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ACC 212 Chapter 2 Notes

by: Kyrena Dudley

ACC 212 Chapter 2 Notes ACC 211

Marketplace > University of Miami > Accounting > ACC 211 > ACC 212 Chapter 2 Notes
Kyrena Dudley
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This is a detailed review of ACC 212 Chapter 2 Notes from the McGraw Hill Managerial Accounting Textbook
Managerial Accounting 212
Class Notes
Accounting, business, Managerial, managerial accounting




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This 6 page Class Notes was uploaded by Kyrena Dudley on Tuesday January 26, 2016. The Class Notes belongs to ACC 211 at University of Miami taught by Sicre in Spring 2016. Since its upload, it has received 17 views. For similar materials see Managerial Accounting 212 in Accounting at University of Miami.

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Date Created: 01/26/16
Accounting 212 Chapter 2 Cost classifications for assigning costs to cost objects  Cost object – anything for which cost data are desired (products, customers, jobs, organizational subunits). Two types of costs: o Direct costs – costs that can easily be traced to a specified cost object  (If a printing company made brochures for a specific customer, the paper used to make the brochures would be a direct cost of that customer)  To be traced to a cost object such as a particular product, the cost must be caused by the cost object. o Indirect costs – costs that cannot easily be traced to a specified cost object  A factory’s manager’s salary is an indirect cost of a particular can of chicken noodle soup because the manager’s salary is incurred as a cost to run the entire factory, not just one soup variety. The manager’s salary would be considered a common cost. o Common cost – cost incurred to support a number of cost objects but can’t be traced to them individually. A type of indirect cost. Cost Classifications for Manufacturing Companies  Manufacturing companies have two classifications to separate costs: o Manufacturing costs, which are separated into three categories (2 direct costs, 1 manufacturing overhead):  Direct materials – materials that become an integral part of the finished product and whose costs can easily be traced by to finished product.  Indirect materials – Small items of material like glue or nails that are an integral part of a finished product, but whose costs cannot be easily traced to it.  Raw materials – materials that go into the final product. Can include both direct and indirect materials  Direct labor – labor costs that can be easily traced to individual units of product. Also called touch labor because direct labor workers usually touch the product being made. Includes assembly line workers or electricians who install equipment  Indirect labor – labor costs that can’t be physically traced to particular products. Treated as part of manufacturing overhead. o Includes cost janitors, supervisors, security guards. Hard to trace their costs.  Manufacturing overhead – all manufacturing costs except direct materials and direct labor.  Indirect materials, indirect labor, depreciation, property taxes, production equipment, insurance on manufacturing facilities  Only costs associated with operating the factory, NOT administrative or selling functions, are included  Nonmanufacturing costs – divided into two categories o Selling costs – all costs incurred to secure customer orders and get finished product to customers.  Sometimes called order-getting and order-filling  Examples: advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.  Can be indirect or direct costs (ad costs for a specific item  direct costs, salary of marketing manager that oversee numerous products  indirect)  Administrative costs (SG&A costs) – costs associated with general management of an organization rather than with manufacturing or selling o Executive compensation, general accounting, secretarial, public relations, general administration as a whole o Can be either indirect or direct Cost Classifications for Preparing Financial Statements  Companies classify costs as product or period costs  Generally, costs are recognized as expenses on income statement in period that benefits from costs (i.e. if you have two years of prepaid insurance, the entire amount is expensed out every half year.)  Matching principle – accrual concept that costs incurred for a particular revenue are recognized as expenses in the same period the revenue is recognized o Costs should be recognized as an expense only when sale takes place Product costs/inventoriable costs – all costs involved in acquiring or making product  Consist of direct materials, direct labor, manufacturing overhead  Counted with good as they are purchased/manufactured, remained as goods go into inventory for sale  Initially signed to inventory account on balance sheet  When goods are sold, costs are released and become expenses (COGS) and matched against sales revenue on I/S  Recorded as expenses when sold  Direct materials + direct labor + manufacturing overhead Period Costs – all costs that aren’t product costs  Selling and administrative costs are period costs  i.e. executive salaries, public relations, and rental costs of admin offices  Expensed on I/S in period they were incurred o Period incurred not always period where cash is made  Selling expenses + admin expenses Prime and Conversion Costs  Prime Costs = direct labor cost + direct materials cost  Conversion costs = direct labor costs +manufacturing overhead costs Cost Classifications for Predicting Cost Behavior  Cost behavior – how a cost reacts to changes in the level of activity. Rises and falls in activity have corresponding rises and falls in costs.  