chapter 2: Flashcards
what are the two main types of costs?
product costs (manufacturing costs)
period costs (non manufacturing costs)
what forms part of product costs?
direct material
direct labor
manufacturing overhead
what forms part of manufacturing overhead?
indirect materials
indirect labor
depreciation on factory buildings and machines
insurance
taxes
maintenance on factory facility
other indirect costs
direct labor
the guys working on the line
The actual guys assembling the shit
indirect material
Association with direct material so small its hard to track
they do not physically become part of the finished product, such as lubricants and polishing compounds
Products not actually used for the assembly of product
what forms part of period costs?
selling expenses
administrative expenses
what are product costs?
are costs that are a necessary and integral part of producing the finished product
Included as asset in inventory, not as expense
also calledinventoriable costs
how do companies record product costs when incurred?
as inventory
when do product costs become expenses?
become expenses until the company sells the finished goods inventory
company records the expense as a cost of goods sold
what are period costs
costs that are matched with the revenue of a specific time period rather than included as part of the cost of a saleable product
non-manufacturing costs
Just expenses
how are period costs recorded when they’re incurred? why?
deducted from revenues in the period in which they are incurred
to determine net income (net earnings)
why are periods costs more than COGS?
cause it could include rent, salaries of CEO, etc
indirect labour
has one of two following characteristics:
(1) it is the work of factory employees that has no physical association with the finished product,
(2) it is work for which it is impractical to trace costs to the goods produced
ex: wages of maintenance people, timekeepers, and supervisors
what are prime costs?
all direct costs
direct materials + direct labour
what are conversion costs?
What is required to convert the raw material into product
direct labour + manufacturing overhead
is the following DM, DL, or MOH
Salaries for assembly-line inspectors
DL
is the following DM, DL, or MOH
Insurance on factory machines
MOH
is the following DM, DL, or MOH
Property taxes on the factory building
MOH
is the following DM, DL, or MOH
Wages paid to assembly-line workers
DL
is the following DM, DL, or MOH
factory repairs
MOH
is the following DM, DL, or MOH
Factory machinery depreciation
MOH
is the following DM, DL, or MOH
Glue, nails, paint, and other small parts used in production
MOH
is the following DM, DL, or MOH
Factory supervisors’ salaries
MOH
is the following DM, DL, or MOH
Wood used in manufacturing furniture
DM
Explain the basic difference in accounting for product costs and period costs
Period costs are expensed when they happened, when incurred
Product costs are an integral part of of the cost of production
these are not expensed until the product is sold
these are recorded as an inventory which is an asset
variable costs
involves unit costs, so per unit costs
Varies based on production volume
Per unit, the cost its fixed
fixed costs
Fixed costs are costs that happen no matter what, not matter the amounts of units
total variable cost
varies directly and proportionally by production volume
unit variable cost
fixed per unit of production
They all need the same amount of material so same cost
total fixed cost
fixed per period
ex: rent
unit fixed cost
Total fixed cost divided by units produced
Therefore fixed cost per unit varies
what is a relevant range regarding total variable costs and total fixed costs?
When you run an operation, you have a normal capacity for it
Going out of that range, you’ll just be less efficient no matter of its above it or below it
That is why there is a relevant range, you want to stay in that
mixed costs
costs that have both a variable element and a fixed element
They are sometimes called semi-variable costs
change in total but not proportionally with changes in the activity level
what is the use of the High-Low Method of Classifying Costs
To allocate the mixed cost between variable and fixed costs
Total cost – variable cost = fixed cost
variable cost per unit
Changes in the cost between two points / changes in the unit of activity between the same two points
what is the formula for maintenance costs at a certain level of operation? at a certain level of outputs produced?
Total fixed cost + Total variable cost (i.e. unit variable costs x level of activity
how do you find the COGS for a merchandiser?
beginning inventory + inventory purchased - ending inventory
how do you find the COGS for a manufacturer?
beginning finished goods inventory + inventory manufactured - ending finished goods inventory
Raw materials inventory
shows the cost of raw materials on hand
Work in process inventory
shows the cost applicable to units that have gone into production but are only partially completed
finished goods inventory
shows the cost of completed goods on hand
what is the formula for the total manufacturing cost?
DL + DM (raw) + MOH
what is the formula for the cost of goods manufactured?
beginning work in progress inventory \+ manufacturing cost - ending work in progress inventory
what is the formula for the cost of goods sold?
Beginning Finished product Inventory \+ cost of goods manufactured - Ending Finished product inventory
