports Quality cost report—details the prevention costs, appraisal costs, and costs of internal and external failures that arise from the company’s current quality control efforts In graphic form Doesn’t include customer ill-will ISO 9000 standards—Quality control requirements issues by the International Organization for Standardization that relate to products sold in European countries
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