Untitled Flashcards Set

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### Key Terms and Concepts

1. Direct Materials: Materials directly traceable to production.

- Example: Wood in furniture manufacturing.

- Account: Work in Process Inventory.

2. Indirect Materials: Materials not directly traceable to production.

- Example: Glue or nails in furniture manufacturing.

- Account: Manufacturing Overhead.

3. Prime Costs: Direct Materials + Direct Labor.

- Example: $60 (Direct Labor) + $150 (Direct Materials) = $210 per unit.

4. Conversion Costs: Direct Labor + Manufacturing Overhead.

- Example: $60 (Direct Labor) + $50 (Manufacturing Overhead) = $110 per unit.

5. Period Costs: Costs not tied to production (e.g., selling, administrative).

- Example: Advertising expense, office supplies.

6. Product Costs: Costs tied to production (e.g., direct materials, direct labor, manufacturing overhead).

- Example: Factory supervisor salary, direct labor.

7. Break-Even Point: The level of sales where total revenue equals total costs.

- Formula: Break-even units = Fixed Costs / Contribution Margin per unit.

8. Contribution Margin: Selling price per unit - Variable cost per unit.

- Example: $12 (Selling Price) - $7 (Variable Cost) = $5.

9. Cost of Goods Manufactured (COGM): Total cost of goods completed during the period.

- Formula: Beginning WIP + Total Manufacturing Costs - Ending WIP.

10. Cost of Goods Sold (COGS): Cost of goods sold during the period.

- Formula: Beginning Finished Goods + COGM - Ending Finished Goods.

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### Practice Questions

1. What accounts are used for direct and indirect materials?

- Direct Materials: Work in Process Inventory.

- Indirect Materials: Manufacturing Overhead.

2. What is the term for moving costs from Work in Process to Finished Goods?

- Cost of Goods Manufactured (COGM).

3. Classify as Period or Product Costs:

- Factory officer’s salary: Product.

- General liability insurance: Period.

- Plant manager’s salary: Product.

- Direct Labor: Product.

- Advertising expense: Period.

4. What is the break-even point?

- The level of sales where total revenue equals total costs.

5. Calculate Prime Costs:

- Direct Labor: $60/unit.

- Direct Materials: $150/unit.

- Total Prime Costs: ($60 + $150) × 2,000 units = $420,000.

6. Calculate Total Manufacturing Costs:

- Direct Materials Used: $304,000.

- Direct Labor: $120,000.

- Manufacturing Overhead: $210,000.

- Total Manufacturing Costs: $634,000.

7. Calculate Break-Even Sales Dollars:

- Fixed Costs: $179,000.

- Contribution Margin Ratio: 0.9.

- Break-even Sales Dollars: $179,000 / 0.9 = $198,888.89.

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### Step-by-Step Problem Solving

#### 1. Calculating Prime Costs

- Step 1: Identify Direct Labor and Direct Materials per unit.

- Step 2: Add Direct Labor and Direct Materials to get Prime Cost per unit.

- Step 3: Multiply Prime Cost per unit by the number of units produced.

- Example:

- Direct Labor: $60/unit.

- Direct Materials: $150/unit.

- Prime Cost per unit: $60 + $150 = $210.

- Total Prime Costs: $210 × 2,000 units = $420,000.

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#### 2. Calculating Total Manufacturing Costs

- Step 1: Calculate Direct Materials Used.

- Formula: Beginning Materials + Purchases - Ending Materials.

- Example: $22,000 + $400,000 - $18,000 = $404,000.

- Step 2: Subtract Indirect Materials Used from Total Materials Used.

- Example: $404,000 - $100,000 = $304,000.

- Step 3: Calculate Manufacturing Overhead.

- Formula: Indirect Labor + Indirect Materials + Other Overhead.

- Example: $30,000 + $100,000 + $60,000 + $20,000 = $210,000.

- Step 4: Add Direct Materials, Direct Labor, and Manufacturing Overhead.

- Example: $304,000 + $120,000 + $210,000 = $634,000.

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#### 3. Calculating Break-Even Point

- Step 1: Identify Fixed Costs and Contribution Margin per unit.

- Example: Fixed Costs = $65,000.

- Contribution Margin = Selling Price - Variable Cost = $12 - $7 = $5.

- Step 2: Use the formula: Break-even units = Fixed Costs / Contribution Margin.

- Example: $65,000 / $5 = 13,000 units.

