CHAPTER 2: THE PRODUCTION PROCESS
) Lower overall production cost
Manufacturing companies
-take raw materials and produce new
products from them.
Merchandising companies
-sells products that someone else has
manufactured.
Service companies
-do not sell a tangible product as their
primary business.
Manufacturing in a traditional
Environment
-traditionally, the factory of a
manufacturing company was organized with
similar machines grouped together.
Raw materials Inventory
-inventory of the materials needed in the
production process but note yet moved to
the production area.
Finished-Goods Inventory
-inventory of finished products waiting
for sale and shipment to customers.
Work In Process (WIP) Inventory
-inventory of unfinished product (in other
words, what is left in the factory at the
end of the period).
Lean Production
-a system focused in eliminating waste
associated with holding more inventory
than required, making more product than
needed, overprocessing a product, moving
products (and people) further that
required and waiting.
Just-In-Time (JIT) Manufacturing
-the philosophy of having raw materials
arrive just in time to be used in
production and for finished goods
inventory to be completed just in time to
be shipped to customers.
Benefits of Lean production & Jit
manufacturing:
1.) Reduce scape and scrap
2.) Improved product quality
3.
(although the cost of raw materials may
increase in some cases)
4.) Lower labor costs
5.) Reduced inventory
6.) Reduced processing time
7.) Increased manufacturing flexibility
Direct Materials
-are defined as materials that can be
directly and conveniently traced to a
particular product or other cost object
and that become an integral part of the
finished products.
(Various materials that can be directly
and conveniently traced to a product.)
Direct Labor
-labor cost assembly-line workers.
Manufacturing Overhead
-indirect materials and labor and any
other expenses related to the production
of products but not directly traceable to
the specific product.
-Indirect labor such as factory
maintenance, workers and factory janitors.
(other factory cost)
-includes both indirect materials and
indirect labor.
Manufacturing cost
-are incurred in the production facility.
-also called Production cost or
inventoriable costs because they attach to
the products as they go through the
manufacturing process.
Indirect materials
-materials used in the production of
products but not directly traceable to the
specific product.
Indirect labor
-labor used in the production of products
but not directly trace traceable to the
specific product.
Product costs
-costs that attach to the products as they
go through the manufacturing process; also
called inventoriable costs.
Non-manufacturing costs
-costs that include selling and
administrative costs.
-called period costs
Period costs
-costs that are expensed in the period
incurred; attached to the period as
opposed to the product.
Actual costing
-a product costing system in which actual
overhead costs are entered directly into
work in process.
-This system of product costing using the
actual overhead cost incurred is called
Actual costing.
Normal costing
-a product costing system in which
estimated or predetermined overhead rates
are used to apply overhead to work in
process.
-Most companies use a system of product
costing called Normal costing.
CHAPTER 3: COST BEHAVIOR
-As production volume changes, some costs
may increase or decrease and other cost
may remain stable, but specific cost
behave in predictable ways as volume
changes.
Fixed cost
-are costs that remain the same in total
but vary per unit when production volume
changes.
Cost behavior
-how costs react to changes in production
volume or other levels of activity.
Relevant range
-is the normal range of production that
can be expected for a particular product
and company.
Step costs
-costs that vary with activity in steps
and may look like and be treated as either
variable costs or fixed costs; step costs
are technically not fixed costs but may be
treated as such if they remain constant
within a relevant range of production.
Mixed costs
-costs that include both a fixed and a
variable component, making it difficult to
predict the behavior of a mixed cost as
production changes unless the cost id
first separated into its fixed and
variable components.
R square (R2)
-a measure of goodness of fit (how well
the regression line “fits” the data).
Absorption (full) costing
-a method of costing in which product
costs include direct materials, direct
labor, and fixed and variable overhead;
required for external financial statements
and for income tax reporting.
Variable (direct) costing
-a method of costing in which product
costs include direct materials, direct
labor, and variable overhead; fixed
overhead is treated as a period cost;
consistent with CVP’s focus on cost
behavior.
Advantages of Variable Costing
-changes in production and inventory
levels do not impact the calculation of
points.
-variable costing focuses attention on
relevant products. That is, attention is
focused on variable products costs, which
are often unavoidable.
-under variable costing, cost behavior is
emphasized and fixed costs are separated
from variable costs on the income
statement.
-variable costing is consistent with the
use of variance analysis, an important
tool used to manage a business.
-variable costing income is more closely
aligned with a company’s cash flows.
CHAPTER 4: JOB COSTING, PROCESS overhead for a cost pool by the estimated
COSTING, & OPERATIONS COSTING units of the cost driver.

Overapplied overhead
Job costing
-the amount of applied overhead in excess
-a costing system that accumulates,
of actual overhead.
tracks, and assigns costs for each job
produced by a company.
Underapplied overhead
-the amount of actual overhead in excess
Process costing
of applied overhead.
-a costing system that accumulates and
tracks costs for each process performed
Material costs
and then assigns those costs equally to
-as materials are drawn from the raw
each unit produced.
materials inventory storeroom, the costs
are traced to processing departments
Operations costing rather than individual jobs.
-a hybrid of job and process costing; used
by companies that make products in Equivalent units
batches. -the number of finished units that can be
made from the materials, labor, and
Fringe benefits overhead included in partially completed
-payroll costs in addition to the basic units.
hourly wage.

Idle time
-worker time that is not used in the
production of the finished product.

Overtime premium
-an additional amount added to the basic
hourly wage owing to overtime worked by
the workers.

Allocation
-the process of finding a logical method
od assigning overhead costs to the
products or services a company produces or
provides.

Cost drivers
-factors that cause, or drive, the
incurrence of costs.

Cost pools
-groups of overhead costs that are
similar; used to simplify the task of
assign costs to products using ABC
costing.

Normal costing
-a method of costing using an estimate of
overhead and predetermined overheard rates
instead of the actual amount of overhead.

Predetermined overhead rates

-used to apply overhead to products;
calculated by dividing the estimated