SOS AFM 102 Midterm Package.pdf

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University of Waterloo
Accounting & Financial Management
AFM 102
Robert Ducharme

CHAPTER 2 COST TERMS CLASSIFICATIONS and CONCEPTSProduct cost all costs involved in purchasing or manufacturing of goods o Includes direct materials direct labour manufacturing overheado Also called inventoriable costso Costs are attached as inventory and are expensed when the good is sold as cost of goods sold Period cost Costs taken directly to income statement as expense in period they are incurredo Selling and administrative expenses Is it directly the result of productacquision or manufacturingYesNoManufacturing NonManufacturing or Productor Period Cost Cost Direct Materials Direct Labour Manufacturing overhead Markeng or Selling Costs Administrave Costsmaterials that can beLabour cost that can beIndirect materialindirectAll costs necessary toAll costs associated with physically and conveniently physically and conveniently labour cost factory ulies secure order and get the general managementtraced to the produc traced to the productdepreciaon of factory produc in customer hands of the company as a sales commission whole depreciaon of depreciaon of delivery oce building excuveequipment shipping costs compensaon Conversion Cost Prime CostCost ClassificationsThe Balance Sheet o Raw materials inventory direct materials which have been used to make product but have not been placed into productiono Work in process inventory partially completed products require some work before being sold o Finished goods complete units of productso For a merchandising company the basic equation for an inventory account Beginning balanceadditions to inventoryEnding balanceWithdrawals from inventoryThe Income Statement o Cost of goods manufactured COGMcosts that include the direct materials direct labour and manufacturing overhead used for the products finished during the periodo Calculated by DMDLManufacturing overhead Total Manufacturing cost SCHEDULE OF COST OF GOODS MANUFACTUREDSchedule of cost of goods manufactured shows direct material direct labour and manufacturing overhead costs incurred fora period and assigned to WIP and FG o Total manufacturing cost is the sum of these three cost elements COGM however is only for the completed goodso Total manufacturing costbeginning work in process inventory ending work in process inventoryCOGM Cash FlowsProduct cost o Expenditure is incurredrecorded in balance sheet as an asset inventoryis expensed and recorded in the income statement cost of goods soldDirect materials are recorded in raw materials inventoryDirect labour and manufacturing overhead is a part of work in process inventory When goods are finished recorded in finished goods inventory Period cost o Expenditure is incurred is expensed and recorded in the income statement selling and administrative expense Selling and administrative expenditure is recorded as selling and admin expense Cost Classifications for Predicting Cost BehaviourCost behavior the way in which costs react to changes in the level of activity Variable cost varies proportionately to changes in level of activityo Consistent at a per unit basiso Ie direct materials varies directly with units commission shipping costs cost of goods soldFixed costs constant regardless of changes in the level of activityo Costs are said to be fixed only within a relevant range a range in which assumptions are valid o Changes if large change in level of activity or outside factors influenceo Average fixed cost per unit decreases as number of units increases decreases because spread over more products o Ie straight line depreciation insurance Mixed cost has both variable and fixed cost component o Ie wages the fixed portion is the amount paid every month and the commission is the variable portion shipping Cost Classifications for Assigning Costs to Cost Objects Cost object anything for which cost data are desired Direct cost a cost that can be traced to the object under consideration o Cost must be caused by the cost object ie a product under consideration Indirect cost a cost that cannot be easily and conveniently traced to the object under consideration Common cost cost incurred to support cost objects but cannot be traced directly to product o An indirect costCost Classification for Decision Making Differential cost a difference in cost between any two alternatives o Incremental cost an increase in cost between two alternativeso Decremental cost a decrease in cost between two alternativeso Can be either a fixed or variable cost o When decision making only differences between alternative decisions are relevant constant costs should not affect the decision Differential revenue a difference in revenue between any two alternatives
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