ACC 406 Chapter Notes - Chapter 2: Nabu, Ath, Horse Length
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ACC 406 – Introduction to Managerial Accounting
CHAPTER 2: Basic Managerial Accounting Concepts
1. Explain the meaning of cost and how costs are assigned to products and services.
Cost is the cash or cash-equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the
Managers use cost information to determine the cost of objects such as products, projects, plants and customers.
Cost vs. Price: Cost is what we pay for something and price is amount we charge our customers for our products or services.
Direct costs are traced to cost objects based on cause-and-effect relationships
Indirect (i.e. overhead) costs are allocated to cost objects based on assumed relationships and convenience.
2. Define the various costs of manufacturing products and providing services as well as the costs of selling and administration
One of the `most important cost objects of a company is its output. Two types of output are tangible products and services.
Products are goods that either are purchased or produced by converting raw materials through the use of labor and indirect
manufacturing resources, such as plants, lands and machinery. Services are tasks performed for a customer using an organizations
products or products or facilities.
Product costs are those costs, both direct and indirect, of acquiring a product in a merchandising business and preparing it for sale or of
producing a product in a manufacturing business. Product costs are classified as inventory on the balance sheet and then expense as as
cost of goods sold on the income statement when the inventory is sold.
Selling costs are the costs of marketing and distributing goods and services and administrative costs are the costs of organizing and
running a company.
Both selling and administrative costs are period costs,
3. Prepare income statements for manufacturing and service organizations.
The cost of goods manufactured (COGM) represents the total product cost of goods completed during the period and transferred too
finished goods inventory. The cost of goods sold (COGS) represents the cost of goods that were sold during the period, and therefore,
transferred from finished goods inventory to cost of goods sold. For a retailer, there is no COGM, and COGS equals the beginning
inventory plus net purchase minus ending inventory.
For manufacturing and merchandising firms, cost of goods sold is subtracted from sales revenue to arrive at gross margin. In addition, for
manufacturing firms, cost of goods manufactured must be first be calculated before calculating cost of goods sold
Service firms do not calculate gross margin because they do not purchase or produce inventory for sale and, as a result, do not have a cost
of goods sold (i.e. inventory expense).
All firms next subtract selling and administrative expenses to arrive at net income.
Summary of Important Equations
Total product cost: direct materials + direct labor + manufacturing overhead
Unit product cost = total product cost/number of units
Prime cost = direct materials +direct labor
Conversion cost = direct labor + manufacturing overhead
Direct materials used in production = beginning inventory of materials + purchases – ending inventory of materials
Costs of goods manufactured = direct materials used in production + direct labor used in production + manufacturing overhead costs
used in production + beginning WIP (Work In Progress) inventory – ending WIP inventory
Costs of goods sold = beginning finished goods inventory + cost of goods manufactured – ending finished goods inventory.
Accumulating costs: the way that costs are measured and recorded
Direct materials: those materials that are a part of the final product and can be directly traced to the goods being produced.
Direct labor: labor that can be directly traced to the goods being produced.
Manufacturing overhead: All product costs other than direct materials and direct labor.
Non product costs:
o Administrative costs: all cost associated with research, development and general administration of the organization that cannot
reasonably be assigned to either selling or production. E.g. executive salaries, legal fees, printing the annual report, etc.
o Selling costs: the costs necessary to market, distribute and service a product or service e.g. warehousing, shipping, advertising.
Expenses: as costs are used up in the production of revenues, they are said to expire costs. Expenses are expired costs.
Gross Margin: the difference between sales revenue and cost of goods sold
Cost Objects: any item such as a product, customer, department, project, geographic region, plant, etc. for which costs are measured and
Opportunity Cost the benefit given up or sacrificed when one alternative is chosen over another
Period Cost: costs that are expensed in the period in which they incurred; they are not inventoried.
Product Cost: costs associated with the manufacture of goods or the provision of services. Product costs include direct materials, direct
labor and overhead.
Work In Progress inventory: the cost of the partially completed goals that are still being worked on at the end of a time period