Managerial Accounting I Flashcards
The costs of manufacturing a product can be classified as follows:
1) Direct materials
2) Direct labor
3) Manufacturing overhead
Are tangible inputs to the manufacturing process that feasibly can be traced to the product. All cost of bringing materials to the production line are included in the cost.
Direct materials
Is the cost of human labor that can feasibly be traced to the product.
Direct labor
Consist of all costs of manufacturing that are not direct materials or direct labor.
Manufacturing overhead
Manufacturing costs are often grouped as follows:
1) Prime cost
2) Conversion cost
Equals direct materials plus direct labor
Prime cost
Equals direct labor plus manufacturing overhead
Conversion cost
On the basis of whether they are capitalized to the cost of products produced or not, cost are classified as follows:
1) Product costs
2) Period costs
Are capitalized as part of finished goods inventory. They eventually become a component of cost of goods sold.
Product costs
Are expensed as incurred
Period costs
Are associated with a particular cost object in an economically feasible way.
Direct Costs
Cannot be associated with a particular cost object in an economically feasible way and must be allocated to that object.
Indirect costs
Are indirect costs shared by two or more users
Common costs
Vary directly with the volume of production.
Variable costs
Vary directly and proportionally with changes in volume.
Variable costs in total
In total remain unchanged in the short run regardless of production level.
Fixed costs
Varies indirectly with the activity level.
Fixed cost per unit
Combine fixed and variable elements.
Mixed (semivariable) costs
Mixed (semivariable) costs can be computed using:
1) High-low method
2) Regression method
The fixed portion of manufacturing overhead is included in the cost of each product.
Absorption (Full) costing
Under absorption (Full) costing, product cost includes:
All manufacturing cost, both fixed and variable costs.
Product cost includes only variable manufacturing costs.
Variable (Direct) Costing
Under absorption (Full) and Variable (Direct) costing: when production and sales are equal for a period:
The two methods report the same operating income
Under absorption (Full) and Variable (Direct) costing: when production and sales are not equal for a period:
The two methods report different operating income
Under absorption (Full) and Variable (Direct) costing: when production exceeds sales, ending inventory increases.
Under absorption costing some fixed cost are still in ending inventory and
Under variable costing all fixed costs have been expensed,
Operating income is higher under absorption costing
Under absorption (Full) and Variable (Direct) costing: when production is less than sales, ending inventory decreases.
Under absorption costing fixed costs in beginning inventory are expensed and
Under variable costing only the current period’s fixed costs are expensed,
Operating income is higher under variable costing
For external financial reporting is prohibited by U.S. GAAP and IFRS.
Variable costing, it is better suited than absorption costing for managerial accounting.
Assigns costs to inventoriable goods or services. It applies to relatively homogeneous product that are mass produced on a continuous basis (e.g., petroleum products, thread, and computer monitors)
Process cost accounting
Some units are unfinished at the end of the period. For each department to account adequately for costs attached to its unfinished units, the units must be restated in terms of
Equivalent units of production (EUP)
Equivalent units of productions (EUP) calculations, three groups of units are:
1) Units in beginning work-in-process (beginning WIP)
2) Units started and completed during the current period
3) Units in ending work-in-process (ending WIP)
= Units transferred out + Ending WIP - Units started
Beginning WIP
= Units transferred out - Beginning WIP
Units started and completed
= Units started - Ending WIP
Units started and completed
= Beginning WIP + Units started - Units transferred out
Ending WIP
Methods used for calculating EUP.
1) Weighted-average method
2) First-in, first-out (FIFO) method
Treats the beginning WIP as started and completed during the current period.
The weighted-average method
Calculating The weighted-average method:
EUP = Units transferred to next department or finished goods + Equivalent units in ending work-in-process inventory
Only includes work done in the current period in the calculation.
The First-in, first-out (FIFO) method
Calculating The First-in, first-out (FIFO) method:
EUP = Equivalent units to complete beginning inventory + Units started and completed during the period + Equivalent units n ending work-in-process inventory
Occurs under normal operating conditions. It is treated as a product cost and absorbed into the cost of good output.
Normal spoilage
Is not expected to occur under normal, efficient operating conditions. It is typically treated as a period cost (a loss).
Abnormal spoilage
Consists of materials left over from the production process.
Scrap
If scrap is sold,
It reduces factory overhead.
If scrap is discarded,
It is absorbed into the cost of good output.
Is a response to the significant increase in the incurrence of indirect costs resulting from the rapid advance of technology.
Activity-Based Costing (ABC)
Under Activity-Based Costing (ABC), indirect costs are:
Attached to activities that are then rationally allocated to end products.
Activity-Based systems involve:
1) Identifying organizational activities that result in overhead.
2) Assigning the costs of resources consumed by the activities.
3) Assigning the costs of the activities by appropriate cost drivers to final object objects.
