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Cost

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sacrificed resource to achieve a specific objective measured as the monetary amount that must be paid to acquire goods or services

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Actual Cost

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a cost that has occurred. Historical

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Budgeted Cost

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a predicted, future, cost

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Cost Object

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anything of interest for which a cost is desired Types: Product, service, project, customer, activity, department

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Direct Cost

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cost that can be conveniently and economically traced to a cost object; ex: tires, assembly line worker wages

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Indirect Cost

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costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner.; ex: electricity, rent(if the plant produces different types of cost objects), property taxes

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Manufacturing Costs

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Direct Materials, Direct Labor, Indirect Manufacturing (Overhead)

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Direct Materials

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acquisition costs of all materials that will become part of the cost object. Raw materials that become an integral part of the product and that can be traced to it conveniently.

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Direct Labor

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compensation of all manufacturing labor that can be traced to the cost object. TOUCH LABOR ex: wages paid to automobile assembly workers

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Overhead (Indirect Manufacturing)

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factory costs that are not traceable to the product in an economically feasible way. Indirect materials and Labor. Includes all manufacturing costs except direct materials and direct labor

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Indirect Materials

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materials used to support the production process: lubricants and cleaning supplies used in the assembly plant

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Indirect Labor

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wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards.

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Other examples of manufacturing overhead

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maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc.

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Nonmanufacturing Costs

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Selling Costs & Administrative Costs

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Selling Costs

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Costs necessary to secure the order and deliver the product. AKA order-getting & order-filling costs Examples: Advertising, shipping, sales commissions, sales travel, sales salaries, costs of finished goods warehouses.

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Administrative Costs

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include all executive, organizational, and clerical costs associated with the general management of an organization. Ex: executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall general administration of the organization as a whole.

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Inventoriable Costs(product Costs)(Manufacturing Costs)

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capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold. Include all costs that are involved in acquiring or making a product: direct materials, direct labor, and manufacturing overhead.

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Period Costs (nonmanufacturing costs)

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no future value and expensed in the period incurred. Include all selling and admin costs. Expenses on income statement in the period they occur

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Prime Costs

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a term referring to all direct manufacturing costs (materials and labor).

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Conversion Costs

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a term referring to direct labor and indirect manufacturing costs.

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Manufacturing Inventories

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Direct Materials, Work in Process, Finished Goods

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Direct Materials Inventory

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resources in-stock and available for use

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Work in Process Inventory

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products started but not yet completed, often abbreviated as WIP

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Finished Goods Inventory

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products completed and ready for sale

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Basic Equation for Inventory Accounts

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beginning balance+additions to inventory=ending balance+withdrawals from inventory

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Manufacturing Cost Flows

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Part I All raw materials, work in process, and unsold finished goods at the end of the period are shown as inventoriable costs in the asset section of the balance sheet. Part II As finished goods are sold, their costs are transferred to cost of goods sold in the income statement. Part III Selling and administrative expenses are not involved in making the product; therefore, they are treated as period costs and reported in the income statement for the period the cost is incurred.

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Cost Behavior

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Variable Costs & Fixed Costs Costs are fixed or variable only with respect to a specific activity or a given time period.

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Variable Costs

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changes in total in proportion to changes in the related level of activity or volume. constant on a per-unit basis

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Fixed Costs

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remain unchanged in total regardless of changes in the related level of activity or volume. change inversely with the level of production

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Cost Driver

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a variable that causally affects costs over a given time span

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Relevant Range

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The band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost For example, fixed costs are considered fixed only within the relevant range.

