Knowt
Managerial Accounting- Chapter 4
TERM: Merchandising Firms
DEFINITION: Businesses that acquire inventory for resale without altering its form. They have inventory costs and selling/administrative costs.
TERM: Manufacturing Firms
DEFINITION: Businesses that produce goods for sale. Costs incurred in manufacturing become inventory costs. They also have selling/administrative costs.
TERM: Product Costs
DEFINITION: Costs incurred to acquire raw materials and convert them into finished goods. Recorded as inventory (asset) first, then expensed as cost of goods sold.
TERM: Direct Materials
DEFINITION: Raw materials that can be directly traced to or easily identified with the final product.
TERM: Direct Labor
DEFINITION: Wages and benefits paid to workers directly involved in transforming raw materials into finished products.
TERM: Direct Labor Hours
DEFINITION: Labor time that can be directly traced to a specific product.
TERM: Manufacturing Overhead
DEFINITION: Indirect production costs that cannot be easily traced to a specific product, such as electricity, factory insurance, and security.
TERM: Indirect Materials
DEFINITION: Supplies and materials used in production that cannot be classified as direct materials.
TERM: Indirect Labor
DEFINITION: Wages paid to workers who support production but do not directly work on the product.
TERM: Nonmanufacturing Costs
DEFINITION: Costs that are not related to production, such as selling and administrative expenses.
TERM: Selling Costs
DEFINITION: Costs associated with the storage, sale, and delivery of finished goods.
TERM: General and Administrative Costs
DEFINITION: Costs related to the general management of the company, benefiting the business as a whole.
TERM: Raw Materials Inventory
DEFINITION: Account used to record the cost of raw materials purchased and used in production.
TERM: Supplies Inventory
DEFINITION: Account used to track the cost of indirect materials used in production.
TERM: Work in Process Inventory
DEFINITION: Account that tracks costs of products that are started but not yet completed.
TERM: Finished Goods Inventory
DEFINITION: Account that records the cost of completed products ready for sale.
TERM: Cost of Goods Manufactured
DEFINITION: The total cost of products that are completed during a given period.
TERM: Flow of Inventory in Manufacturing
DEFINITION: Inventory moves from raw materials to work in process to finished goods before being sold.
TERM: Journal Entry - Purchase of Raw Materials
DEFINITION:
DEBIT Raw Materials Inventory
CREDIT Accounts Payable or Cash
TERM: Journal Entry - Direct Materials Used in Production
DEFINITION:
DEBIT Work in Process Inventory
CREDIT Raw Materials Inventory
TERM: Journal Entry - Direct Labor Used in Production
DEFINITION:
DEBIT Work in Process Inventory
CREDIT Wages Payable or Cash
TERM: Journal Entry - Incurring Overhead Costs
DEFINITION:
DEBIT Manufacturing Overhead Control
CREDIT Various Accounts (e.g., Indirect Materials, Indirect Labor, Depreciation)
TERM: Journal Entry - Transferring Overhead to Work in Process
DEFINITION:
DEBIT Work in Process Inventory
CREDIT Manufacturing Overhead Control
TERM: Journal Entry - Transferring Finished Goods
DEFINITION:
DEBIT Finished Goods Inventory
CREDIT Work in Process Inventory
TERM: Journal Entry - Sale of Goods (Revenue)
DEFINITION:
DEBIT Cash or Accounts Receivable
CREDIT Sales Revenue
TERM: Journal Entry - Sale of Goods (Cost)
DEFINITION:
DEBIT Cost of Goods Sold
CREDIT Finished Goods Inventory
TERM: Job Order Costing
DEFINITION: Costing system where product costs are accumulated by batch or customer. Used by both manufacturers and service businesses.
TERM: Job Cost Sheet
DEFINITION: Document summarizing costs for a particular job, used in job order costing.
TERM: Materials Requisition Slip
DEFINITION: Document authorizing the release of direct materials from inventory to production.
TERM: Bills of Materials
DEFINITION: A detailed list of raw materials needed to create a single unit of product.
TERM: Time Ticket
DEFINITION: Document recording an employee’s labor time spent on a specific job.
TERM: Overhead Application
DEFINITION: The process of allocating manufacturing overhead costs to jobs.
TERM: Applied Overhead
DEFINITION: The amount of manufacturing overhead allocated to a job based on a predetermined rate.
TERM: Reasons for Overhead Allocation
DEFINITION:
Overhead costs are not always known at the time of production.
Some costs are seasonal and need to be spread out.
Many overhead costs are fixed and must be allocated across all production.
TERM: Predetermined Overhead Rate
DEFINITION: Rate used to allocate overhead costs, calculated as:
Formula:
Predetermined Overhead Rate = Estimated Overhead Costs ÷ Estimated Activity Level
TERM: Applying Overhead to Jobs
DEFINITION: Overhead applied to a job is calculated as:
Formula:
Applied Overhead = Predetermined Overhead Rate × Actual Activity Level
TERM: Underapplied Overhead
DEFINITION: Occurs when too little overhead is assigned to products, leading to understated inventory costs.
TERM: Overapplied Overhead
DEFINITION: Occurs when too much overhead is assigned to products, leading to overstated inventory costs.
TERM: Journal Entry - Closing Underapplied Overhead
DEFINITION:
DEBIT Cost of Goods Sold
CREDIT Manufacturing Overhead
TERM: Journal Entry - Closing Overapplied Overhead
DEFINITION:
DEBIT Manufacturing Overhead
CREDIT Cost of Goods Sold
TERM: Prorating Overhead
DEFINITION: When the amount of underapplied or overapplied overhead is large, it is allocated to Work in Process, Finished Goods, and Cost of Goods Sold accounts.
TERM: Steps for Prorating Overhead
DEFINITION:
Add ending balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Calculate each account’s percentage of the total.
Multiply percentages by the underapplied/overapplied amount.
TERM: Actual Overhead
DEFINITION: The real overhead costs incurred by a company during the period.
TERM: Estimated Overhead
DEFINITION: The forecasted overhead costs a company expects to incur, used for setting predetermined overhead rates.
