Managerial Accounting Review Session: key terms and concepts

Classifications of Costs Manufacturing costs are often combined as follows: Direct Materials Direct Labor Manufacturing Overhead Prime Cost Conversion Cost

Quick Check  Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks. B. Sales commissions. C. The cost of a flight recorder in a Boeing 767. D. The wages of a production shift supervisor.

Quick Check  Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks. B. Sales commissions. C. The cost of a flight recorder in a Boeing 767. D. The wages of a production shift supervisor. Ask what B and C would be. Then ask them to identify one DL, DM, OH cost in their company.

Product Costs Versus Period Costs Period costs are not included in product costs. They are expensed on the income statement. Product costs include direct materials, direct labor, and manufacturing overhead. Inventory Cost of Good Sold Expense Sale Balance Sheet Income Statement Income Statement

Quick Check  Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

Quick Check  Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.

Cost Classifications for Predicting Cost Behavior

Opportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

Sunk Costs Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Chapter 4 Many different products are produced each period. Products are manufactured to order. Cost are traced or allocated to jobs. Cost records must be maintained for each distinct product or job.

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms

Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Estimated total manufacturing overhead cost for the coming period POHR = Estimated total units in the allocation base for the coming period Ideally, the allocation base is a cost driver that causes overhead.

Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. Incurred during the period.

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Raw Materials Direct Materials Direct Materials Material Purchases Indirect Materials Mfg. Overhead Actual Applied Indirect Materials

Salaries and Wages Payable Overhead Applied to Work in Process Job-Order System Cost Flows Work in Process (Job Cost Sheet) Salaries and Wages Payable Direct Labor Direct Materials Indirect Labor Direct Labor Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Materials Overhead Applied to Work in Process Indirect Labor

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Direct Materials Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Direct Labor Overhead Applied Cost of Goods Sold Cost of Goods Sold

Assigning Costs Using Weighted-Average Costing Beginning Inventory 250 units 1,250 units 1,100 units completed 1,000 units started Ending Inventory 150 units Now let’s examine the five-step process.

Weighted Average Example Materials 1,000 Units Started Beginning Work in Process 250 Units 100% Complete Ending Work in Process 150 Units 100% Complete 850 Units Started and Completed 1,100 Units Completed 150 × 100% 150 Equivalent Units 1,250 Equivalent units of production

Weighted Average Example Conversion 1,000 Units Started Beginning Work in Process 250 Units 80% Complete Work to Complete Process 20% 250 Units Ending Work in Process 150 Units 33 1/3% Complete 850 Units Started and Completed 1,100 Units Completed 150 × .333% 50 Equivalent Units 1,150 Equivalent units of production

CVP: The Profit Equation (P × X) - [(V × X) + F] = (P – V)X – F =

Finding Target Volumes (units) = Fixed costs + Target profit Contribution margin per unit

Contribution margin ratio Break-Even in Units Let’s use the Hap Bikes information again. Contribution margin ratio

Using CVP to Analyze Different Cost Structures

Margin of Safety Excess of projected (or actual) sales over the break-even volume. The amount by which sales can fall before the company is in the loss area of the break-even graph. Sales Break-even volume sales volume – = Margin of Safety

Identifying Relevant Costs Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs. Unavoidable costs are never relevant and include: Sunk costs. Future costs that do not differ between the alternatives.

Quick Check  Colonial Heritage makes reproduction colonial furniture from select hardwoods. The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No

Quick Check  The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 tables