Managerial Accounting: Cost Concepts, Job Costing, ABC, and Quality Management

A comprehensive vocabulary review set covering cost classifications, value-chain activities, job costing calculations, predetermined overhead rates, activity-based costing, and total quality management.

Three Types of Companies

Service company, Merchandiser, and Manufacturer.

Six Value-Chain Activities

Research & Development, Design, Production, Marketing, Distribution, and Customer Service.

Direct Cost

A cost that can be conveniently traced to the cost object.

Indirect Cost

A cost that is shared or not conveniently traceable and must be allocated.

Product Costs

Costs to manufacture a product, stored in inventory until sold.

Period Costs

Selling and administrative costs expensed in the period incurred.

Prime Costs (Formula)

$$\text{Direct Materials (DM)} + \text{Direct Labor (DL)}$$

Conversion Costs (Formula)

$$\text{Direct Labor (DL)} + \text{Manufacturing Overhead (MOH)}$$

Merchandiser Cost of Goods Sold (COGS)

(Formula)

$$\text{Beginning Merchandise Inventory} + \text{Purchases} - \text{Ending Merchandise Inventory}$$

Flow of inventory for a manufacturer

Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

Total Manufacturing Costs

$$\text{Direct Materials used} + \text{Direct Labor} + \text{Manufacturing Overhead}$$

Job Cost Record

A document used to accumulate all manufacturing costs assigned to one job.

Job Cost Information

Data used to help price jobs, compare profitability, plan, and make internal decisions.

Predetermined Overhead Rate (POHR)

(Formula)

An overhead allocation rate calculated as $\text{Estimated total MOH} \div \text{Estimated total allocation base}$ (or $\text{Estimated MOH} \div \text{Estimated DL cost}$).

Allocated Manufacturing Overhead (MOH)

$$\text{Allocated MOH} = \text{POHR} \times \text{Actual base}$$

Allocated MOH vs. Actual MOH Difference

The variance used to determine whether manufacturing overhead is overallocated or underallocated.

Overallocated MOH

A condition occurring when allocated MOH is greater than actual MOH, indicating that jobs are overcosted.

Underallocated MOH

A condition indicating that jobs are undercosted, which may require an increase in Cost of Goods Sold (COGS).

Activity-Based Costing (ABC)

A costing method that uses separate activity cost pools and cost drivers for more accuracy.

Activity-Based Management (ABM)

A management approach that uses Activity-Based Costing information.

Four Steps of Activity-Based Costing

1. Identify primary activities; 2. Assign estimated overhead costs; 3. Choose a cost driver and calculate the activity rate; 4. Allocate overhead based on actual driver use.

Activity Rate Formula in ABC

$$\text{Estimated overhead for activity} \div \text{Estimated driver units}$$

Cost Distortion Risk in ABC

A risk that is higher when products or departments use different overhead activities in different amounts.

Primary Benefit of Activity-Based Costing (ABC)

Benefits that are usually higher when a company produces diverse products and incurs substantial overhead.

Product Overcosting in Traditional vs. ABC

Indicated when traditional cost is greater than ABC cost.

Product Undercosting in Traditional vs. ABC

Indicated when traditional cost is less than ABC cost.

Direct Materials Used

$$\text{Beginning RM} + \text{DM purchases} + \text{freight-in} + \text{import duties} - \text{Ending RM}$$

Manufacturing Overhead (MOH)

All factory costs except Direct Materials and Direct Labor.

Freight-in vs. Freight-out

Freight-in is treated as an acquisition cost, while freight-out is usually classified as a distribution expense.

Cost of Goods Manufactured (COGM)

$$\text{COGM} = \text{Beginning WIP} + \text{Total Manufacturing Costs} - \text{Ending WIP}$$

Manufacturer COGS

$$\text{Manufacturer COGS} = \text{Beginning FG} + \text{COGM} - \text{Ending FG}$$

Retailer COGS

$$\text{Retailer COGS} = \text{Beginning Inventory} + \text{Purchases} + \text{Freight-in/Import Duties} - \text{Ending Inventory}$$

Gross Profit

$$\text{Gross Profit} = \text{Sales} - \text{COGS}$$

Net Income (SG&A Given)

$$\text{Net Income} = \text{Gross Profit} - \text{SG\&A expenses}$$

Salon Cuts COGS Calculation

$$\text{COGS} = \$2{,}675{,}000 + \$23{,}975{,}000 - \$3{,}455{,}000 = \$23{,}195{,}000$$

Total Quality Management (TQM)

A management approach that focuses on quality throughout the organization and preventing defects.

Four Categories of Quality Costs

Prevention, Appraisal, Internal Failure, and External Failure.

Prevention Costs

Quality costs incurred to avoid defects before they occur.

Appraisal Costs

Quality costs associated with inspecting and testing to find defects.

Internal Failure Costs

Quality costs incurred when defects are found before delivery.

External Failure Costs

Quality costs incurred when defects are found after delivery.