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Chapter 2

Chapter 2 - ACTG 2020.docx

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ACTG 2020
Sylvia Hsingwen Hsu

Chapter Two – Managerial Accounting - Cost is used in many different ways - To carry out the main functions: planning, motivation/directing, and control, managers need information – which ties to COSTS General Cost Classifications - Focus is on manufacturing companies Manufacturing Costs - Three categories: direct materials, direct labour, and manufacturing overhead - Direct Materials: o Materials going into final product = raw materials (any materials used in the final product and finished product of one company can become raw materials of another)  Ex. Car batteries is raw material for BMW o Can include both direct and indirect materials  Direct materials: integral part of the finished product and is traceable  Indirect Materials: (ex. Glue used in shoes) are included in manufacturing overhead as a result  NOT TREATED AS DIRECT MATERIALS BECAUSE COSTS OF DIRECTLY TRACING THEM TO FINISHED PRODUCT IS > THAN BENEFITS OF DOING SO - Direct Labour: o Labour costs easily *physically and conveniently* traced to individual units of product o Called touch labour – since direct labour workers typically touch product while it is being made  Ex. Costs of assembly-line workers at a company o Labour costs which cannot be physically traced – indirect labour and goes into mfting overhead along with indirect mtls - - labour costs of janitors, supervisors, materials handlers, and security guards o Because of increased automation direct labour averages only about 10% of sales revenue in many manufacturing industry – minor element of cost o Still recognized as a separate cost category - Manufacturing Overhead: o 3 element of mfting costs, includes all costs of mfting except direct materials and direct labour o Includes maintenance and repair on production equipment, depreciation, insurance, heat and light, INDRIECT MTLS and INDIRECT LABOUR o ^^regards to this: only costs associated with operating the production facility are in the manufacturing overhead category o Manufacturing overhead combined with direct labour is called conversion cost stems from fact that direct labour and overhead costs are incurred to convert materials into finished products*** o Direct labour with direct materials is called prime cost – which groups two types of direct costs into one category Classification of Labour Costs of Manufacturing - Idle time can be either direct or overhead o Direct if the time being idle relates to the production process o Indirect if time being spent idle is waste-mon stuff - Overtime premium o Extra hourly wage rate paid to production workers who must work above their normal time requirements o A job specific reason would dictate a direct job cost whereas normal overtime cost resulting from general conditions would dictate an overhead (indirect) charge to all jobs completed during the peak period o So if base rate is $20, and overtime = 1.5x, then overtime premium = $10 bucks - Employee benefits like employment taxes, medical plans, and pension costs are specific % of base pay o Benefit costs for indirect labour would obviously be classified as indirect overhead o But employee costs for direct labour are added to the base direct labour rate in calculating a total direct labour cost including benefits*** Non-Manufacturing costs - 2 categories: marketing/selling OR administrative - Marketing/Selling: all costs necessary to secure customer orders and get the finished product or service to the customer – called ‘order-getting and order-filling costs’ - advertising, sales travel, sales commission, and cost of finished of goods - Administrative: executive, organizational, and clerical costs associated with general management of an orgs rather than with manufacturing, marketing, or selling - - ex. Exec compensation, accounting, secretarial costs, etc Product costs vs period costs - Matching principle: based on accrual concept and states that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized - So expense incurred to sell something is recognized at the same time that the product is sold – this is a PRODUCT COST Product Costs - All costs involved in acquiring or making product - Costs for mfting co: cost of direct materials, direct labour, and mftin overhead - Product costs attach to units of product as goods produce and remain ‘attached’ until good sold - Taken out as COGS and cr inventory - Also known as inventoriable costs - Product costs aren’t necessarily treated as expenses in the period in which they’re incurred; instead treated as expenses in which the related products are sold – so direct materials may be incurred as a cost during one period but expensed later when completed product is sold - - thus, product costs will be present in inventories and COGS Period costs - All of the costs that aren’t included in product costs – expensed on income statement in pd in which they are incurred, using the usual rules of accrual actg - Not included as part of cost of purchased or mfting goods - Commissions or advertising aren’t included as part of cost of purchased or mfted goods but instead treated as expenses on income statement in which they are incurred - All selling and administrative expenses are considered to be period costs - SOOO: non-manufacturing costs (both types) = period costs  Side NOTE: ASK YOURSELF FIRST: is it a manufacturing cost or not? - -helps to classify the sort of cost we’re dealing with  Ex. Delivery can be either selling (under non-manufacturing) OR can be product cost Cost classification on financial statements - F/S prepared by manufacturing and merchandising companies - By manufacturing: more complex cause the co must account for the production of its goods as well as marketing for them o Merchandising co’s simply buy goods from suppliers and resell them to customers The Balance Sheet - Merchandising co only has one type of inventory – awaiting for resale (merchandise inventories) - Manufacturing – three: raw, WIP, and finished goods - Summary of cost terms*** -
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