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Chapter 17

Managerial Accounting and Cost Concepts

TermDefinition
What is the role of managerial accounting? to enable managers and people throughout the organization to make informed decisions, be more effective at their jobs, and improve the organization's performance
How does managerial accounting differ from financial accounting? it includes people inside the organization and managers rely on them in evaluating an organization's performance; may report historical or future oriented info w/o guidelines or restrictions
managers measure costs by tracing them to cost objects, such as products or services, sales territories, departments, or operating activities... direct costs and indirect costs
direct costs costs that can measured economically by tracing them to a cost object; for example wages of workers who make candy bars can be traced to a particiular batch because of time cards
indirect costs costs that cannot be measured conveniently and economically by tracing them to a cost object. Some examples include nails used in furniture, the salt used in candy, and rivets used in airplanes; however must be included in cost of a product or service
period costs aka noninventioriable costs; costs of resources not assigned to products; recognized as operating expenses on the income statement; selling, administrative, and general expenses are examples as well
product costs inventoriable costs; includes direct materials, direct labor, and overhead (indirect costs); recognized as COGS on I/S and inventory on B/S; classified as direct or indirect costs
product unit cost cost of manufacturing a single unit of a product; made up of the costs of direct materials, direct labor, and overhead; total costs are divided by the units produced to determine product unit costs
service unit cost the cost to perform one service; the direct materials element does not apply so only DL and OH would be totaled and divided b the number of services performed
direct materials cost the costs of materials that can be conveniently and economically measured when making specific units of a product; examples meat and bun in hamburgers, the oil and additives in gasoline, sugar used in making candy
direct labor costs the costs of hands-on labor needed to make a product or service that can be measured when making specific units; for example, the wages of production line workers are direct labor costs
overhead costs the costs that cannot be practically or conviently measured directly to an end product or service; includes indirect material costs and indirect labor costs
indirect material costs such as the costs of nails, rivets, lubricants, and small tools
indirect labor costs costs of labor for maintenence, inspection, engineering design, supervision, and materials handling; others include costs of building maintaince, property taxes, property insurance, depreciation, on plant and equip, rent, and utilities
the three elements of product cost can be also grouped into.. prime costs and conversion costs
prime costs the primary costs of production. They are the sum of the direct materials costs and direct labor costs
conversion costs the costs of converting or processing direct materials into a finished product. They are the sum of direct labor costs and overhead costs
variable cost cost that changes in direct proportion to a change in productive output (or some other measure of volume)
fixed cost is a cost that remains constant within a defined range of activity or time period
value-adding cost is the cost of an activity that increases the market value of a product or service
non-value adding cost is the cost of an activity that adds cost to a product or service but does not increase its market value
purchase request beginning of purchasing process that is submitted for specific quantities of materials needed and then the purchasing department prepares a purchase order and sends it to a supplier
receiving report this report is used when the materials arrive and an employee on the dock examines the materials and enters the information into the company database as this form of documentation
job order cost card can be used to record all direct materials, direct labor, and overhead costs incurred as the products move through production
manufacturing cost flow is the flow of direct materials, direct labor, and overhead through the materials inventory, WIP, and finished goods inventory accounts into the cost of goods sold account; foundation for product costing, inventory, valuation, and financial reporting
Materials Inventory Account shows the balance of the cost of unused materials; shows the cost of materials that have been purchased but not used in the production process
Work in Process Inventory Account shows the manufacturing costs that have been incurred and assigned to partially completed units of products. This account therefore represents the costs involved with manufacturing the unfinished product
finished goods inventory account shows the costs assigned to all completed products that have not been sold; shows the cost of the product that is complete and ready for sale. For example, wrapped packages of candy
When is inventory expensed on the income statement? when the finished goods are sold
total manufacturing costs aka current manufacturing costs; the total costs of direct materials, direct labor, and overhead incurred and transferred to the Work in Process Inventory account
cost of goods manufactured the costs of all units completed and moved to Finished Goods Inventory during a period
Finished Goods Inventory holds the balance of costs assigned to all completed products that a manufacturing company has not yet sold; cost of goods manufactured increases this account and cost of goods sold decreases
what are the keys to preparing an income statement or a balance sheet in any organization? recognizing and measuring its cost of goods or services sold and the value of its inventories
what is the income statement format for any organization? sales-cost of sales or cost of goods sold=gross margin-operating expenses=operating income; however, how the cost of sales or cost of goods sold is computed differently depending on the organization
statement of cost of goods manufactured summarizes the flow of all manufacturing costs incurred during the period
what are the three steps the statement of cost of goods manufactured is divided into? step 1) compute the cost of direct materials used during the accounting period step 2) calculate total manufacturing costs for the period step 3) determine total cost of goods manufactured for the period
product unit cost is the cost of manufacturing a single unit of a product. It is made up of the COGM: costs of DM, DL, and OH.
What are the three methods managers and accountants can use to calculate product unit cost? actual costing, normal costing, and standard costing
actual costing method uses the actual costs of direct materials, direct labor, and overhead to calculate the product unit cost
normal costing method combines the easy to track actual direct costs of materials and labor with estimated overhead costs to determine a product unit cost; at the end of the period, financial statements must show only actual product costs
Standard costing method uses estimated or standard costs of DM, DL, and OH to calculate the product unit cost
why is standard costing method useful? it is useful in performance management and evaluation because a manager can compare actual and standard costs to compute variances
what is the most important cost in a service organization? direct cost of labor that can be traceable to the service rendered
What are the indirect costs incurred in performing a service that are similar to those incurred in manufacturing a product classified as? overhead and appear on the income statement as cost of sales
What is the four stage management process? planning, performing, evaluating, and communicating
strategic objectives broad, long term goals that determine the fundamental nature and direction of a business and that serve as a guideline for decision making
tactical objectives mid-term goals that position an organization to achieve its long-term strategies; usually cover a three to five year period
operating objectives short-term goals that outline objectives for the performance of day-to-day operations. Operating objectives link to performance targets and specify how success will be measured.
Planning formulate mission statement; set strategic, tactical, and operating performance objectives and measures; select the best product cost measurement method; classify and budget costs
Perform manage ethically; manage supply chain relationships; flow product-related costs through the inventory accounts; compute the unit cost of a product or service
evaluate compare actual performance with performance levels established in planning stages
communicate prepare business plan; communicate information clearly and ethically; prepare external reports; prepare internal management reports to monitor and control costs
The Institute of Management Accountants has issued standards of ethical conduct and emphasizes management accountants have the responsibilities to follow: competence, confidentiality, integrity, and credibility
Created by: krystalamber04