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Chapter 2 Notes

by: Ryan Rodriguez-Mena

Chapter 2 Notes ACC 212

Marketplace > University of Miami > ACC 212 > Chapter 2 Notes
Ryan Rodriguez-Mena
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About this Document

Chapter 2 of managerial accounting Prof. Sicre notes
Managerial Accounting 212
Class Notes
Acc 212, Ch. 2, managerial accounting




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This 4 page Class Notes was uploaded by Ryan Rodriguez-Mena on Sunday February 7, 2016. The Class Notes belongs to ACC 212 at University of Miami taught by Sicre in Spring2015. Since its upload, it has received 44 views.

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Date Created: 02/07/16
Ch.2 01/21/2016 ▯ Costs are assigned to cost objects for a variety of purposes including:  Pricing  Preparing profitability studies  Controlling spending o Source of difference – have a budget  Why did I buy this? ▯ Direct Cost  Cost that are more easily managed ▯ Indirect Cost  A cost that cannot be specifically traced back to a cost object ▯ ▯ Cost Classifications for Manufacturing Companies ▯ Manufacturing companies separate their costs into two broad categories  Manufacturing o Direct Materials - Direct o Direct Labor - Direct o Manufacturing Overhead – Non-Direct  Non-manufacturing ▯ Raw Materials  Materials that are used in the final product (Planks of wood) ▯ Direct Materials  Materials that become part of the final product (The Table) ▯ Indirect Materials  Materials that are supplementary to make the product (The Glue) ▯ ▯ ▯ The underlying basis for product or period costs is the matching principle which is in turn is based on the accrual basis of accounting  Accrual basis of accounting Revenues recognized when earned AND expenses are recognized when incurred (GAAP uses this) ▯ Matching Principle  Expenses are recognized when revenues are recognized ▯ Costs will remain in inventory (as an asset) until the product is sold at which time it becomes COGS (cost of goods sold) ▯ Two additional categories used in discussion of manufacturing costs:  Prime cost o the sum of direct materials PLUS direct labor  Conversion cost o the sum of direct labor PLUS manufacturing overhead ▯ Fixed Costs  the total remains constant, as long as it is within the ‘relevant range’, and changes per unit depending on activity o $200 x 5 IPads = 1,000 o $200 x 40 Ipads = 8,000  The unit changes from 5 to 40 Ipads  The variable cost is 8,000 because the number of units changes ▯ Relevant range  it is the ‘normal’ range of activity for the item being evaluated. o Friend that goes to Disney world at $20 bucks a piece and a 6 friend comes along, because now he has to rent another car because it only fits 5 so its not worth it = More Money (Diminishing returns) ▯ Cost Driver  Activity that drives the cost o Direct labor hours  More hours you work more you get paid ▯ Keep in mind that in the long-run….  ALL COSTS ARE VARIABLE ▯ Equation for a straight line  Y = a + bx  We use this equation when we want to separate fixed costs from regular costs o Y = Total cost o A = Fixed cost o B = Variable cost o X = The activity ▯ Traditional Formal Income Statement – GAAP requires this  Sales – COGS = Gross Margin or Gross Profit  Gross Margin or Gross Profit – Operating Expenses = Net income before taxes  Trick: o Beginning Inventory + Purchases –End Inventory = COGS ▯ Contribution Format Income Statement  Sales – Variable Costs = Contribution Margin  Contribution Margin – Fixed Costs = Net income before taxes ▯ Sunk Cost  An expense that has already occurred that can’t be changed  Things that cannot be sold after you buy them o Reported in the books ▯ Opportunity Cost  Potential opportunities that are present and are dependent on the decisions you make o Not reported in the books ▯ ▯ QUESTIONS AT THE END OF THE CHAPTER  Define the following terms: (a) cost behavior and (b) relevant range. o A) The way a cost reacts to changes in activity o B) The relevant range is the range of activity within which the assumption that cost behavior is reasonably valid  ‘normal’ range of activity for the item being evaluated  What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.  Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear? ▯ ▯ ▯ ▯ ▯ ▯


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