ACG 2071 Exam 1 (Holly Sudano)

Role of management accounting?

to provide relevant information to aid managers in making business decisions

Cost object:

anything we want to know the cost of

direct cost:

can be "traced" to the cost object

indirect cost:

cannot "trace" to the cost object, so we must allocate these costs.

Tip on deciphering between indirect and direct cost:

is it economically feasible to trace the product

Which costs along the value chain are inventoriable product costs?

production/purchases

which costs along the the value chain are period costs?

all the others: research & development, design, marketing, distribution, customer service, etc

how do product costs flow through the financial statement?

the costs are treated as part of inventory (asset, valued at cost) on the Balance Sheet until the product is sold.

how do period costs flow through financial statement?

the costs are expensed in the period incurred.

Period costs are comprised of:

"operating expenses," or "selling & administrative expenses" incurred by a company.

- do NOT follow the product cost route

do service companies have product costs?

NO

what costs are considered product costs for Merchandising companies?

cost of merchandise + freight-in + customs/duties + cost of getting product ready for sale

-merchandising companies only have ONE category of inventory on the Balance Sheet

what are the product costs for a Manufacturing company?

Direct Materials + Direct Labor + Manufacturing Overhead (MOH)

Direct Material (DM):

the primary materials that can become a physical part of the finished product. can be DIRECTLY traced to the product

Direct Labor (DL):

the compensation for employees why physically covert Raw Materials into Finished Product

Manufacturing Overhead (MOH):

ALL manufacturing costs other than direct materials and direct labor.

ex. indirect materials, indirect labor, other indirect MANUFACTURING costs, cannot be traced directly to the job (depreciation, insurance, and utilities incurred in the manufacturing process.)

3 types of inventory for Manufacturing Companies:

(think stages of production)

1.) raw materials inventory

2.) work in process inventory

3.) finished goods inventory

raw materials inventory:

all raw materials used in the manufacturing process and in the plant

work in process inventory:

goods that have been started but not yet finished

finished goods inventory:

completed goods that have not been sold

service revenues - operating expenses = operating income

Income Statement of a service company: equation

Prevention:

COQ incurred to AVOID producing poor-quality goods or services.

--spend time and money on design

--train employees

-- better materials

--preventative maintenance

--evaluate potential suppliers

Income Statement of a service company: equation

service revenues - operating expenses = operating income

controllable costs:

costs that can be influenced or changed by management

uncontrollable costs:

cost that cannot be changed or influenced in the short run by management

relevant costs:

costs that impact a decision

irrelevant costs:

costs that have no impact on a decision

differential costs:

the difference in cost between two alternatives

sunk costs:

a cost that has been already incurred

fixed costs:

constant in total, varies on a per unit base

ex. think gym membership, doesn't matter how many times you go, you are always paying the same cost

variable cost

changes in total (in indirect proportion to changes in volume,) constant per unit

calculate COGS for manufacturer:

step 1:) raw materials inv. (calculate DM used)

step 2:) work-in-process inv. (calc cost of goods manufactured)

step 3:) finished goods inv. (calc the COGS)

job costing

used for unique or custom products/services that differ in the amount of DM,DL, and MOH used. also used for small batches and trades (plumbers, electricians.)

process costing

used for a large number of identical units that typically go through a uniform production process. used for mass manufacturing

Predetermined MOH Rate=

estimated total MOH costs / estimated total allocation base

Costs of Quality's goal:

keep cost low without sacrificing quality

when determining the allocation base that should be used:

whatever "drives" the cost (the "cost driver") should be considered

why not use the "number of units" as the allocation base?

in a job costing environment, each unit is different. therefore, they should not all get equal allocation of MOH.

why do companies use a predetermined MOH rate, rather than an actual one?

in order to have timely info, we need to sacrifice accuracy. to get an accurate (actual) MOH rate, we would have to wait until the end of the year.

MOH allocated to job (equation)

predetermined MOH rate x actual use of allocation rate

at the end of the year, how do manufacturers deal with under allocated MOH?

since the predetermined (or estimated) rate was used, the amount of MOH allocated will not = the amount of MOH actually incurred. the difference between the two is the amount over or under the MOH.

MOH account is:

a temporary account used to track the actual MOH incurred against the MOH allocated.

the total amount of MOH allocated during the year is dependent upon two factors:

allocation base used & actual quality of base used

the allocation base used, & the actual MOH for the year

A company could either overallocate or underallocate MOH depending on:

_ & _

underallocated overhead

actual > allocated, not enough MOH was allocated to the job, COGS is understated

overallocated overhead

allocated > actual, too much MOH was allocated to the jobs, COGS is overstated (therefore making income understated)

In a job costing environment, how are employee benefits handled?

1. treated as MOH-gets allocated to jobs along with all other MOH

2. Use a "fully loaded wage rate" when tracing DL costs to jobs

professional billing rate:

# professional hours x $ billing rate

departmental overhead rates

several different allocation bases for different departments

departmental rates are more accurate because...

they capture

1. types of resources used

2. amount/extent of resources used

cost distortion:

a. when some products/jobs are allocated too much MOH (overcosted) while others are allocated too little (undercoated)

b. caused by an allocation system that doesn't capture the different types of MOH or indirect resources used

Activity based costing:

further allocating indirect costs. instead of departments we uses activities to define the indirect cost pools

calculate Activity Allocation Rate:

total estimated costs in pool / total estimated amount of allocation base

what is the goal of any refined costing system?

to IMPROVE the ALLOCATION of indirect costs to be able to provide more accurate cost information

how can one distinguish between "value-added" and "non-value-added activities"?

ask 2 questions:

1. could this activity be eliminated if we improve another part of the process?

2. would a customer be willing to pay for this activity?

Costs of Quality goal:

keep cost low without sacrificing quality

Cost of Quality categories (4):

-prevention

-appraisal

-internal failure

-external failure

Prevention:

costs incurred to AVOID producing poor-quality goods or services.

--spend time and money on design

--train employees

-- better materials

--preventative maintenance

--evaluate potential suppliers

Appraisal:

costs incurred to DETECT poor-quality goods or services.

-- testing products

--inspecting materials

--inspecting products throughout production

Internal Failure:

costs incurred on defective units BEFORE delivery to customers.

--reworking defective products

--scrapping defective products/ rejected units

--machine breakdowns

External Failure:

costs incurred because the defective goods or services are not detected until AFTER delivery is made to customers.

-- recalls

--warranties

-- costs profits from lost customers

conformance costs:

Prevention + Appraisal

-- incurred to make sure the product or service conforms to its intended design (not defective)

Nonconformance costs

internal failures + external failure

--incurred because the product or service is defective

best way to reduce the total COQ?

spend more on prevention