ACCT 201 - Chapter 1 Notes

Financial accounting

Reporting financial information to external parties, such as stockholders, creditors, and regulators.

Managerial accounting

Providing information to employees within an organization so they can formulate plans, control operations, and make decisions.

Purposes of cost classification

Assigning costs to cost objects, accounting for costs in manufacturing companies, preparing financial statements, predicting cost behavior in response to changes in activity, and making decisions.

Direct costs

Costs that can be easily and conveniently traced to a unit of product or other cost object.

Direct costs examples

Direct material and direct labor.

Indirect costs

Costs that cannot be easily and conveniently traced to a unit of product and other cost object.

Indirect cost example

Manufacturing overhead.

Common costs

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

Classifications of manufacturing costs

Direct materials, direct labor, and manufacturing overhead.

Direct materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Direct materials example

A seat installed in an aircraft.

Direct labor

Labor costs that can be easily traced to individual units of product.

Direct labor example

Wages paid to automobile assembly workers.

Manufacturing overhead

Includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products. Includes indirect materials and labor costs that cannot be easily or conveniently traced to specific units of product.

Manufacturing overhead examples

Depreciation of manufacturing equipment, utility costs, property taxes, and insurance premiums incurred to operate a manufacturing facility.

Operating the factory

Only those indirect costs associated with ___ are included in manufacturing overhead.

Prime costs include

Direct material and direct labor.

Conversion costs include

Direct labor and manufacturing overhead.

Nonmanufacturing costs are made up of

Selling costs and administrative costs.

Selling costs

Costs necessary to secure the order and deliver the product. Can be either direct or indirect costs.

Administrative costs

All executive, organizational, and clerical costs. Can be either direct or indirect costs.

Product costs

All costs involved in acquiring or making a product. Include direct materials, direct labor, and manufacturing overhead.

Manufacturing product costs include

Raw materials, work in process, and 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 of product that have not yet been sold to customers.

Period costs

Include all selling costs and administrative costs. All costs that aren’t product costs.

Cost behavior

How a cost will react to changes in the level of activity.

Cost behavior most common classifications are

Variable costs, fixed costs, and mixed costs.

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity.

Constant

A variable cost per unit is ___.

Activity base (cost driver)

A measure of what causes the incurrence of a variable cost.

Activity base (cost driver) examples

Unit produced, units sold, machine hours, and labor hours.

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity.

Varies inversely

The averaged fixed cost per unit ___ with changes in activity.

Types of fixed costs

Committed and discretionary.

Committed fixed costs

Long term, cannot be significantly reduced in the short term.

Discretionary fixed costs

May be altered in the short term by current managerial decisions. Fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

Straight line closely approximates

A curvilinear variable cost line within the relevant range.

The relevant range of activity for a fixed cost

The range of activity over which the graph of the cost is flat.

Increase and decrease

Total variable cost ___ in proportion to changes in the activity level.

Not affected

Total fixed cost is ___ by changes in the activity level within the relevant range.

Constant

Variable cost per unit remains ___.

Decreases; Increases

Fixed cost per unit ___ as the activity level rises and ___ as the activity level falls.

Mixed cost

Contains both variable and fixed elements.

Total mixed cost line equation

Y = A + bX. Y equals total mixed cost. A = Total fixed cost (vertical intercept). B = Variable cost per unit of activity (slope of the line). X = The level of activity.

Differential costs (incremental costs)

The difference in cost between any two alternatives. Either fixed or variable. Relevant to decisions.

Differential revenue

A difference in revenue between two alternatives. Relevant to decisions.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another.

Sunk costs

Already been incurred and cannot be changed now or in the future. Irrelevant costs that should be ignored when making decisions.

Traditional income statement formula

Sales – CGS = Gross margin – selling and administrative expenses = net operating income.

Traditional income statement

Used primarily for external reporting purposes.

Contribution income statement formula

Sales – Variable expenses = Contribution margin – fixed expenses = net operating income.

Contribution income statement

Used primarily by management. Used as an internal planning and decision-making tool.

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization.

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Relevant cost

A cost that should be considered when making decisions.

Relevant benefit

A benefit that should be considered when making decisions.

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes.

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted.