August 18th-25th Notes
August 18th-25th Notes Acct 2210- 001
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Acct 2210- 001
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This 4 page Class Notes was uploaded by Callisa Ruschmeyer on Thursday August 25, 2016. The Class Notes belongs to Acct 2210- 001 at Auburn University taught by Mr. Fetsch in Fall 2016. Since its upload, it has received 21 views. For similar materials see Managerial Accounting in Accounting at Auburn University.
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Date Created: 08/25/16
August 18 -25 Notes Chapter 2 Types of Cost Classification Financial reporting Predicting cost behavior Assigning costs to cost objects Making business decisions Assigning Costs to Cost Objects Direct costs o Those that can be easily and conveniently traced to a unit of product or other cost object o Example direct material direct labor Indirect costs- those that cannot be easily and conveniently traced to a unit of product or other cost object o Example- manufacturing overhead o Common costs- indirect costs incurred to support a number of cost objects; cost that cannot be traced to an individual object Classifications of Manufacturing Costs Direct materials- raw materials that become an integral part of the product and that can be conveniently traced directly to it Direct labor- the many different people doing specialized tasks; can be easily traced to individual units of product- who did which part? o Also known as "touch" labor- because it refers to the people who actually touch the product Manufacturing overhead- special equipment needed; extra materials; costs that cannot be easily traced directly to specific units produced o Indirect materials, indirect labor, maintenance and repairs on production equipment, heat and light, property taxes, depreciation, insurance on manufacturing facilities o Indirect materials- used to support the production process (example- lubricants and cleaning supplies) o Indirect labor- wages paid to employees who are not directly involved in production work (example- maintenance workers) Nonmanufacturing costs o Selling costs- costs necessary to secure the order and deliver the product; can be either direct or indirect Examples- advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses Do not get confused: advertising is direct, but the advertising manager is indirect o Administrative costs- all executive, organization, and clerical costs; can be either direct or indirect costs August 18 -25 Notes Examples- general management: administrative costs, general accounting, secretarial, public relations, and similar costs involved with administration as a whole You want to have all the costs associated with the car to gage what profit you want to price the car Cost Classifications for Preparing Financial Statements Product costs- direct materials, direct labor, and manufacturing overhead o Inventory (balance sheet) and cost of goods sold (income statement) o Consist of direct materials, direct labor, and manufacturing overhead Period costs- include all selling costs and administrative costs o Expenses that go on the income statement o Examples- property taxes on corporate headquarters, sales commission, advertising, executive salaries, public relations, and the rental costs of administrative offices Prime Costs and Conversion Costs Prime cost- pay outside the company o Direct material and direct labor Conversion cost- you took a raw material and had to convert it into something useful o Direct labor and manufacturing overhead Cost Classifications for Predicting Cost Behavior Cost behavior refers to how a cost will react to changes in the level of activity Cost structure refers to the relative proportion of each type of cost in an organization o Variable costs Varies in direct proportion to changes in the level of activity Behave like a straight line HOWEVER, variable cost per unit is constant (horizontal line) What causes the incurrence of a variable cost (referred to as activity base)? Units produce Machine hours Labor units Miles driven More specific examples- cost of goods sold for merchandising company, direct materials, direct labor, variable elements of manufacturing overhead (indirect materials, supplies, power, administrative and selling expenses like commissions and shipping costs) o Fixed costs A cost that remains constant HOWEVER, if it is expressed per unit, the average fixed cost per unit varies; becomes a downward sloping curve Examples- straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising Types of fixed costs August 18 -25 Notes Committed- long-term, cannot be significantly reduced in the short term (multi-year) Depreciation on buildings and equipment and real estate taxes Discretionary- may be altered in the short-term by current managerial decisions (aka, managed fixed costs) Advertising and research and development Relevant range- the range of activity over which the graph of the cost is flat; outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable o Mixed costs- contains both variable and fixed elements Formula Y = a +bX y- the total mixed cost a- the total fixed cost b- the variable cost per unit of activity x- the level of activity Example- phone plans: fixed rate up until a certain point, then the rate changes Analysis Account analysis- each account is classified as either variable or fixed based on the analyst's knowledge of how the account behaves Engineering approach- classifies costs based upon an industrial engineer's evaluation of production methods, and material, labor, and overhead requirements Scattergraph Plots and High-Low Method The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours o Top: total maintenance cost = highest -lowest value o Bottom: total hours of maintenance = highest - lowest value o Variable cost = cost / activity (hours, units, etc.) Total fixed cost = total cost - total variable cost The cost equation for ________ = Y = a + bX Least-Squares Regression Method A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables o This method uses all of the data points to estimate the fixed and variable cost components of a mixed cost o The goal of this method is to fit a straight line to the data that minimizes the sum of the squared errors (aka, minimizes the deviations among the points to the line) Provides the most accurate estimate because it uses all the data points The Traditional and Contribution Formats Use contribution because it can be used by multiple managers, not just those in accounting Contribution Format- used as an internal planning and decision-making tool 1. Cost-volume-profit analysis 2. Budgeting August 18 -25 Notes 3. Segmented reporting of profit data 4. Special decisions such as pricing and make-or-buy analysis Cost Classifications for Decision Making Every decision involves a choice between at least two alternatives Only those costs and benefits that differ between alternatives are relevant in a decision o All other costs and benefits can and should be ignored as irrelevant Differential Cost and Revenue Costs and revenues that differ among alternatives o Revenue = profits or the positives o Costs = expenses or the negatives Opportunity Cost The potential benefit that is given up when one alternative is selected over another These costs are not usually entered into the accounting records or an organization, but must be explicitly considered in all decisions Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future These costs should be ignored when making decisions Example- you have a factory --> once the factory is purchased, it no longer factors into decisions because you own it; the good from selling or keeping it is an opportunity cost
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