Accounting: Chapter 6

We need to know how much our __________ cost

We need to know how much our __________ cost

products

Cost accounting collects cost information to report

what costs have been and to use that information for making decisions about the future

Fixed costs are those that _________________ \n with changes in the volume of production \n

For example, the rent for our factory building

do not change

Variable costs change in ______________ to \n production \n

For example, the cost of raw materials

direct proportion

Marginal costs are the __________ incurred to \n produce an additional unit

additional cost

Marginal cost is the proper cost measure for \n effective ______________ decision making

short-term

\n You compare the change in revenues to the change in costs to determine the

financial benefit of a change

if the decision is made

Ignore costs that will not change

Say your current product cost is $2 per unit ($1 fixed and $1 variable) and you’re offered $1.50 to produce more units (within your current capacity) – do you accept this offer?

Yes! Fixed costs are irrelevant to the decision because they won’t change as volume goes up

Direct costs: Direct Materials and Direct Labor \n

The materials specifically used to make a product \n

The labor _________________ with the production of a specific product or service

directly associated

Everything else = Indirect costs → “____________”

overhead

Fixed Costs

Costs related to plant and equipment to make products

Rent on the factory (or depreciation, if owned)

Salaries for factory supervisors/managers (indirect labor)

Maintenance staff (cleaning crew, etc.)

Utilities such as heat and electric

Legal department (for product-related work)

Security guards

Cost allocation is the process by which we allocate a share of our _____________ to each product unit

For example: maintenance/cleaning costs

overhead costs

The first step is to determine an ______________

allocation base

\n Say we allocate cleaning costs by square feet: Each department is allocated a cost based upon their share of the building’s square footage

If cleaning costs are $100k and the production \n department comprises 25% of the space, allocate $25k

The second step is to allocate overhead to _______

products

\n If we produced 50k units, then the allocated cost/unit \n for this overhead cost is $0.50

Historically, most costs of production have \n consisted of direct materials and direct labor

As long as total overhead costs are relatively minor, the distortion caused by an arbitrary allocation of an overhead item is not important

However, overhead has recently been a substantially __________________ of the overall cost of production

Growing Proportion

Activity-based costing proposes examination of \n each element of ______________ to see whether \n they can be directly related to specific activities

Overhead Units

If more costs of production can be classified as direct, the costing would be more accurate

Under process costing, a firm that makes large \n quantities of _________________ keeps track of \n the cost of the components of the production \n process and the # of units made

one product

By dividing the total cost by the number of units, we find the

cost per unit

Under job-order costing, a firm that makes a \n ____________________ (i.e. made-to-order) \n product gathers information for the product (“job”)

specific custom-order

How much of each raw material was used for the job

How much time every worker spent on the job

Standard costing uses industrial engineering \n analysis to determine how much of our various \n resources we expect _________ of each product to consume and what we expect those resources cost

each unit

At the end of any month, as long as we know the number of units we have produced, we can \n multiply the standard cost per unit times the \n number of units produced to get our total \n estimated ___________ costs

production

Analyze ___________ between estimated standard costs and actual costs at the end of each period

variances

A bill of materials is an extensive list of raw \n materials, components, and assemblies required to manufacture ____________ of a product

Includes full detail on all labor inputs (which role, how much time) and estimated cost of each labor input \n

Also includes allocation of overhead costs

Informs ______________, determine \n profitability

Pricing Decisions

Fundamental demand for acct: help \n _______________!

Guide exchange