ACCT 2521 1st EditionExam # 1 Study Guide Chapter: 23 Types of Companies1. Service Companies: sell intangible services Ex: health care, insurance, banking, and consulting- Make up the largest sector of the U.S. economy - No inventory2. Merchandising Companies: resell tangible products they buy from suppliers Ex: Walmart, Best Buy- One inventory account3. Manufacturing Companies: use labor, plant, and equipment to convert raw materials into new finishedgoods Ex: Toyota converts steel, tires, and fabric into high performance vehicles using production labor and advanced manufacturing equipmentValue chain: activities that add value to the company’s products and servicesResearch & DevelopmentDesignProductionMarketingDistributionCustomer serviceR&D: researching and developing new or improved products or services and the process for producing themDesign: Detailed engineering of products and services and the processes for producing themProduction: Resources used to produce a product or service or to purchase finished merchandise intended for resaleProduction- costs include raw materials, plant labor (machine operators’ wages), and manufacturing overhead (factory utilities and depreciation)Merchandising- Cost includes the cost of purchasing the inventory that the company plans to sell to customers. (Freight-in, import duties, and tariffs)Marketing: Promotion and advertising of products and servicesDistribution: Delivery of products or services to customers Ex: cost of shipping the vehicles to retailers and the cost of administering Web-based sales portalsCustomer Service: Support provided for customers after the saleCost object: anything for which managers want a separate measurement of cost Ex: Toyota- individual units, different models, alternative marketing strategies, geographic segments, departmentsDirect cost: a cost that can be traced to the cost object Ex: If the cost object is a Prius, Toyota can trace the cost of tires to a specific PriusIndirect cost: cost that related to the cost object but cannot be traced to it Ex: Toyota incurres substantial cost to run a manufacturing plant, including utilities, property tax, and depreciation. Toyota cannot build a Prius withoutincurring those costs, so they cost are related to the Prius. But, it is impossible to trace a specific amount of these cost to one Prius Whether a cost is direct or indirect depends on the specified cost objectToyota assign direct costs to each Prius by tracing those costs to specific vehicles=Very precise cost figureToyota cannot trace indirect costs so they must allocate these indirect costs among all the vehicles produced at the plant= less precise cost figureTotal Costs for Internal Decision MakingTotal costs: the costs of all resources used throughout the value chainInventoriable Product Costs for External ReportingInventoriable product costs: only the costs incurred during the production stage of the value chainPeriod costs (operating expenses): R&D, design, marketing, distribution, and customer service costs- Selling, general, and administrative expenses on the income statementMerchandising Companies’ Inventoriable Product CostsInclude only the cost of purchasing the inventory from suppliers plus any costs incurred to get the merchandise to the merchandiser’s place of business and ready for sale- Ex: Freight-in, tariffs, and import dutiesManufacturing Companies’ Inventoriable Product CostsInclude only those costs incurred in the production of the product- Direct materials, direct labor, and MOHDirect materials: primary materials that become a physical part of the finished product Ex: steel, tires, engines, upholstery, carpet, dashboard instrumentsDirect Labor: the cost of compensating employees who physically convert raw materials into the company’s products Ex: wages and benefits of machine operators and technicians who build and assemble completed vehiclesMOH: all manufacturing costs other than direct materials and direct labor- All indirect manufacturing costs- Indirect materials, indirect labor, and other indirect MOH costsIndirect Materials: materials used in the plant that are not easily traced to individual units Ex: janitors supplies, oil and lubricants for the machines, and any physical components of the finished product that are very inexpensiveIndirect Labor: cost of all employees in the plant other than those employees directly converting the raw materials in to the finished product Ex: salaries, wages, and benefits of plant forklift operators, plant security officers, plant janitors, and plant supervisorsOther Indirect MOH costs: include plant-related costs as depreciation on the plant and plant equipment, plant property taxes and insurance, plant repairs and maintenance, and plant utilitiesPrime Costs: combination of direct materials and direct labor Conversion costs: combination of direct labor and MOHChapter 3Most manufacturers use one of the two product costing systems in order to find the cost of producing their products:- Process costing- Job costingProcess costing: used by companies that produce extremely large numbers of identical units through a series of uniform production steps or processes Ex: Pace Foods uses two processes to make picante sauce1. Cleaning and chopping vegetables2. Mixing and bottling sauce First, they accumulate all manufacturing costs incurred in the cleaning and chopping process over a period of time (cost of vegetables and cost of cleaning and chopping them)Next, the company averages the total costs of this process over all units passing through the process during the same period Pace spends $500,000 on purchasing, cleaning and chopping to make 1 millions jarsCleaning and chopping process= $500,000 = $.50 per jar 1,000,000 jarsSecond production process- mixing and bottling=average cost of $.25$.50+$.25=.75 per jarJob costing: used by companies that produce unique, custom-ordered products, or relatively small batches of different productsEx: Dell custom-built computers, Life Fitness machines, Boeing airplanes, custom-home builders, high-end jewelers, furniture manufacturers- Job costing is not limited to manufacturers- Professional service providers such as law firms, accounting firms, consulting firms, and marketing firms use job costing to determine the cost of serving each client- Ex: mechanics, plumbers, electriciansFlow of