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Financial Accounting

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measures and records business transactions and provides financial statements to external users including investors, creditors, and governmental agencies. Purpose:Communicate financial position to outsiders Primary Users: External users Past oriented Rules: GAAP compliant, CPA audited Time Span: annual and quarterly reports Behavior Issues: Indirect effects on employee behavior (effect on management-most of their wages are reflective of company performance)

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Managerial Accounting

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measures, analyzes, and reports financial and nonfinancial information to help managers make decisions (planning and strategic decisions) to fulfill organizational goals. Purpose: decision making Primary users: internal managers Future oriented Rules: no need to follow GAAP. Time span: ultra current to very long time horizons Behavioral Issues: designed to influence employee behavior

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Cost Accounting

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measures, analyzes, and reports financial and nonfinancial information relating to the costs of acquiring or using resources in an organization. (input into management accounting)

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Managers Responsibilities

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Decision Making: Planning, Directing, Controlling

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Planning

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identify alternatives, select alternative that does the best job furthering organizations objectives, develop budgets (prepared annually under the direction of the controller) to guide progress toward the selected alternative

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Budget

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the quantitative expression of a plan. most important planning tool

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Directing

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means overseeing the company's day-to-day operations. Management uses product cost reports, product sales information, and other managerial accounting reports to run daily business operations.

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Controlling

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means evaluating the results of business operations against the plan and making adjustments to keep the company pressing toward its goals. Comparing budgeted sales with actual sales to take corrective actions Comparing budgeted product costs against actual product costs to take corrective actions

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Role of Management Accounting

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To identify, collect, measure, analyze, and disseminate/report information to managers to aid them making decisions while they plan, direct, and control operations.

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Value Chain

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is the sequence of business functions in which customer usefulness is added to products or services. consists of: Research & development Design Production Marketing Distribution Customer service

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Controller

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The chief managerial and financial accountant is responsible for: Supervising accounting personnel. Preparation of information and reports, managerial and financial. Analysis of accounting information. Planning and decision making

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Treasurer

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Responsible for raising capital and safeguarding the organization's assets. Supervises relationships with financial institutions. Work with investors and potential investors. Manages investments. Establishes credit policies. Manages insurance coverage.

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Internal Auditor

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Responsible for reviewing accounting procedures, records, and reports in both the controller's and the treasurer's area of responsibility. Expresses an opinion to top management regarding the effectiveness of the organization's accounting system.

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Cost Pool

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any logical grouping of indirect costs items. range from broad to narrow

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Cost Allocation Base

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a cost driver that is use as a basis upon which to build a systematic method of distributing indirect costs

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Costing Approaches

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Actual Costing & Normal Costing

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Actual Costing

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allocates: indirect costs based on the actual indirect costs rates times the actual activity consumption. allocate direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption.

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Normal Costing

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allocates: indirect costs based on the budgeted indirect cost rates times the actual activity consumption. allocate direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption.

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Product Costing Systems

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Process Costing & Job-Order Costing

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Process Costing

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A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit (average cost system)

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Job-Order Costing

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Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

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Hybrid-costing Systems

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blends characteristics from both job costing and process costing systems

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Seven Step Job Costing

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1.Identify the job that is the chosen cost object. 2.Identify the direct costs of the job. 3.Select the cost-allocation base(s) to use for allocating indirect costs to the job. 4.Match indirect costs to their respective cost-allocation base(s). 5.Calculate an overhead allocation rate: budgeted man. overhead rate=budgeted man. overhead costs/budgeted total quantity of cost-allocation base 6.Allocate overhead costs to the job: Budgeted Allocation Rate X Actual Base Activity For the Job 7.Compute total job costs by adding all direct and indirect costs together.

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Accounting for Overhead

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Actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts. 1. If Actual Overhead > Overhead Allocated, this is called Underallocated Overhead 2. If Actual Overhead < Overhead Allocated, this is called Overallocated Overhead This difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methods. The choice of method should be based on such issues as materiality, consistency, and industry practice.

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Three Methods for Adjusting over/under applied overhead

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Adjusted allocation rate approach, proration approach, write-off approach

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Adjusted Allocation rate approach

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all allocations are recalculated with the actual, exact allocation rate.

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Proration approach

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the difference is allocated among ending work-in-process inventory, finished goods inventory, and cost of goods sold based on their relative sizes.

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Write-off approach

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the difference is simply written off to cost of goods sold.

Accounting 307-Cost Accounting – Flashcards

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