Categorized as: o Variable cost – varies, in total, in direct proportion to changes in the level, of activity. It is constant if expressed on a per unit basis.  Rises and falls when activity rises and falls  EX: COGS, direct materials, direct labor, variable elements of manufacturing overhead (indirect materials, supplies, selling and admin expenses)  A cost is variable with respect to an activity base/cost driver, a measure of what causes the incurrence of a variable costs, or total volume of goods and services provided.  EX: direct labor hours, machine hours, units produced, units sold o Fixed cost – remains constant, regardless of activity levels. Can be either committed or discretionary fixed costs.  EX: Straight-line depreciation, insurance, property taxes, rent, supervisory salaries, admin salaries, advertising  Average fixed cost per unit becomes progressively smaller as level of activity increases.  Committed fixed costs - Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes. o EX: investment in facilities and equipment, insurance expenses  Discretionary Costs (managed fixed costs) – arise from annual decision by management to spend on certain fixed cost items. o EX: advertising, research, PR, management development programs o Mixed/semi-variable - contains both variable and fixed cost elements  Equation to express relationship between mixed cost and level of activity:  Y = a+bX  Y= total mixed cost  A = total fixed cost  B = variable cost per unit  X = level of activity  Linearity Assumption and the Relevant Range o The relation between cost and activity is curved (curvilinear)  not everything is straight forward. o Relevant Range – range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.  Outside the relevant range, a fixed/variable cost may not be strictly fixed/variable.  Cost structure- relative proportion of fixed, variable, and mixed costs in an organization The Analysis of Mixed Costs Fixed portion of mixed costs represents minimum cost of having a service ready and available Variable portion of mixed costs represents cost incurred for actual consumption of the service Four ways to estimate fixed and variable components of a mixed costs: 1. Account analysis – an account is classified as either fixed or variable based on the analyst’s prior knowledge of how the cost account behaves a. EX: direct materials classified as variable, and building least cost classified as fixed 2. Engineering approach – involves detailed analysis of what cost behavior should based on an industrial engineer’s evaluation of production methods used, material specifications, labor requirements, equipment usage and so on. 3. High-Low method (use scatter plot) – based on the rise-over-run formula for the slope of a straight line. a. If relation between cost and activity can be represented by a straight line, then slope of line is equal to variable cost (VC) per unit of activity. b. c. Fixed cost = Total Cost – Variable cost 4. Least-squares regression (use scatter plot) – uses all of data in scattergraph plot to separate mixed cost into fixed and variable components. a. Regression line of form Y = a + bX fitted to data, where a = fixed cost, b = variable costs per unit of activity b. Usually use computers to carry out data  Diagnosing Behavior with a Scattergraph Plot o Cost is plotted on the vertical, or Y-axis. Cost is the dependent variable because the cost incurred depends on the level of activity for the period. o Activity is plotted on the horizontal, or X-axis. Activity is the dependent variable because it causes variations in the cost. o Scattergraph plots are used to perform high-low methods or least-squares regression calculations Tradition and Contribution Format Income Statements The Traditional Format Income Statement  Primarily for external reporting purposes  Organizes costs into two categories: o Cost of Goods Sold (COGS)  Sales – COGS = gross margin  COGS reports product costs attached to merchandise sold in the period o Selling and Administrative Expenses  Gross margin – expenses = operating income  Report all period costs that have been expensed as incurred The Contribution Format Income Statement  Contribution approach - An income statement format that organizes costs by their behavior. o Costs are separated into variable and fixed categories rather than being separated into product and period costs o Clearly distinguishes between fixed and variable costs o Deducts variable expenses from sales to obtain contribution margin  Contribution margin – amount remaining from sales revenue after variable expenses have been deducted. o Used as an internal planning and decision making tool  Helps organize data better for managers (product-line analysis, pricing, use of scarce resources, etc.) Cost Classifications for Decision Making 1. Differential Costs and Revenue  Differential costs – a difference in costs between any two alternatives o Also called incremental cost, but technically incremental costs refer to an increase in costs from one alternative to another. o Decreases in costs are decremental costs  Differential revenue – difference in revenue between any two alternatives o Can be either fixed or variable 2. Opportunity Costs – the potential benefit that is given up when one alternative is picked over another 3. Sunk Cost – a cost that has already been incurred and cannot be changed by any decisions made now or in the future


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