Accounting Exam 1

Direct costs

Costs that can be easily traced to a specific product or project (e.g., raw materials, labor costs, shipping costs).

Indirect costs

Costs that support multiple products and cannot be easily traced to one product (e.g., factory supervisor salaries, utilities, rent).

Cost object

Anything for which cost data is desired, such as products, departments, or office locations.

Manufacturing costs

The three categories of manufacturing (product) costs are direct materials, direct labor, and manufacturing overhead.

Direct labor

Labor costs that are easily traceable to finished products (e.g., assembly line workers).

Manufacturing overhead

Indirect manufacturing costs, including factory utilities, depreciation, and indirect labor.

Indirect materials

Raw materials that cannot be easily traced to a product (e.g., glue used in furniture).

Indirect labor

Employees who support production but do not directly work on the product (e.g., janitors, supervisors).

Nonmanufacturing costs

Costs that are not associated with manufacturing and are classified as selling costs and administrative costs.

Selling costs

Expenses related to selling the product, including advertising, sales commissions, and shipping.

Administrative costs

Expenses related to the overall administration of the company, such as legal counsel, accounting, and executive salaries.

Cost behavior

The classification of costs based on how they respond to changes in business activity levels; types include variable, fixed, and mixed costs.

Variable costs

Costs that change in direct proportion to activity levels (e.g., raw materials, commissions, shipping costs).

Fixed costs

Costs that remain constant regardless of activity level (e.g., rent, property taxes, administrative salaries).

Mixed costs

Costs that have both variable and fixed elements (e.g., utility bills with a base fee plus usage charges).

Step-variable cost

A cost that remains fixed over small activity ranges but increases once a threshold is reached (e.g., supervisor salaries when hiring extra staff).

Relevant cost

A cost that differs between alternatives and should be considered when making decisions.

Irrelevant cost

A cost that does not change between alternatives and should be ignored.

Opportunity cost

The potential benefit lost when choosing one alternative over another.

Sunk cost

A cost that has already been incurred and cannot be changed, so it should be ignored in decision-making.

Product costs formula

Direct Materials + Direct Labor + Manufacturing Overhead.

Period costs formula

Selling Expenses + Administrative Expenses.

Conversion costs formula

Direct Labor + Manufacturing Overhead.

Prime costs formula

Direct Materials + Direct Labor.

Variable manufacturing costs formula

Direct Materials + Direct Labor + Variable Manufacturing Overhead.

Total fixed costs formula

Fixed Manufacturing Overhead + Fixed Selling Expense + Fixed Administrative Expense.

Traditional income statement

Used for external reporting, focuses on product vs. period costs, calculates gross margin.

Contribution format income statement

Used for internal decision-making, focuses on variable vs. fixed costs, calculates contribution margin.

Gross margin formula

Sales - Cost of Goods Sold (COGS).

Contribution margin formula

Sales - Variable Expenses.

Job-order costing

Tracking costs for individual jobs in manufacturing and service industries.

Direct costs in job-order costing

Direct materials, direct labor, and applied manufacturing overhead.

Predetermined overhead rate formula

Estimated Overhead Costs ÷ Estimated Direct Labor-Hours.

Underapplied overhead

Applied overhead < Actual overhead → Increases COGS, decreases net income.

Overapplied overhead

Applied overhead > Actual overhead → Decreases COGS, increases net income.

Cost of Goods Manufactured (COGM) formula

COGM = Direct Materials + Direct Labor + Applied Overhead + Beginning WIP Inventory - Ending WIP Inventory.

Cost of Goods Sold (COGS) formula

COGS = COGM + Beginning Finished Goods Inventory - Ending Finished Goods Inventory.

Manufacturing Overhead (MOH) definition

Includes indirect costs like factory utilities, indirect materials, and depreciation.

MOH Clearing Account debits

Actual overhead costs incurred.

Nonmanufacturing costs treatment

Recorded as period costs directly on the income statement.

Job Order Costing vs Process Costing

Job Order Costing: Unique jobs; Process Costing: Continuous, identical products.

Entries for Job Order Costing

Purchase Raw Materials: Debit Raw Materials Inventory; Use Materials in Production: Debit WIP (direct), Debit MOH (indirect), etc.