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Chapter 2 Notes

by: Dalia Szkolnik

Chapter 2 Notes ACC 212

Marketplace > University of Miami > ACC 212 > Chapter 2 Notes
Dalia Szkolnik
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Managerial Accounting and Cost Concepts
Managerial Accounting 212
Class Notes
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This 7 page Class Notes was uploaded by Dalia Szkolnik on Sunday January 31, 2016. The Class Notes belongs to ACC 212 at University of Miami taught by Quintana in Spring 2016. Since its upload, it has received 29 views.

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Date Created: 01/31/16
Chapter 2 Notes Managerial Accounting and Cost Concepts Cost Classifications • Objects o Direct costs: easily traced o Indirect costs: cannot be easily traced • Manufacturing o Direct materials, direct labor, manufacturing overhead • Non-manufacturing o Selling and administrative costs • Financial statements o Product costs: inventoriable o Period costs: expensed • Cost behavior due to changes in activity o Variable costs: proportional to activity o Fixed costs: constant in total o Mixed costs: variable and fixed elements Cost Objects • Direct costs o Easily traced and conveniently traced to a specific cost object  Example: materials used to produce an automobile • Indirect costs o Cost that cannot be easily traced and conveniently traced to a specified cost object  Example: the cost of the electricity used to power the machines used in automobile production  Example: salaries of factory managers  it is a cost incurred due to running the factory but it is not incurred to produce any type of product • Factory manager’s salary is considered a common cost, which is a type of indirect cost o Common cost: cost incurred to support a number of cost objects but cannot be traced to them individually Manufacturing Costs Manufacturing companies separate their costs into direct materials and direct labor 1. Materials • Raw materials: Materials that go into the final product. A finished product of one company can become the raw material of another. In other words, a company can use the finished product to produce their own product. o Direct materials: those that become an integral part of the finished product and the costs can be easily traced to the finished product  Example: electronic components that Microsoft uses for it computers o Indirect materials: insignificant materials to finished products that are not worth tracing their costs, so they are included as part of manufacturing overhead  Example: the glue used to make a chair in a company 2. Labor • Direct Labor: labor costs that can be easily traced to individual units of product o Labor workers typically touch the product while it is being made  Example: assembly-line workers in the Microsoft factory • Indirect labor: labor costs that cannot be physically traced to a product or those that can be traced but at a high and inconvenient cost o It is included as part of the manufacturing overhead  Example: costs of janitors, supervisors, guards 3. Manufacturing Overhead • All manufacturing costs except direct materials and direct labor • ONLY costs associated with operating the factory o Depreciation of machinery, insurance on facilities, property taxes, electricity, maintenance and repairs 4. Nonmanufacturing Costs • Selling costs: costs incurred to secure customer orders and get finished products to the customer (order-filling or order-getting) o Advertising, shipping, sales commissions, sales salaries • Administrative costs: costs associated with the general management of an organization rather than manufacturing or selling o Public relations, executive compensation, secretarial Preparing Financial Statements For income statements, costs need to me classified as either product or period. The matching principle states that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized • Product costs: costs involved in acquiring or making a product o These costs are essentially attached to the product as the goods are purchased or manufactured and remain attached as they pass into the inventory section  Also known as inventoriable costs since they are initially assigned to inventories o Recorded as expenses in the period in which the product is sold • Period costs: costs that are not product costs (selling and administrative expenses) o Sales commissions, advertising, executive salaries, rental costs of administrative offices • Prime Cost and Conversion Cost o Prime cost: sum of direct materials and direct labor o Conversion cost: sum of direct labor cost and manufacturing overhead cost Product cost = direct materials + direct labor + manufacturing overhead Period cost = selling expenses + administrative expenses Conversion cost = direct labor + manufacturing overhead Prime cost = direct materials + direct labor Predicting Cost Behavior Cost behavior: how a cost reacts to changes in the level of activity (activity level rises or falls  cost may rise or fall or remain constant) Cost structure: relative