managerial accounting exam 1

financial and managerial accounting

two types of accounting

financial accounting

• primary users - external (outside the company: investors, creditors etc)

• purpose is to help investors and creditors make investments and credit decisions

• relevant and faithfully representative information and focuses on the past

• required to follow the GAAP

• summary reports prepped primarily on the company as a whole

• concerns about adequacy of disclosures

managerial accounting

• primary users are internal to the company

• helps managers and employees plan, direct, and control operations

• relevant information and focuses on the future

• not required to follow GAAP

• detailed reports prepped on parts of the company (products, departments) on a daily or weekly basis

• concern about how reports will affect employee behavior

cost

payment of cash (or commitment to pay cash) for something meant to generate revenue

as expenses

how do costs get reported on the income statement?

direct cost

cost that is easily and cost-effectively traced to a cost objecti

indirect cost

cost that is not easily or cost-effectively traced to a cost object

cost object

anything for which managers want to separate measurement of cost (product, department, territory, activity, etc)

product cost

the cost of purchasing or making a product; includes manufacturing products

• capitalized as inventory, expensed as COGS @ time of sale

manufacturing costs

direct labor, direct materials, and manufacturing overhead

period cost

operating cost expensed in the period in which it is incurred

• includes all costs that are NOT manufacturing costs

  • ex. selling expenses or administrative expenses

prime costs

the direct costs of the manufacturing process

• direct materials + direct labor

conversion costs

the cost to convert direct materials into finished goods

• direct labor + manufacturing overhead

fixed costs

costs that DO NOT change in total over wide ranges of volume activity

• a company rents a building $20,000 a month: 5,000 units are produced in january, rent is $20,000, it’s same when 7,000 units are produced in february

variable costs

costs that vary in proportion to changes in volume of activity

ex. a company uses $2 of materials on each unit of product produced

direct materials

cost of raw materials that are converted into the finished product and are easily traced to the product

• ex. seats, tires, chain, steel/aluminum, pedals

direct labor

cost of wages and salaries of employees who convert the raw materials into the finished product

ex. wages paid to welders, painters, and assembly workers

manufacturing overhead

indirect manufacturing costs that cannot be easily traced to specific products (all manufacturing costs not classified as DM or DL)

3 groups of MOH costs

indirect materials, indirect labor, and other MOH costs

indirect materials

cost of raw materials that are difficult or not cost-effective to trace directly to the product

ex. screws, staples, glue, lubricants

indirect labor

cost of wages and salaries in the factory for persons not directly producing the product

ex. wages/salaries paid to equipment maintenance workers

other MOH costs

other costs related to the manufacturing facility

• factory utilities, rent/taxes/insurance, maintenance and depreciation, manufacturing equipment maintenance and depreciation

raw materials inventory

cost of materials used to make a product that have not yet entered the manufacturing process

work in process inventory

costs of DM, DL, and MOH for products that have entered the manufacturing process, but are not yet complete

finished goods inventory

costs of DM, DL, and MOH for products that have been completed, but not yet sold

Cost of Goods Sold

Beginning finished goods inventory + cost of goods manufactured = COG available for sale - ending finished goods inventory = COGS

COGM formula

beginning WIP inventory + total manufacturing costs incurred during the year = total manufacturing costs to account for - ending WIP = COGM

direct materials used formula

beginning DM + purchases of DM = DM available for use - ending DM = DM used

measure, record, and report

why do companies use a cost accounting system?

job order costing system

cost system that accumulates costs by jobj

job

production of a single unique product or batch of unique products; products accounted for are generally heterogenous and customized

process costing system

cost system that accumulates cost by process

• products are manufactured using a continuous series of production steps and products are homogenous, not customized

increases; purchased

raw materials inventory _________ when raw materials are ________

decreases; used in production

raw materials inventory ________ when raw materials are _______________

WIP

costs of RM used as direct materials move to the….

MOH account

costs of RM used as indirect materials move to the…

WIP inventory

where are direct labor costs added as employees work on jobs?

MOH account

where does indirect labor move to?

no

are actual MOH costs added to the WIP inventory account?

increase

all actual MOH costs __________ the MOH account

POAR formula

total estimated overhead costs/total estimated quantity of the overhead allocation base

• this is set before the period begins

allocation base

denominator that links indirect costs to cost objects

overhead allocation formula

POAR * actual quantity of activity base used by each job

overallocated MOH

if the overhead > actual overhead incurred, then there is an….

underallocated MOH

if overhead allocated < incurred, then there is an….

COGS

how do you adjust the MOH if it’s under/overallocated

finished goods inventory

when a job is complete, we send the costs of the job to….