1. Managerial Accounting
Review Session: key terms and concepts

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

3. 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.

4. 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.

5. 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

6. 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.

7. 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.

8. 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.

9. Cost Classifications for Predicting Cost Behavior

10. 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.

11. 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.

12. 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.

13. 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

14. 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.

15. 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.

16. 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

17. 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

18. 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

19. 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.

20. 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

21. 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

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

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

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

25. Using CVP to Analyze Different Cost Structures

26. 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

27. 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.

28. 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

29. 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