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#### 4. Calculating Cost of Goods Manufactured (COGM)

- Step 1: Calculate Total Manufacturing Costs.

- Example: $342,000 (from previous steps).

- Step 2: Use the formula: COGM = Beginning WIP + Total Manufacturing Costs - Ending WIP.

- Example: $25,000 + $342,000 - $30,000 = $337,000.

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#### 5. Calculating Cost of Goods Sold (COGS)

- Step 1: Calculate COGM (from Step 4).

- Step 2: Use the formula: COGS = Beginning Finished Goods + COGM - Ending Finished Goods.

- Example: $190,400 + $272,600 - $33,000 = $430,000.

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#### 6. Calculating Contribution Margin Ratio

- Step 1: Calculate Contribution Margin per unit.

- Example: Selling Price - Variable Cost = $110 - $30.80 = $79.20.

- Step 2: Divide Contribution Margin by Selling Price.

- Example: $79.20 / $110 = 0.72 (72%).

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#### 7. Calculating Margin of Safety

- Step 1: Calculate Break-even Sales.

- Example: Fixed Costs / Contribution Margin Ratio = $150,000 / 0.40 = $375,000.

- Step 2: Subtract Break-even Sales from Total Sales.

- Example: $600,000 - $375,000 = $225,000.

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### Direct T-Accounts Section

#### 1. Materials Inventory T-Account

- Debit Side: Beginning Materials Inventory + Purchases.

- Credit Side: Direct Materials Used + Indirect Materials Used.

- Ending Balance: Beginning + Purchases - (Direct Materials Used + Indirect Materials Used).

Example:

- Beginning Materials: $22,000

- Purchases: $400,000

- Direct Materials Used: $304,000

- Indirect Materials Used: $100,000

- Ending Materials: $22,000 + $400,000 - ($304,000 + $100,000) = $18,000

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#### 2. Work in Process (WIP) T-Account

- Debit Side: Beginning WIP + Direct Materials Used + Direct Labor + Manufacturing Overhead.

- Credit Side: Cost of Goods Manufactured (COGM).

- Ending Balance: Beginning WIP + Total Manufacturing Costs - COGM.

Example:

- Beginning WIP: $40,000

- Direct Materials Used: $304,000

- Direct Labor: $120,000

- Manufacturing Overhead: $210,000

- COGM: $634,000

- Ending WIP: $40,000 + ($304,000 + $120,000 + $210,000) - $634,000 = $50,000

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#### 3. Finished Goods T-Account

- Debit Side: Beginning Finished Goods + COGM.

- Credit Side: Cost of Goods Sold (COGS).

- Ending Balance: Beginning Finished Goods + COGM - COGS.

Example:

- Beginning Finished Goods: $190,400

- COGM: $272,600

- COGS: $430,000

- Ending Finished Goods: $190,400 + $272,600 - $430,000 = $33,000

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#### 4. Manufacturing Overhead T-Account

- Debit Side: Indirect Materials + Indirect Labor + Other Overhead (e.g., rent, utilities).

- Credit Side: Overhead Applied to WIP.

- Ending Balance: Overhead Incurred - Overhead Applied.

Example:

- Indirect Materials: $100,000

- Indirect Labor: $30,000

- Rent: $60,000

- Utilities: $20,000

- Overhead Applied: $210,000

- Ending Balance: $0 (if fully applied).

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### Additional Quizlet Cards

1. What is the formula for Prime Costs?

- Direct Materials + Direct Labor.

2. What is the formula for Conversion Costs?

- Direct Labor + Manufacturing Overhead.

3. What is the break-even formula?

- Break-even units = Fixed Costs / Contribution Margin per unit.

4. What is the formula for COGM?

- Beginning WIP + Total Manufacturing Costs - Ending WIP.

5. What is the formula for COGS?

- Beginning Finished Goods + COGM - Ending Finished Goods.

6. What is Contribution Margin?

- Selling Price per unit - Variable Cost per unit.

7. What is Margin of Safety?

- Actual Sales - Break-even Sales.

8. What are Period Costs?

- Costs not tied to production (e.g., advertising, office supplies).

9. What are Product Costs?

- Costs tied to production (e.g., direct materials, direct labor, manufacturing overhead).

10. What is the difference between Fixed and Variable Costs?

- Fixed Costs: Do not change with activity level.

- Variable Costs: Change with activity level.

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