Acg Study GuideFinal ExamExam Date: _________________________Room: ________________1Basic Cost Management and Product CostingChapters 2 & 3Cost Accounting•Cost - the measure of resources given up to achieve a particular purpose•Understanding costs is important to a company’s strategy formulation, planning, control, decision making, and directing.•Types of costs:1. Product vs. Period•Product costs - costs associated with goods for sale until the time period during which the products are sold•The costs associated with making a good for sale and are capitalized as part of inventory•Represented by three main types of costs:1. Direct Materials2. Direct Labor3. Manufacturing Overhead•Financial Accounting cares about product costs since these go to inventory and cost of goods sold•Managerial Accounting cares about product costs since they are essential to planning, control, directing, and management decision-making•Handled differently by the two types of firms: 1. Retailers•Product costs are the costs of buying goods and getting them ready to sell and are reported as inventory•Once they are sold, they become cost of goods sold2. Manufacturers •Product costs are the direct materials, direct labor, and manufacturing overhead used to make a good for sale•All of the product costs in a period are called total manufacturing costs•Total manufacturing costs go to WIP•When a good is finished and ready for sale, all of the product costs associated with that good becomes a COGM and moves to finished goods inventory•Once a good is sold, the product costs associated with a good leaves inventory and becomes COGS•Period costs - costs that are expensed during the time period in which they are incurred2. Direct vs. Indirect•Direct costs - costs that can be easily and conveniently traced to a product or department•Indirect costs - costs that must be allocated in order to be assigned to a product or department3. Fixed vs. Variable24. Prime vs. Conversion•Prime costs - direct product costs (direct material and direct labor)•Conversion costs - the cost of converting materials into goods (direct labor and manufacturing overhead)5. Controllable vs. Uncontrollable•Controllable costs - costs that can be significantly influenced by the manager•Uncontrollable costs - costs that are not reasonably influenced by the manager, such as the cost of a national advertising campaign6. Differential costs - costs that differ between alternatives7. Marginal Costs vs. Average Costs•Marginal costs - the extra cost incurred to produce one additional unit of a product•Average costs - the total cost of producing a quantity divided by the quantity produced8. Opportunity costs - the potential benefit that is foregone when selecting one alternative over another9. Sunk costs - costs that have been incurred in the past and can’t be changed by any action in the present or future•Can’t be changed and should not be considered in any decision•Cost accounting - supports both financial and management accounting functions of the firmActual vs. Normal Costing•While direct costs are known as soon as they occur, actual overhead for a period is not known until the end of the period.•Actual Costing•Actual costing - calculates product costs as actual direct material, actual direct labor, and actual overhead•Normally used with large, entirely unique items, such as a ship or movie•Normal Costing•Normal costing - calculates product costs as actual direct material, actual direct labor, and applied overhead•Used by many companies because it trades off timeliness with accuracy•Normally used with large quantity, highly similar, mass-produced items like microwaves, Frosted Flakes, or Scrumdiddlyumptious barsJob-Order Costing•Job-Shop environment•Used with companies that manufacture in very low volumes or one at a time•Example: feature film production, custom house building•Batch-production environment•Multiple products are produced in batches of relatively small quantity•Example: furniture manufacture, pleasure boat production•Job order costing - assign costs to each job and then average them over the units ob production to get the average cost per unit•Job-cost record - the primary document for a job-order production process3•Includes a breakdown of actual materials used, actual labor used, and how overhead was appliedApplying Overhead•Overhead if applied using a cost driver•Choose an activity which we believe causes overhead to occur or reasonably captures its use and apply overhead based upon this activity•How To:1. Determining what overhead’s cost driver is (direct labor hours and number of units are common examples). 2. Find the predetermined overhead rate (POHR)POHR = budgeted manufacturing overhead costs / budgeted amount of cost driver or activity base3. Overhead appliedOverhead applied = POHR x Actual activityMisapplied Overhead1. Determine if overhead was over-applied or under-applied.•Hint: you are comparing applied overhead to the baseline of actual overhead2. Determine the effect of misapplication•Over applied OH = higher inventory if not everything sold and higher COGS if anything sold•If uncorrected, it will lower net income if anything is sold. •Under applied OH = lower inventory if not everything sold and lower COGS if anything sold•If uncorrected, it will raise net income if anything is sold•To methods to solving1. Allocating to inventory and cost of goods sold (COGS)•More accurate but is more difficult2. Closing directly to COGS•Most companies do this4Activity Based CostingChapter 5Traditional Product Costing System1. Find the POHR2. Multiply POHR by cost driver used by each product3. Add direct materials and direct labor•The problem is that its simplicity causes a loss in accuracy of overhead allocationActivity Based Costing (ABC)•Increases the difficulty of our computing overhead, but leads to smaller errors in the product cost by using multiple cost drivers1. Treat each cost pool like total overhead from the traditional product-costing system. A. Find the POHRB. Multiply POHR by cost driver2. Add up the overhead applied to a product from each cost pool to equal total overhead