Midterm 2 Flashcards
Managerial vs. Financial Accounting
Managerial accounting is used internally for decision-making, focusing on relevance and timeliness.
It does not need to follow GAAP and can be both objective and subjective.
Categories of Manufacturing Costs
- Direct Materials: Raw materials directly used in production.
- Direct Labor: Wages for employees directly making the product.
- Manufacturing Overhead: Indirect costs related to production, like factory utilities or depreciation
of factory equipment.
Conversion Costs
Conversion Costs are the costs needed to convert raw materials into finished goods.
Formula: Conversion Costs = Direct Labor + Factory Overhead
Cost Flow in Manufacturing
Costs flow through different stages: Raw Materials, Work-in-Process (WIP), Finished Goods, Cost of
Goods Sold (COGS).
Cost of Goods Manufactured (COGM) represents total cost of producing goods during a period.
Overhead Allocation Methods
- Single Plantwide Rate: Allocates overhead using one rate for the entire plant.
- Multiple Departmental Rates: Different rates by department.
- Activity-Based Costing (ABC): Allocates overhead based on actual activities, like setups or
inspections.
Just-in-Time (JIT) Manufacturing
JIT minimizes inventory and reduces waste by producing goods in response to demand, not
forecasts.
Period Costs vs. Product Costs
Product Costs: Costs directly tied to manufacturing, like DM, DL, and MOH.
Period Costs: Not directly tied to production, like selling and administrative expenses.
Fixed Costs vs. Variable Costs
Fixed Costs: Do not change with production volume (e.g., rent).
Variable Costs: Change with production volume (e.g., raw materials).
Break-even Analysis
The break-even point is where total revenue equals total costs. Calculated by dividing fixed costs by
contribution margin per unit.
Process Costing vs. Job Order Costing
Process Costing: Used for identical items produced in large volumes (e.g., soda).
Job Order Costing: Used for customized products (e.g., construction projects).
Categories of Quality Costs
- Prevention Costs: To avoid quality issues.
- Appraisal Costs: To check product quality.
- Internal Failure Costs: To correct issues before shipping.
- External Failure Costs: Fixing issues after delivery.
High-Low Method for Cost Behavior
Used to separate fixed and variable costs. Calculate variable cost per unit and use it to estimate
costs at different levels.
Operating Leverage
Indicates how sensitive net operating income is to changes in sales. High leverage means a small
change in sales leads to a larger change in profit.
Equivalent Units of Production (EUP)
EUP measures partially completed units in terms of fully completed units, helping allocate costs in
process costing.
Cost per Equivalent Unit
Total costs are divided by equivalent units of production (EUP) to assign costs to each unit or stage
of completion.
