Accounting213 Study Guide EXAM 1 LECTURE 1 Cost Classifications Cost Object anything for which costa data are desired Ex Products customers departments jobs Direct Cost a cost that can be easily and conveniently traced to a particular cost object Indirect Cost a cost that cannot be easily and conveniently traced to a particular cost object Ex Manufacturing O H and general hospital admin costs Manufacturing Cost Direct Materials Direct Labor Manufacturing Overhead Prime Cost Direct Materials cost Direct Labor Cost Conversion Cost Direct Labor Cost Manufacturing Overhead Nonmanufacturing Costs Selling costs administrative costs Net Income Sales COGS SG A Materials WIP beg FG beg purchases MC DM COGM COGM COGS beg DL O H end end end LECTURE 2 Variable Cost Varies in direct proportion to changes in the level of activity Activity Base a measure of whatever causes the incurrence of a variable cost Variable Cost Behavior In Total Total variable cost increases and decreases in proportion to changes in activity Per Unit Variable cost per unit is constant Fixed Cost a cost that remains constant it total regardless of changes in the level of activity Fixed cast behavior In Total Total fixed cost is not affected by changes in activity level rises and remain constant Per Unit fixed cost per unit decreases as the activity increase as the activity level falls Committed fixed costs relate to investment in plant equipment and basic administrative structure It is difficult to reduce these fixed costs in the short term Ex Equipment depreciation real estate taxes salaries of key operating personnel Discretionary fixed costs arise from annual decisions by management to spend in certain areas These costs can often be reduced in the short term Ex Advertising public relations research management development programs VARIABLE FIXED MIXED Relevant range the range of activity within which the assumptions that have been made about variable and fixed costs are valid Mixed or semi variable cost contains elements of both variable and fixed costs High Low Method for Cost Estimation 1 Determine High activity and Low activity 2 Difference between High and Low Cost High Activity Cost Low Activity Activity Hi gh Activity Low 3 Total Cost Variable Costs Fixed Costs VC slope Least squares regression method uses all of the data to separate a mixed cost into its fixed and variable components A regression line of the form y a bX I fitted to the data Lecture 3 Costing Systems Two major types of costing systems are used in manufacturing and many service firms process costing and job order costing Process Costing used where a single homogenous product or service is produced In this total manufacturing costs are divided by total number of units produced during a given period The unit cost that results is a broad average figure Traces the costs to the process Ex cement flour brick etc Job Order Costing is used when different types of products jobs or batches are produced typically over a rather short period of time In this DM cost and DL costs are usually traced directly to jobs O H is applied to jobs using a predetermined rate Actual O H costs are not traced to jobs Ex Order printing shipbuilding construction hospitals etc Manufacturing Overhead includes all of those costs incurred in the manufacturing process which are not traced to a particular job Usually consists of all manufacturing costs other than direct materials and direct labor Manufacturing overhead control account temporary control account WIP FG COGS Jobs not complete Jobs complete not sold Jobs Sold Determining Under over applied overhead by the ending balance in manufacturing O H Underapplied results when more overhead cost is actually incurred than is applied to the work in process account COGS needs to increase Overapplied results from applying more overhead to work in process than is actually incurred COGS needs to decrease Estimating O H 1 Determine O H rate Est Total O H Est Activity 2 Est O H Rate Actual Activity 3 Adjust for Actual est O H actual over under applied O H Lecture 4 The manufacturer of nearly any product requires three types of cost Direct materials direct labor and manufacturing overhead Equivalent units of output EU s the expression of a processing department s activity in terms of fully completed units Turning parts into whole Two methods of treating BWIP inventory Weighted average method and FIFO method 1 Weighted average method combines the partially completed units in beginning work in process inventory with units produced in the current period to determine a weighted average Multiple Inputs materials and conversion Equivalent units must be calculated for each category of manufacturing input EU s calculated for 1 Each type of material 2 Transferred in costs costs from prior departments if any and 3 Conversion costs 2 FIFO method separates beginning inventory costs prior period work from costs of current period work Excludes EU s and cost in BWIP from the current period unit cost calculations can be more useful for cost control pricing decisions and performance evaluation because the FIFO method concentrates on the current period s activity