Acg Study Guide Final Exam Exam Date Room 1 Basic Cost Management and Product Costing Chapters 2 3 Cost 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 Materials 2 Direct Labor 3 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 rms 1 Retailers 2 Manufacturers 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 sold 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 nished and ready for sale all of the product costs associated with that good becomes a COGM and moves to nished 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 Direct costs costs that can be easily and conveniently traced to a product or Indirect costs costs that must be allocated in order to be assigned to a product or incurred 2 Direct vs Indirect department department 3 Fixed vs Variable 2 4 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 signi cantly in uenced by the manager Uncontrollable costs costs that are not reasonably in uenced by the manager such as the cost of a national advertising campaign 6 Differential costs costs that differ between alternatives 7 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 8 Opportunity costs the potential bene t that is foregone when selecting one produced alternative over another 9 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 nancial and management accounting functions of the rm Actual 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 overhead Normal Costing applied overhead Actual costing calculates product costs as actual direct material actual direct labor and Normally used with large entirely unique items such as a ship or movie Normal costing calculates product costs as actual direct material actual direct labor and 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 bars Job Order Costing Job Shop environment Used with companies that manufacture in very low volumes or one at a time Example feature lm 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 process 3 Includes a breakdown of actual materials used actual labor used and how overhead was applied Applying 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 common examples 2 Find the predetermined overhead rate POHR 1 Determining what overhead s cost driver is direct labor hours and number of units are POHR budgeted manufacturing overhead costs budgeted amount of cost driver or activity base 3 Overhead applied Overhead applied POHR x Actual activity Misapplied Overhead 1 Determine if overhead was over applied or under applied Hint you are comparing applied overhead to the baseline of actual overhead 2 Determine the effect of misapplication Over applied OH higher inventory if not everything sold and higher COGS if anything 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 sold If uncorrected it will raise net income if anything is sold To methods to solving 1 Allocating to inventory and cost of goods sold COGS More accurate but is more dif cult 2 Closing directly to COGS Most companies do this 4 Activity Based Costing Chapter 5 Traditional Product Costing System 1 Find the POHR 2 Multiply POHR by cost driver used by each product 3 Add direct materials and direct labor The problem is that its simplicity causes a loss in accuracy of overhead allocation Activity Based Costing ABC Increases the dif culty of our computing overhead but leads to smaller errors in the product 1 Treat each cost pool like total overhead from the traditional product costing system cost by using multiple cost drivers A Find the POHR B Multiply POHR by cost driver applied 2 Add up the overhead applied to a product from each cost pool to equal total overhead Used to allocate overhead does not change the treatment of direct material or direct labor Only difference between ABC and traditional product costing systems is the way we allocate overhead not the amount of overhead which is allocated Often differs from GAAP When to use ABC When costs appear highly inconsistent with competitors When cost drivers other than unit level cost drivers signi cantly affect overhead When one cost driver cannot be reasonably estimated for all overhead ABC data is gathered using