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MGMT 202: Managerial Accounting > Chapter 2: Cost Concepts > Flashcards

Chapter 2: Cost Concepts Flashcards

1
Q

Costs can be classified in four broad categories

A

1) Behaviour
2) Traceability
3) Relevance
4) Function

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2
Q

Cost behaviour

A

How a cost reacts or responds to changes in the level of business activity.
(such as how the number of passengers flying on a plane will change costs)

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3
Q

Variable Cost definition

A

A cost that varies, in total, in direct proportion to changes in the level of activity.

Examples: # of customers served, units produced or sold, beds occupied

Remains constant when expressed per unit of activity

Fluctuates / increases or decreased when in TOTAL proportion to changes in activity level

The amount IN TOTAL (not per unit)

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4
Q

Fixed cost definition

A

A cost that remains constant, in total, regardless of changes in the level of activity within a relevant range.

If a fixed cost is expressed on a per-unit basis, it varies inversely with the level of activity.

Examples: Rent! No matter how many customers are served I still need the same monthly payment
Examples: Straight-line depreciation / amortization, insurance, property taxes, rent

Fixed within some relevant range

Remains constant in total, but fluctuate when expressed per unity of activity

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5
Q

Relevant range

A

The range of activity within which assumptions about variable and fixed cost behaviour are valid.

I can produce between x and y in this facility, if not i will need to expand my facility apparent

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6
Q

Cost object

A

Anything for which cost data are desired.

Examples of cost objects are services, product lines, customers, jobs, and organizational subunits, such as departments or divisions of a company.

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7
Q

Costs can be classified by in two ways

A

Direct costs

Indirect costs

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8
Q

Direct cost

A

A cost that can be easily and conveniently traced to a particular cost object.

Example:Fuel costs can be traced to individual flights and are direct costs

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9
Q

Indirect cost

A

A cost that cannot be easily and conveniently traced to a particular cost object.

Examples: Salaries of baggage handlers, ticketing staff, or expenses incurred from running the airline’s marketing cannot be traced to any one specific flight

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10
Q

Common cost

A

A cost that is incurred to support a number of cost objects but cannot be traced to them individually.

For example, the salary and benefit package of the receptionist in a bank is common to all the different services provided by that bank.

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11
Q

Differential cost

A

A difference in cost between any two alternatives.

Which one is cheaper, option A or B

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12
Q

Differential revenue

A

The difference in revenue between any two alternatives.

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13
Q

Opportunity cost

A

The potential benefit given up when one alternative is selected over another.

Choosing an hour of studying or an hour or tv. By watching tv i miss out on an hour of studying, by studying i miss out on an hour of tv

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14
Q

Sunk cost

A

Any cost already incurred that cannot be changed by any decision made now or in the future.

NOT DIFFERENTIAL COST (sunk costs of irrelevant to decision making)

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15
Q

Value chain

A

A sequence of major activities undertaken by an organization to fulfill its mission.

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16
Q

Cost classification by function

A

Consists of associating costs with the type of activity for which the cost is incurred

Example include: manufacturing, marketing, administration

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17
Q

Manufacturing costs

A

Costs incurred in production during a certain period, including direct materials, direct labour, and manufacturing overhead.

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18
Q

Raw materials

A

Materials used to make a product.

String and cotton which becomes a shirt eventually

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19
Q

Direct materials

A

Those materials that become an integral part of a finished product and can be conveniently traced to it.

Considered a variable cost

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20
Q

Indirect materials

A

Small items of materials, such as glue and nails. These items may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience.

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21
Q

Direct labour (aka touch labour)

A

Those factory labour costs that can be easily traced to individual units of product.

FINGER PRINT THEY NEED TO TOUCH THE PRODUCT

Wages and benefits of individuals who are directly involved in rolling sheets of metal, or touch the product along the way!!!!!!!!!

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22
Q

For our purposes, we will generally classify direct labour as a

A

Variable cost

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23
Q

Indirect labour

A

The labour costs of janitors, supervisors, materials handlers, and other factory workers that cannot be traced directly to particular products.

DO NOT TOUCH PRODUCT AKA NO FINGERPRINT

24
Q

Manufacturing overhead
AKA indirect manufacturing cost
AKA Factory Overhead
AKA factory Burden

A

All costs associated with manufacturing, except direct materials and direct labour.

Contains indirect material, indirect labour, rent for the factory, utilities (electric bill for factory), depreciation, and maintenance

Only those costs related to operating the factory

25
Q

Conversion cost (equation)

A

Direct labour cost + manufacturing overhead cost.

26
Q

Prime cost (equation)

A

Direct materials cost + direct labour cost.