proportion of each type of cost in an organization • Variable cost: varies in total and in direct proportion to changes in level of activity o Cost of goods sold, direct materials, direct labor, variable elements of manufacturing overhead, variable elements of selling and administrative expenses o A variable cost must be variable with respect to something  The activity base is the “something”  it is the measure of whatever causes the incurrence of a variable cost  Activity base is a cost driver • Examples: direct labor hours, machine hours, units produced, units sold • Examples: miles driven by a person, number of pounds cleaned by a hotel, number of calls handled by technical support • Fixed cost: cost that remains constant in total regardless of changes in level of activity o Straight-line depreciation, insurance, property taxes, rent, administrative salaries, advertising o NOT affected by changes in activity  Committed fixed costs: represent organizational investments with a multiyear planning horizon that cannot be significantly reduced even for short periods of time without making changes • Investments in equipment, real estate taxes, salaries of top management  Discretionary fixed costs: arise from annual decisions made by management to spend on certain fixed cost items • Advertising, research, public relations, internships for students **Example: the cost of ice cream and the cost of napkins for customers are variable with respect to the number of cones sold. Linearity assumption and relevant range • Relevant range: range of activity within which the assumption of cost behavior (strictly linear, reasonably valid) Mixed costs • Contains both variable and fixed cost elements o For example, some licensing fees include a fixed cost as well as a variable cost that changes Y= a + bX • Y= total mixed cost • a = total fixed cost • b = variable cost per unit of activity • X = level of activity Analysis of mixed costs • Account analysis: each account is classified as either variable or fixed • Engineering approach: classifies costs based upon evaluation of production methods, and material, labor, and overhead requirements • Cost is a dependent variable because the amount of it incurred during a period depends on the level of activity • Activity is an independent variable because it causes variations in the cost • High-low method o Identify period of lowest level of activity and period of higher level of activity o Variable cost = change in cost / change in activity  Change in cost is the cost at high activity level minus cost at low activity level o Total fixed cost = total cost – total variable cost  For example, get the higher level of cost minus the variable cost times the number of hours • Least-squares regression method o Analyzes mixed costs if a scatter graph plot reveals a linear relationship between X and Y o Y = a + bX Income Statements Formats • Traditional format: external reporting purposes o Organizes costs into either cost of goods sold or selling and administrative expenses  Sales – cost of goods sold = gross margin  Gross margin – selling/administrative expenses = net operating income • Contribution format: distinction between fixed and variable costs (aids in planning, controlling, and decision making) o Separates costs into fixed and variable Differential cost and Revenue • Differential cost: difference in costs between any two alternatives (also known as incremental cost) • Differential revenue: difference in revenues between any two alternatives Opportunity cost and sunk cost • Opportunity cost: potential benefit that is given up when one alternative is selected over another • Sunk cost: cost that has already been incurred and that cannot be changed by any decision made (NOT DIFFERENTIAL COSTS) EXAMPLES 1) A company started December with 500 unites in beginning finished goods. During the month 4,000 unites were produced and 3,700 units were sold. Costs added in December were direct materials $2,000 direct labor $400 production overhead $1,400. Sales salaries were a total of $1,200 and administrative costs $800. Inventory balances were the following Beginning work in process $250 Beginning finished goods $450 Ending work in process $600 Ending finished goods $690 a. Cost of goods manufactured? b. Cost of goods sold? 2) Product costs used for external financial reporting include which of the following? a. Customer service costs b. Marketing costs c. Production costs d. Research and development costs e. All of the above 3) What is the assignment of indirect costs to cost objects called? 4) When are product costs expensed? 5) Within the relevant range what happens? 1) a. $3,450 beginning work in process + added manufacturing costs – ending work in process $250 + ($2000 + $400 + $1400) – $600 = $3,450 b. $3,210 Beginning finished goods + cost of goods manufactured – ending finished goods $450 + $3450 - $690 = $,3210 2) Production costs 3) Allocation 4) When the product is sold 5) Fixed cost per unit increases as production decreases


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