Managerial Accounting Ch. 2: Managerial Accounting and Cost Concepts

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13th edition by Ray H. Garrison

Administrative Costs

All executive, organizational, and clerical costs associated with the general management of an organization rather that manufacturing, or selling.

Budget

A detailed plan for the future, usually expressed in formal quantitative terms.

Common Cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight.

Control

The process of instituting procedures and then obtaining feedback to ensure that all parts of the organization are functioning effectively and moving toward over all company goals.

Controller

The member of the top management team who is responsible for providing relevant and timely data to managers and for preparing financial statements for external users. The controller reports to the CFO.

Controlling

Actions taken to help ensure that the plan is being followed and is appropriately modified as circumstances change.

Conversion Cost

Direct labor cost plus manufacturing overhead cost.

Cost Behavior

The way in which a cost reacts to changes in the level of activity

Cost Object

Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions.

Differential Cost

A difference in cost between two alternatives. Also see Incremental cost.

Differential Revenue

The difference in revenue between two alternatives.

Direct Cost

A cost that can be easily and conveniently traced to a specified cost object.

Directing and Motivating

Mobilizing people to carry out plans and run routine operations.

Direct Labor

Factory labor costs that can be easily traced to individual units of product. Also called touch labor.

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Feedback

Accounting and other reports that help managers monitor performance and focus on problems and/or opportunities that might otherwise go unnoticed.

Financial Accounting

The phase of accounting concerned with providing information to stockholders, creditors, and others outside the organization.

Finished Goods

Units of product that have been completed but have not yet been sold to customers.

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.

Incremental Cost

An increase in cost between two alternatives. Also see Differential cost.

Indirect Cost

A cost that cannot be easily and conveniently traced to a specified cost object.

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Indirect Materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Inventoriable Costs

Synonym for product costs.

Managerial Accounting

The phase of accounting concerned with providing information to managers for use within the organization.

Manufacturing Overhead

All manufacturing costs except direct materials and direct labor.

Opportunity Cost

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

Performance Report

A detailed report comparing budgeted data to actual data.

Period Costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.

Planning

Selecting a course of action and specifying how the action will be implemented.

Planning and Control Cycle

The flow of management activities through planning, directing and motivating, and controlling, and then back to planning again.

Prime Cost

Direct materials cost plus direct labor cost.

Product Cost

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see "Inventoriable Costs".

Raw Materials

Any materials that go into the final product.

Relevant Range

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

Schedule of Cost of Goods Manufactured

A schedule showing the direct materials, direct labor, and manufacturing overhead costs incurred during a period and the portion of those costs that are assigned to Work in Process and Finished Goods.

Segment

Any part of an organization that can be evaluated independently of other parts and about which the manager seeks financial data. Examples include a product line, a sales territory, a division, or a department.

Selling Cost

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Sunk Cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Work in Process

Units of product that are only partially complete.

Describe the three major activities of a manager.

Managers carry out three major activities in an organization: planning, directing and motivating, and controlling. Planning involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented. Directing and motivating involves mobilizing people to carry out plans and run routine operations. Controlling involves ensuring that the plan is actually carried out and is appropriately modified as circumstances change.

What are the four steps in the planning and control cycle?

The planning and control cycle involves formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance.

What are the major differences between financial and managerial accounting?

In contrast to financial accounting, managerial accounting: (1) focuses on the needs of managers rather than outsiders; (2) emphasizes decisions affecting the future rather than the financial consequences of past actions; (3) emphasizes relevance rather than objectivity and verifiability; (4) emphasizes timeliness rather than precision; (5) emphasizes the segments of an organization rather than summary data concerning the entire organization; (6) is not governed by GAAP; and (7) is not mandatory.

What are the three major elements of product costs in a manufacturing company?

The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead.

Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.

(a) Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. (b) Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. (c) Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called "touch labor." (d) Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product.
(e) Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

Explain the difference between a product cost and a period cost.

A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.

Describe how the income statement of a manufacturing company differs from the income statement of a merchandising company.

The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of goods sold section. A merchandising company sells finished goods that it has purchased from a supplier. These goods are listed as "purchases" in the cost of goods sold section. Because a manufacturing company produces its goods rather than buying them from a supplier, it lists "cost of goods manufactured" in place of "purchases." Also, the manufacturing company identifies its inventory in this section as Finished Goods inventory, rather than as Merchandise Inventory.

Describe the schedule of cost of goods manufactured. How does it to into the income statement?

The schedule of cost of goods manufactured lists the manufacturing costs that have been incurred during the period. These costs are organized under the three categories of direct materials, direct labor, and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e. finished) during the period.
The schedule of cost of goods manufactured ties into the income statement through the cost of goods sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the Purchases account in a merchandising firm.

Describe how the inventory accounts of a manufacturing company differ from the inventory account of a merchandising company.

A manufacturing company usually has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. A merchandising company may have a single inventory account—Merchandise Inventory.

Why are product costs sometimes called inventoriable costs? Describe the flow of such costs in a manufacturing company from the point of incurrence until they finally become expenses on the income statement.

Product costs are assigned to units as they are processed and hence are included in inventories. The flow is from direct materials, direct labor, and manufacturing overhead to Work in Process inventory. As goods are completed, their cost is removed from Work in Process inventory and transferred to Finished Goods inventory. As goods are sold, their cost is removed from Finished Goods inventory and transferred to Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement.

Is it possible for costs such as salaries or depreciation to end up on the balance sheet? Explain.

Yes, costs such as salaries and depreciation can end up as part of assets on the balance sheet if they are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of the period.

Define the following terms: differential cost, opportunity cost, and sunk cost.

A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future.

When __, managers mobilize people to carry out plans and run routine operations.

directing and motivating

The plans of management are expressed formally in __

budgets.

__ consists of identifying alternatives, selecting among the alternatives the one that is best for the organization, and specifying what actions will be taken to implement the chosen alternative.

Planning

Managerial accounting places less emphasis on __ and more emphasis on __ than financial accounting.

precision; timeliness

__ emphasizes detailed segment reports about departments, customers, and products.

Managerial accounting

__ must follow GAAP, whereas __ need not follow GAAP.

Financial accounting; managerial accounting

The accounting and other reports that help managers monitor performance and focus on problems and/or opportunities are a form of __

feedback.

The manager in charge of the accounting department is normally known as the __

controller.

A detailed report to management comparing budgeted data with actual data for a specific time period is a __

performance report.

What's the procedure for generating a schedule of cost of goods manufactured?

Direct Material, then Direct Labor, then Manufacturing Overhead, the final solution should be the cost of goods manufactured.

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