Accounting Term

Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.

Managerial accounting is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.

- