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WEEK 1: INTRODUCTION AND COST BEHAVIOR [+] COST CLASSIFICATIONS - Begin study of managerial accounting by focusing on tools and

approaches th at are useful for internal users of financial statements. - Managerial accounting functions are planning, directing, motivating, and co ntrolling. - We will dicuss tools and approaches that can be used by managers in perform ing these functions. ||||| - COST is the name of the game in managerial accounting. - We can classify costs regarding function -- manufacturing, selling, adminis trative, or financial. - We can classify costs regarding the objective of the expenditure (according to the goods and services purchased) -- wage expense, rent expense, supply expe nse. - We can also classify costs regarding the controllability of the cost. In ot her words, can managers of a particular segment influence the amount of the cost within a specific period - variable and fixed? - Alternatively, we can classify costs regarding their traceability to a part icular finished unit of production, and as inventoriable or non-inventoriable (p roduct or period). ||||| - In a cost system, costs are accumulated by classification and then accumula ted by objective. * For example, we can separate m anufacturing costs into variable, fixed, an d mixed. Then we can accumulate the costs related to products A, B, and C. - Through the use of a cost system, management determines such things as whic h product to make or discontinue, when to manufacture a component or purchase it , what price to charge for a product, whether a department should be expanded, w hich manager should be promoted, and what happens if 1,000 more units are sold o r produced. - There is a common theme: "What will happen to financial results if volume, prices, and/or costs are changed?" ||||| - PRODUCT COST * Product costs are incurred to produce a product or service. * They are inventoriable and are expensed through the Cost of Goods Sold. - DIRECT vs. INDIRECT COSTS * Costs can also be classified based on their relationship to certain cost o bjectives. Examples of cost objectives include departments, products, and territ ories. In terms of cost objective, costs will be either direct or indirect. * Direct costs are costs that can be directly traced to a specific cost obje ctive. Direct costs will include costs like raw materials and direct labor (dire ct labor includes wages that are paid to employees who do the actual labor to pr oduce products, and the labor can be directly traced to products). * Indirect costs cannot be traced to a specific product (or cost objective). Factory overhead represents an indirect cost. Overhead includes rent, utilities , depreciation, insurance, property taxes, and supervisory salaries. These costs are not identified with the manufacture of particular products, but rather are common to the firm's overall business activities. * Categorizing costs as direct or indirect depends on the cost objective. Fo r example, if a particular production area produces three products and has one s upervisor's salary is an indirect cost for the various products. However, if the corporation was categorizing costs for the various factories, then the supervis or's salary would be a direct cost. - PRODUCT vs. PERIOD COSTS * Product costs for a manufacturer would include costs incurred to manufactu re a product (direct materials, direct labr, and manufacturing overhead). Produc t costs for a reseller (i.e., wholesaler or retailer) would include the cost of

purchasing the products. When a product is sold, the cost of the product that wa s sold will be shown on the income statement as cost of goods sold. After produc tion and prior to the sale, these costs appear on the balance sheet as inventory . * Period costs are costs that are not incurred to purchase or produce produc ts. Instead, period costs are expenses that are incurred during an operating per iod and are not tied to the production or purchase of goods. Examples of period costs include advertising and marketing expenses, administrative salaries, rent, and insurance. Period costs appear in the general and administrative section of the income statement. * Product costs can be further broken down into two more categories - prime costs and conversion costs. ** Prime costs are the direct costs of production. They would be the direc t materials and direct labor costs. ** Conversion costs are composed of items involved in the conversion of th e materials into the product -- direct labor and manufacturing overhead. ||| NOTE: Costs can be classified in more than one category. For example, raw ma terial costs are variable (they vary in direct proportion to the quantity of goo ds manufactured), direct (they are directly related to the product being produce d), and product costs. [+] MANUFACTURING VS. MERCHANDISING - There is a key difference in the way that manufacturers and merchandisers a ccount for inventory. The cost of inventory, or product cost, for merchandisers would be the cost of the goods that were purchased for the resale. For example, the cost of the Gap's inventory consists of the price that it pays for the cloth ing and accessory items that it sells. When items are sold, their costs are tran sferred from inventory on the balance sheet to the Cost of Goods Sold on the inc ome statement. - For manufacturing firms, the Cost of Goods Sold consists of the following t hree manufacturing costs: * 1. Direct Materials -- the cost of all materials that are purchased and us ed in the manufacture of the product. * 2. Direct Labor -- the wages of employees who manufacture the products, li ke assembly line workers. * 3. Indirect Manufacturing (Overhead) -- all costs of production other than direct materials and direct labor, for example, utilities, supplies, supervisor s' salaries, property taxes, rent, insurance, and depreciation. - The Cost of Goods Sold algorithm for a manufacturing company is below. * Beginning Finished Goods Inventory * + Cost of Goods Manufactured * = Goods Available for Sale * - Ending Finished Goods Inventory * = Cost of Goods Sold - There are actually three types of inventories for manufacturing firms. * The raw materials inventory is similar to the merchandise inventory of a r etail firm in that it is purchased from an outside supplier. * The Work in Process Inventory includes all of the costs applicable to unit s that have been started into production but are only partially completed. This would include raw materials, direct labor, and allocated overhead. * Finally, the Finished Goods inventory includes all costs related to the pr oduction of the finished products awaiting sale. - The following chart shows how the costs flow. * Raw Materials Inventory --.. * ..----> Work in Process Inventory --.. * ..---> Finished Goods Inventory --.. * ..---> Cost of Goods Sold |||| OVERHEAD - Overhead consists of indirect costs associated with the manufacturing proces s.

* Included are such things as indirect materials, indirect labor, depreciat ion on factory buildings and equipment, insurance on production workers and the factory building and machinery, property or inventory taxes, and maintenance o f actory buildings or machinery. * These costs are termed to be indirect since it would be too costly to dir ectly relate them to the production of a particular unit or product. * The allocation of overhead costs become extremely difficult and is a larg e topic in advanced cost accounting courses. |||| COST OF GOODS MANUFACTURED AND COST OF GOODS SOLD - The cost of goods manufactured represents the total cost of goods produced d uring a period of time, e.g., a month, quarter, or year. * As we have learned, prduct costs, as opposed to period costs, are the foc us in this calculation. So, we need to know or compute the direct materials used , total direct labor, total manufacturing overhead applied (based on predetermin ed overhead rate), beginning work-in-progress, ending work-in progress, and the total cost of goods completed and transferred to finished goods inventory. - The total cost of goods manufactured for the period then flows into the cost of goods sold section of the income statement. Recall that, insted of the purch ases amount that is part of the cost of goods sold for a retail operation, the c ost of goods manufactured is used for a manufacturing concern. [+] PREDICTING COST BEHAVIOR [+] COST CONCEPTS FOR DECISION MAKING [+] COST BEHAVIOR [+] INCOME STATEMENT