Accounting Exam 3 Flashcards
Manufacturing Company Inventory Components
- Raw Materials (cost of raw materials on hand)
- Work In Process Inventory (cost applicable to partially completed goods)
- Finished Goods Inventory (cost of completed goods on hand)
Product vs Period Costs
Product = Manufacturing costs, including direct materials, directly labor and manufacturing overhead.
Period = Non- Manufacturing costs, including selling expenses & admin expenses
Costs that are an integral part of producing the product (all costs incurred at the factory).
Recorded in the inventory account, not an expense (COGS) until the goods are sold.
Product Costs
Non-manufacturing costs, dharged to expense as incurred.
Includes Selling and Admin costs
Period Costs
Kahoot: Factory Maintenance would be classified as what?
Overhead
Kahoot: Wages for employees installing doors on cars?
Direct Labor
Kahoot: Depreciation Expense for manufacturing facility?
Overhead
Kahoot: Indirect Roofing materials at a home builder?
Overhead
Kahoot: Salaries for sales staff - product or period?
Period
Kahoot: Salaries for manufacturing facility managers - product or period?
Period
Kahoot: Rental of delivery trucks to deliver finished goods to customers (freight) - product or period?
Period
Activity Index Concept
The activity that causes changes in the behavior of costs. Example - as sales go up, COGS go up
Variable Costs
Costs that vary in total directly and proportionately with changes in the activity level.
Example: If the activity level increases 10 percent, total variable costs increase 10 percent.
Variable costs remain the same per unit at every level of activity.
Fixed Costs
Costs that remain the same in total regardless of changes in the activity level within a relevant range.
Fixed cost per unit cost varies inversely with activity: As volume increases, unit cost declines, and vice versa
Mixed Costs
Costs that have both a variable element and a fixed element.
Change in total but not proportionately with changes in activity level.
Examples of Variable, Fixed and Mixed Costs
- Variable: Direct and Indirect Materials, Direct Labor
- Fixed: Depreciation and Rent
- Mixed: Maintenance and Utilities
Relevant Range
The relevant range is the range of activity (e.g., production or sales) over which these relationships are valid.
For example, if the factory is operating at capacity, increasing production requires additional investment in fixed costs to expand the facility or to lease or build another factory.
Cost Volume Profit Analysis
the study of the effects of changes in costs and volume on a company’s profits.
CVP Assumptions
- Behavior of both costs and revenues is linear throughout the relevant range of the activity index.
- Costs can be classified accurately as either variable or fixed.
- Changes in activity are the only factors that affect costs.
- All units produced are sold.
- When more than one type of product is sold, the sales mix will remain constant.
Contribution Margin
Shows the percentage of each sales dollar available to apply toward fixed costs and profits.
Break Even Analysis
Used to determine when total sales equal variable costs plus fixed costs. i.e Net Income is Zero
Target Net Income Purpose
Used to determine levels of sales needed to achieve a specified income.
Expressed in either sales units or in sales dollars
Margin of Safety
Is the difference between actual or expected sales and sales at the break even point.
Measures the cushion that a particular level of sales provides.
The higher the dollars or percentage, the greater the margin of safety.
Kahoot: Variable Costs are costs that:
Remain the same per unit at every activity level.
