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Chapter 2 Notes

by: boilermaker2016

Chapter 2 Notes MGMT 201

GPA 3.4

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About this Document

These notes cover everything from chapter 2, specifically what was covered during lecture. The "red" text covers what was left out in the blanks.
Managerial accounting
David Scott
Class Notes
Accounting, Management, MGMT 201, MGMT201
25 ?




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This 3 page Class Notes was uploaded by boilermaker2016 on Wednesday March 2, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 23 views. For similar materials see Managerial accounting in Business, management at Purdue University.

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Date Created: 03/02/16
Chapter 2 Basic Cost Management Concepts • The Management Process o Planning o Directing o Controlling • Managers need cost information to perform each of these functions o Decision Making • So… What’s a Cost??? o A cost is a measure of resources given to achieve a particular purpose • Are there different kinds of costs • Expenses are the consumption of assets for the purpose of generating revenue (the matching principle) • Product costs are associated with goods for sale until the time period during which the products are sold, at which time the costs become an expense (costs of goods sold) • Period costs are costs that are expensed during the time period in which they are incurred Product Costs & the Cost of Goods Sold • Period costs are expensed in the period incurred Show Me the Financial Statements! • Income Statement • Product costs appear on the Income Statement as cost of goods sold in the period in which the products were sold o Product Costs à Costs of Goods Sold • Period costs appear on the Income Statement in the period in which they were incurred o Period Costs à Operating Expenses • Raw Materials – Materials waiting to be processed • Work-In-Process – Partially completed products = materials and some labor and/or overhead has been added • Finished Goods – Completed products awaiting sale o Value measured by product costs Manufacturing Operations and Costs Assembly Manufacturing o Comet Computer Corporation is a manufacturer of computers and peripheral devices o It purchases computer parts (motherboards, computer chips, power units) and assembles them into a variety of devices such as tablets, laptops, and desktop PCs o Comet sells its products mainly through its website • So what kind of manufacturing costs would Comet incur? Manufacturing Costs • Raw materials added to the production process • Easily traced to the finished product • Salaries, wages, and fringe benefits for personnel that work directly on the manufactured product • All other costs of manufacturing o Other manufacturing costs o Indirect materials o Indirect labor o Other manufacturing costs Manufacturing Overhead • All other costs of manufacturing o Indirect Materials § Materials required for the production process that do not become apart of the finished product § Materials that do become part of finished product but are insignificant in cost o Indirect Labor § Costs of personnel that don’t work directly on the product, but whose services are necessary for the manufacturing process (i.e., at the production facility) o Other manufacturing costs § All other manufacturing-related costs that are not material or labor • Depreciation on plant and equipment • Production facility property taxes, insurance, utilities • Overtime premiums and unavoidable idle time • Prime Costs = Direct Material + Direct Labor • Conversion Costs = Direct Labor + Manufacturing Overhead Manufacturing Cost Flow • Direct Material + Direct Labor + Manufacturing Overhead à WIP Inventory à Finished- Goods Inventory à Cost of Goods Sold Costs of Goods Manufactured • The transfer between WIP and FG is called the Cost of Goods Manufactured Cost Drivers • Activities that cause costs to be incurred are called Cost Drivers Cost Driver / Activities • Production scheduling à Manufacturing Orders • Machine setup à Setup Hours • Machine operations à Machine hours • Inspection à Pieces inspected • Purchasing à Purchase Orders • Assembly support à Customer requests for help Additional Cost Concepts • Responsibility Accounting – Tracing costs to departments that incurred them • Activity Accounting – Tracing costs directly to activities that caused them • Cost Object – Where a cost is assigned to – product, department, etc. o MBA Program o Krannert School of Management o Accounting Department • Direct Costs – Can be traced directly to a particular cost object o My salary is a direct cost of the Accounting Department cost object o Dean Hummels salary is a direct cost of the Krannert School of Management • Indirect Costs – Cannot be directly traced to a particular cost object o Dean Hummels salary is an indirect cost of the Accounting Department • Sunk Costs – All costs incurred in the past that cannot be changed by any decision made now or in the future o If you withdraw from Purdue during the 2nd week of classes, 20% of your Spring semester tuition is non-refundable (sunk) o If you withdraw after the 6th week of classes, 100% of your Spring o Sunk costs should NOT be considered in decisions • Differential Costs – Costs that differ between alternatives • Marginal Cost – The extra cost incurred to produce one additional unit • Average Cost – The total cost to produce a quantity divided by the quantity produced o Marginal and average costs are largely a function of cost behavior – variable and fixed costs • Cost/Benefit Concept – If the cost of information is greater than its benefits, you won’t pursue it


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