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Managerial Accounting Ch02 by Needles, Chapter Outline

Managerial Accounting Ch02 by Needles, Chapter Outline

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CHAPTER 2
Cost Concepts and Cost Allocation
00001
REVIEWING THE CHAPTER
Objective 1: Describe how managers use information about costs.
10.Because costs affect profitability, having accurate and up-to-date cost information isimportant to managers in all types of for-profit organizations. Managers in manufacturing,retail, and service businesses use information about operating costs to plan, perform,evaluate, and communicate the results of operating activities.a0.In the planning stage, managers develop budgets and estimate selling prices for goodsor services based on estimates of operating costs. b0.In performing operating activities, managers use cost information in several ways,including estimating the profitability of a product or service, deciding whether to dropa product line or service, and determining selling prices.c0.When managers evaluate performance, they want to know about significant variances between estimated costs and actual costs. Such variances help them ascertain thereasons for cost overruns, which may enable them to avoid such problems in thefuture.d0.In external reports, managers expect income statements that communicate the actualcost of operating activities and balance sheets that show the value of inventory. Theyexpect internal reports that summarize their plans, summarize performance outcomes,and evaluate variances.
Objective 2: Explain how managers classify costs and how they use these cost classifications.
20.A single cost can be classified in several ways: by cost traceability, by cost behavior, bywhether it is value-adding or nonvalue-adding, and by whether it is a product cost or a period cost.30.By tracing costs to cost objects, such as products or services, managers can obtain a fairlyaccurate cost measurement on which to base decisions about pricing and about reallocatingresources to other cost objects.a0.
Direct costs
are costs that can be conveniently or economically traced to a specificcost object. The wages of production workers, which can be directly traced to anindividual product, are an example. b0.
Indirect costs
are costs that cannot be conveniently or economically traced to a costobject. Rivets used in the production of airplanes and glue used in the production of furniture are examples. Although difficult to trace, indirect costs must be included inthe cost of a product or service; to do so, managers use a formula to assign them to acost object.40.Cost behavior is the way costs respond (or do not respond) to changes in volume or activity.A cost that changes in direct proportion to a change in productive output (or to any other measure of volume) is a
variable cost
. A
fixed cost
is one that remains constant within a
 
defined range of activity or time period. By analyzing cost behavior, managers can calculatethe number of units that must be sold to obtain a certain level of profit.50.A
value-adding cost
is the cost of an activity that increases the market value of a product or service—that is, the value as perceived by the customer. For example, if customers arewilling to pay more for a product made of a better material, the company’s cost of using thatmaterial in its product is a value-adding cost. A
nonvalue-adding cost
is the cost of anactivity that adds cost to a product or service but does not increase its market value. Such acost may, however, be necessary. For example, the accounting department is necessary for the operation of a business, but it does not add value to a business’s product or service. Byclassifying costs as adding value or not adding value, managers can eliminate the costs of nonvalue-adding activities that are not essential to the business and try to reduce the costs of those that are essential.60.For financial reporting purposes, managers classify costs as product costs or period costs.a0.
Product costs
(also known as
inventoriable
costs) are costs assigned to inventory.They include the three elements of manufacturing cost: direct materials, direct labor,and overhead. Product costs appear on the income statement as cost of goods sold andon the balance sheet as finished goods inventory. b0.
Period costs
(also called
noninventoriable
costs) are the costs of resources usedduring the accounting period and not assigned to products. They appear as operatingexpenses on income statement. Period costs appear as expenses on the incomestatement in the period in which they are incurred—for example, selling,administrative, and general expenses.
Objective 3: Compare how service, retail, and manufacturing organizations report costs ontheir financial statements and how they account for inventories.
70.A manufacturer prepares a
statement of cost of goods manufactured
so that the cost of goods sold can be summarized in the income statement. The example that follows illustratesthe three steps involved in preparing a statement of cost of goods manufactured.a0.First, the cost of direct materials used must be found.Beginning balance, materials inventory$100Add direct materials purchased (net)350Cost of direct materials available for use$450Less ending balance, materials inventory200Cost of direct materials used$250(1) b0.Second, total manufacturing costs must be computed.Cost of direct materials used (computed in section
a
)$ 250(1)Add direct labor costs900Add total overhead costs750Total manufacturing costs$1,900(2)c0.Third, the cost of goods manufactured must be computed.Total manufacturing costs (computed in section
b
)$1,900(2)Add beginning balance, work in process inventory400Total cost of work in process during the period$2,300Less ending balance, work in process inventory700Cost of goods manufactured$1,600(3)
 
80.When the figure for the cost of goods manufactured has been computed, it can betransferred to the cost of goods sold section of the income statement, as follows:Beginning balance, finished goods inventory$1,250Add cost of goods manufactured (computed in section
c
)1,600(3)Total cost of finished goods available for sale$2,850Less ending balance, finished goods inventory300Cost of goods sold$2,55090.Because the operations of service, retail, and manufacturing organizations differ, their financial statements differ as well. Because a service organization sells services, not products, it has no inventory account on its balance sheet. The cost of sales on its incomestatement reflects the net cost of the services sold. A retail organization, which purchases products ready for resale, maintains only one inventory account on its balance sheet. Calledthe Merchandise Inventory account, it reflects the costs of goods held for resale. The cost of goods sold on a retail organization’s income statement is simply the difference between thecost of goods available for sale and the ending merchandise inventory. A manufacturingorganization, because it creates a product, maintains three inventory accounts on its balancesheet: Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. Itscost of goods sold equals the cost of goods available for sale minus ending finished goodsinventory.
Objective 4: Describe the flow of costs through a manufacturer’s inventory accounts.
100.A manufacturer maintains a
Materials Inventory account,
a
Work in Process Inventoryaccount,
and a
Finished Goods Inventory account.
The balance in the Materials Inventoryaccount shows the cost of goods purchased but unused. The balance in the Work in ProcessInventory account shows the costs assigned to partially completed products. The balance inthe Finished Goods Inventory account shows the costs of products completed but not yetsold.110.Accountants track manufacturing costs and make changes in account balances by referringto the source documents that accompany the flow of costs through the production process.a0.The purchasing process begins with a
 purchase request 
for materials. If the materialsare not on hand, the purchasing department sends a
 purchase order 
to a supplier. A
receiving report 
documents the arrival of the materials. The company then receives a
vendor’s invoice
for payment for the materials. The costs of these materials increasethe balance in the Materials Inventory account. b0.As production begins, the storeroom clerk receives an authorized
materials request  form
specifying which materials are to be sent to the production area. The cost of thedirect materials transferred to production increases the balance of the Work in ProcessInventory account, and the cost of the indirect materials transferred increases the balance of the Overhead account. The costs of both types of materials decrease the balance of the Materials Inventory account.
Time cards
are used to record productionemployees’ hours; the cost of their labor increases the Work in Process Inventoryaccount. A
 job order cost card 
records all costs incurred as the products move through production.c0.The cost of completed products decreases the balance of the Work in ProcessInventory account and increases the balance of the Finished Goods Inventory account.When a product is sold, a clerk prepares a
 sales invoice
. A
 shipping document 
showsthe quantity of goods shipped and gives a description of them. As products are sold,

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