ACCT 211 Midterm 1

managerial accounting

informs decision-making, teaches us what information is needed and how it should be used to make good business decisions, businesses continuously evolve and owners/executives have to make decisions that impact employees, customers, executives, etc.

direct costs

costs that can be easily and conveniently traced to a unit of product or other cost object (ex. direct materials and direct labor)

indirect costs

costs that cannot be easily and conveniently traced to a unit of product or other cost object (ex. manufacturing overhead)

direct materials

raw materials that become an integral part of the product and that can be conveniently traced directly to it (ex. a seat installed in an aircraft)

direct labor

labor costs that can be easily traced to individual units of product (ex. wages paid to automobile assembly workers)

manufacturing overhead

includes all manufacturing costs except direct materials and direct labor, cannot be readily traced to finished products (ex. depreciation of manufacturing equipment, utility costs, property taxes, insurance premiums incurred to operate a manufacturing facility)

direct materials + direct labor

prime cost

direct labor + manufacturing overhead

conversion cost

selling costs

costs necessary to secure the order and deliver the product, can be either direct or indirect

administrative costs

all executive, organizational, and clerical costs, can be either direct or indirect

product costs

all costs involved in acquiring or making a product, "attach" to a unit of product as it is purchased or manufactured and they remain attached to each unit of product as long as it remains in inventory awaiting sale

manufacturing product costs

raw materials, work in process, finished goods

raw materials

include any materials that go into the final product

work in process

consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer

finished goods

consist of completed units that have not yet been sold to customers

period costs

include all selling and administrative costs

cost behavior

refers to how a cost will react to changes in the level of activity

variable cost

a cost that varies, in total, in direct proportion to changes in the level of activity, is constant per unit

activity base/cost driver

a measure of what causes the incurrence of a variable cost (ex. units sold, units produced, labor hours, machine hours)

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity, varies inversely with changes in activity if expressed on a per unit basis

mixed cost

contains both variable and fixed elements, y = a + bX

differential costs

the difference in cost between any two alternatives, always relevant to decisions, can be fixed or variable

opportunity cost

the potential benefit that is given up when one alternative is selected over another, not usually found in accounting records but must be explicitly considered in every decision

sunk costs

have already been incurred and cannot be changed now or in the future, these irrelevant costs should be ignored when making decisions

job-order costing

used when 1. many different products are produced each period 2. products are manufactured to order or custom 3. the unique nature of each order requires tracing or allocating costs to each job and maintaining cost records for each job

estimated total manufacturing overhead cost for the coming period / estimated total units in the allocation base for the coming period

predetermined overhead rate (POHR)

need for a POHR

1. actual overhead for the period is not known until the end of the period 2. actual overhead costs can fluctuate seasonally

activity-based costing

when a company creates overhead rates based on activities that it performs

job cost sheets

collectively form a subsidiary ledger, prvoide an underlying set of financial records that explain what specific jobs comprise the amounts reported in work-in-process and finished goods on the balance sheet and cost of goods sold on the income statement

underapplied overhead

when a company applies less overhead to production than it actually incurs, increases cost of goods sold and decreases net operating income

overapplied overhead

when a company applies more overhead to production than it actually incurs, decreases cost of goods sold and increases net operating income

cost-volume-profit (CVP) analysis key assumptions

1. selling price is constant 2. costs are linear and can be accurately divided into variable and fixed components 3. in multiproduct companies, the mix of products sold remains constant

variable expense / sales

variable expense ratio

contribution margin / sales

CM ratio

contribution margin per unit / selling price per unit

CM ratio per unit

( CM ratio x sales) - fixed expenses

profit

contribution margin - fixed expenses

net operating income

break-even point

the level of sales at which profit is zero

selling price per unit - variable expenses per unit

unit CM

contribution margin / net operating income

degree of operating leverage

fixed expenses / unit CM

unit sales to break even

fixed expenses / CM ratio

dollar sales to break even

total sales - break-even sales

margin of safety in dollars