27
Q

Nonmanufacturing cost two categories

A

1) Marketing (selling costs)

2) Administrative cost

28
Q

1) Marketing (selling costs)
order-getting cost
order-filling cost
marketing costs

A

All costs necessary to secure customer orders and get the finished product or service into the hands of the customer. Also called order-getting and order-filling costs.

Examples: Market research, advertising, shipping, sales travel, sale commissions, sale salaries, and costs of finished goods

29
Q

Administrative costs

A

All executive, organizational, and clerical costs associated with the general management of an organization, rather than with manufacturing, marketing, or selling.

Examples: executive compensation, general accounting, secretarial, public relations

30
Q

Matching principle

A

Based on the accrual concept and states that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized

Only recognize the costs as an expense only when the sale takes place (product cost)

31
Q

Product cost (Manufacturing costs)

Aka Inventoriable costs too

A

All costs involved in acquiring or making a product. In the case of manufactured goods.

These costs consist of direct materials, direct labour, and manufacturing overhead.

Carried forward to an inventory account that appears on the balance sheet

32
Q

Inventoriable costs

A

Costs that can be carried forward to inventory. Also see product costs

33
Q

Period costs (non-manufacturing costs)

A

All costs not included in product costs, for example all selling and administrative expenses.

Expensed on the income statement in the period in which they are incurred

Not included as part of the cost of either purchased or manufactured goods

Examples: Sales commission and office rent

All nonmanufacturing costs are considered to be period costs - therefore, advertising, executive salaries, public relations all count

34
Q

How is the balance sheet different between manufacturing and merchandising companies?

A

A merchandising company only has one type of inventory – goods purchased from suppliers that await resale

35
Q

Three types of inventory for manufacturing companies

A

1) Raw materials,
2) work in process,
3) finished goods

36
Q

Work in process (aka goods in process)

A

Units of product that are only partially complete and will require further work before they are ready for sale to a customer.

37
Q

FInished goods

A

Units of product that have been completed but have not yet been sold to customers.

38
Q

Basic equation for inventory accounts (equation)

Cost of goods sold (COGS)

A

Beginning balance + Additions to inventory - withdrawals from inventory = ending balance

39
Q

Two methods to track inventory and compute cost of goods sold (COGS)

A

1) Perpetual inventory system

2) Periodic inventory system

40
Q

1) Perpetual inventory system

A

An inventory system wherein a continuous record of inventory is maintained.

  • Additions to inventory are debited to the account
  • Withdrawals from inventory and transferred to the COGS account
41
Q

2) Periodic inventory system

A

An inventory system wherein the inventory accounts are updated at the end of every period.

42
Q

Costs of goods manufactured

A

The manufacturing costs associated with the goods that were finished during the period.

43
Q

Schedule of cost of goods sold (COGS)

A

A schedule showing the direct materials, direct labour, and manufacturing overhead costs incurred for a period and assigned to work in process and finished goods.

44
Q

Product costs are often called inventoriable costs because

A

these costs go directly into inventory accounts as they are incurred (first into work in process and then into finished goods), rather than going into the expense accounts

45
Q

Merchandising COGS

A

Adding the cost of merchandise purchases in a given period to beginning inventory and subtracting the ending merchandise inventory

46
Q

Cost of goods manufactured (COGM)

A

Include costs of direct materials, direct labour, and manufacturing overhead

Beginning Work-in-Process (WIP) Inventory + (DM + DL + MOH) – Ending WIP Inventory = COG Manufactured

47
Q

If shipping is happening in the production facility, yes it is a _______.

But if you ship the product out after its finished than it is a _______

A

product cost

period cost

48
Q

Direct material and direct labour are always

A

Variable costs

49
Q

Manufacturing and merchandising equation

A

Sales - COGS = Gross Margin

Gross margin - operating expense = Net Income

50
Q

Direct materials + direct labour =

A

manufacturing overhead

51
Q

Direct materials inventory Beg + purchases =

A

Direct materials available for production

52
Q

Direct materials available for production - direct materials inventory END =

A

Direct materials used

53
Q

Product costs /manufacturing costs equation =

A

Direct Materials + direct labour + manufacturing overhead

54
Q

Merchandising companies equation

A

Beginning inventory + purchases - COGS = ending inventory

55
Q

Manufacturing companies equation

A

Beginning finished goods inventory + COG manufactured - COGS = Ending finished gods inventory

56
Q

COGM equation

A

Beginning work-in-process (WIP) inventory + (DM + DL +MOH) - ending WIP inventory

MGMT 202: Managerial Accounting (11 decks)

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