Exam 2 Concept Review Managerial Accounting Chapter 4 Product Costing for Manufacturing Companies Cost Classifications Product costs or manufacturing costs are any costs that a company incurs to acquire raw materials and convert them to finished goods ready for sale o Direct materials Direct labor Manufacturing overhead Product cost o Direct materials materials that can be directly traced to or easily identified with the final product o Direct labor wages paid to the workers who transform direct materials into a finished product o Manufacturing overhead the indirect product or costs that arise in the manufacturing process and that cannot easily be traced to a unit or product Indirect materials include supplies used in supporting the production process which may or may not be part of the final product Indirect labor includes the labor cost of all he workers who support the production process ex Janitors supervisors security Period costs any cost that is not a product cost or non manufacturing cost Associated with the selling of products and the administration of the business o Selling costs costs that are associated with the storage sale and delivery of finished goods o General and Administrative costs includes all of the costs associated with the general management of the company as a whole Selling administrative general period cost Total Costs Product costs Period Costs Direct Costs Indirect Costs Direct Material Direct Labor Manufacturing Overhead General Administrative Selling Prime Costs costs of labor and material needed to make the product o Direct materials Direct labor prime costs Conversion Costs In a process costing system labor and overhead costs are typically combined and referred to as conversion costs o Direct labor factory overhead Cost flows through inventory accounts Calculation of ending inventory balances Raw materials Work in Process inventory Finished goods inventory cost of goods sold Beginning balance Costs added during period costs removed during period ending balance Cost of goods manufactured COGM o Dollar amount of goods manufactured o Direct Materials Direct labor Manufacturing overhead Total manufacturing Costs o Total manufacturing costs beginning work in progress inventory ending work in progress inventory Cost of goods manufactured Cost of goods sold COGS o Cost of goods manufactured beginning finished goods inventory goods available for sale o GAFS ending finished goods inventory COGS Applying Overhead dividing or allocating overhead to various jobs o Budgeted total manufacturing overhead cost Predetermined overhead rate Budgeted total level of application base Applied overhead o Predetermined overhead rate x actual amount of application base o Underapplied overhead need to increase COGS o Overapplied overhead need to decrease COGS COGS Man OH control Man OH Control COGS 5 000 5 000 5 000 5 000 Chapter 7 Activity based costing and activity based management Activity Based Costing A costing technique that assigns costs to cost objects such as products departments or customers based on the activities those cost objects require Matches resources consumed with the products departments that consumed them Activity Allocation rate o Total activity cost Total activity cost driver Activity proportion o Activity cost for each product Total activity Cost Driver Chapter 8 Using Accounting information to make managerial decisions Relevant vs irrelevant information for decision making Relevant information 1 Must occur in the future 2 Must differ between alternatives other alternative relevant o Avoidable costs costs that are incurred under one alternative but are not incurred under the o Unavoidable costs costs that are incurred under all alternatives irrelevant o Sunk costs costs that have already been incurred in the past irrelevant o Incremental analysis calculations which show the additional impact of one alternative over another Incremental revenue additional costs Accept Incremental revenue additional costs Reject o Opportunity cost lost or gained based on choice The value of the activity you could have undertaken Decision Making Special orders o A customer or potential customer offers to purchase a large quantity of the company s product but wants to pay an amount less than the regular sales price o FIXED COSTS ARE NOT RELEVANT Outsourcing o Transfers the production of goods to a provider outside of the company Decisions involving whether to manufacture a good within the company or to have someone else do it are often referred to as make or buy decisions o Avoidable fixed overhead is RELEVANT o For any outsourcing decision one must also consider qualitative factors such as Quality of the product provided by the supervisor Stability of the price offered by the supplier Theft of intellectual property Allocating constrained resources o Constrained resource anything that limits a company s ability to produce products or provide services Ex cash machine hours facilities labor hours o Bottleneck the most constrained resource that limits the business ability to produce products or provide services o Note we only have so much cash labor hours etc we have to decide what we should focus on Then the next most profitable and so on and so on Prioritize by profit and demand The activity with the highest contribution margin per hour maximizes profitability of constrained resources Keeping or eliminating operations o Segment margin contribution margin of a particular segment less any direct fixed costs o Direct fixed costs fixed costs that can be attributed to one segment Therefore if the segment is eliminated these specific costs will be eliminated o Common fixed costs fixed costs that are shared by all segments These fixed costs will continue to be incurred even if a segment is eliminated Sell as is vs Process further o Some products or services may be sold as is or it can be processed further into a different product service that can be sold for a higher amount Of course additional costs will be incurred to process further so managers must decide whether to sell the product as is or process further
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