Accounting ACCT 2620 Final: 2016 Final Review Notes (1)
Expense: the cost incurred when an asset is used up or sold for the purpose of generating revenue
Cost: the sacrifice made to achieve a particular purpose
o Product costs: costs of goods manufactured or the cost of goods purchased for resale
▪ Inventoried until the goods are sold
▪ Go into costs of goods sold on the income statement
▪ Go into various inventory accounts on the balance sheet (raw materials, work in process, finished goods)
▪ Manufacturing product costs:
• Direct material
• Direct labor
• Manufacturing overhead
o Period costs: all other non-product costs in an organization
▪ Expensed as time passes
▪ Go into operating expenses
o Cost object: an entity, such as a particular product, service, or department to which a cost is assigned
o Direct costs: a cost which is related to particular cost objective & can be traced to it an economically feasible way
▪ Includes
• Direct material
• Direct labor
o Indirect costs: a cost which is related to a particular cost objective by cannot be traced in an economically feasible
way
▪ Allocated to cost objectives
▪ Examples: Indirect material, Indirect labor, Depreciation, Utilities, and Insurance
o Flow of costs -- Direct material, direct labor, manufacturing overhead → WIP inventory → finished goods inventory
→ cost of goods sold
• Income statement
o Sales revenue – COGS = gross margin
o Gross margin – SG&A = operating income
o Income before taxes – income tax expense = net income
Cost drivers: (cost generator, cost determinant) a factor that causes the amount of cost incurred to change
• Production costs are driven by the # of products produced, labor costs, # of setups required, # of change orders
• Examples:
o Machining operations → machine hours, Setup → setup hours, Production scheduling → manufacturing orders,
Inspection → pieces inspected, Purchasing → purchase orders
• Average cost: the total cost to produce a quantity divided by the quantity produced
• Marginal cost: the extra cost incurred to produce 1 additional unit
• Opportunity cost: the potential benefit that is given up when 1 alternative is selected over another
• Sunk cost: all costs incurred in the past that cannot be changed by any decision made now or in the future
• Overhead application: allocate an equitable amount of cost to each job
o Overhead applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of
the accounting period
▪ POHR = budgeted manufacturing overhead cost/budgeted amount of cost driver
▪ Overhead applied = POHR x actual activity
• Steps
o Identify the job that is the chosen cost object
o Identify the direct costs of the job
o Select the cost driver used to allocate indirect costs to the job
o Match indirect costs to their cost drivers
o Calculate POHR
o Allocate overhead costs to the job (multiply POHR by actual activity)
o Add direct & indirect costs
Traditional costing vs. activity based costing
• Uses broad averages to spread costs among products & services
• Some resources will not be consumed in proportion to the activity of the cost driver
• Product cost cross-subsidization: leads to over-costing & under-costing of products & services
o Zero-sum game (if you over-cost something, you are under-costing another)
o Over-costed products are subsidizing under-costed
Activity-Based costing (4 steps)
1. Group costs into cost pools
2. Choose cost driver – activity used to assign costs to objects
a. Try to group all costs associated with an activity together
3. Calculate pre-determined overhead rate (pool rate)
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Document Summary
Expense: the cost incurred when an asset is used up or sold for the purpose of generating revenue. Cost: the sacrifice made to achieve a particular purpose: product costs: costs of goods manufactured or the cost of goods purchased for resale. Income statement: sales revenue cogs = gross margin, gross margin sg&a = operating income. Income before taxes income tax expense = net income. Identify the job that is the chosen cost object. Chapter 9: budgeting steps (sales forecast production forecast operation budget financing/cash budget: sales forecast for each product, decide how much to produce, create operational budget, create financing/cash budget. Direct labor variance: 2 effects that contribute to standard cost variance: labor rate variance: Management by exception: focus on quantities & costs that differ from standard costs by a substantial margin. Investigate performance: mainly investigate unfavorable variances b/c need to make a change.
