Chapter 1 Flashcards
What is the difference between managerial and financial accounting?
Financial accounting: reports financial data to eternal parties (stockholders, creditors, regulators)
Managerial accounting: provides data to internal employees for decision-making
What are the cost classification purposes?
- Assigning costs to cost objects
- Accounting for costs in manufacturing
- Preparing financial statements
- Predicting cost behaviour
- Making business decisions
What are direct costs?
Easily traceable to a product (e.g. direct materials, direct labor)
What are indirect costs?
Cannot be easily traced to a specific product (e.g. manufacturing overhead)
What are common costs?
Indirect costs supporting multiple cost objects.
What are the three basic manufacturing cost categories? What do they mean?
Direct materials: raw materials that become part of the product (e.g. seat in an aircraft).
Direct labor: labor costs traceable to a product (e.g. wages of assembly workers)
Manufacturing overhead: indirect costs including factory utilities, depreciation, and property taxes.
What are prime costs?
Direct materials + direct labor.
What are conversion costs?
Direct labor + manufacturing overhead.
What are product costs?
Include direct materials, direct labor, and manufacturing overhead. There are recorded as inventory until sold.
What are period costs?
Include all selling and administrative costs (e.g. office rent, sales commissions).
What are the three cost behaviour types? What do they mean?
Variable costs: change in total with activity level but remain constant per unit (e.g. raw materials, labor per unit)
Fixed costs: do not change in total with activity level but vary per unit (e.g. rent, insurance)
Mixed costs: contain both fixed and variable elements (e.g. utility bills).
What are the two decision-making cost classifications? What do they mean?
Relevant costs: affect decision-making (e.g. differential costs, opportunity costs).
Irrelevant costs: do not affect decisions (e.g. sunk costs)
What is a contribution income statement? (format)
Used for internal decison-making (helps with cost-volume-profit analysis, budgeting, pricing decisions).
What is a traditional income statement? (format)
Used for external reporting.
What are the flow of costs for product costs?
- Raw materials: unprocessed materials used in production.
- Work in process: partially completed units still in production.
- Finished goods: completed units not yet sold.
- Cost of goods sold.
What is an example of a variable cost?
Cost of ice cream and napkins at a Baskin Robbins shop increases with sales.
What is an example of a fixed cost?
Monthly rent remains constant regardless of ice cream sales.
What is an opportunity cost?
The benefit lost when choosing one alternative over another (e.g. skipping a job offer to attend college).
What is a sunk cost?
Costs already incurred that cannot be recovered (e.g. past investments in equipment).
What are selling costs?
Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect
costs.
What are administrative costs?
All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.
What is the transfer of product costs?
- When direct materials are used in production, their
costs are transferred from Raw Materials to Work in
Process. - Direct labor and manufacturing overhead costs are
added to Work in Process to convert direct materials
into finished goods. - Once units of product are completed, their costs are
transferred from Work in Process to Finished
Goods. - When a manufacturer sells its finished goods to
customers, the costs are transferred from Finished
Goods to Cost of Goods Sold.
What are the two types of fixed costs?
- Committed: Long term, cannot be significantly reduced in the short
term. - Discretionary: May be altered in the
short term by current managerial decisions.
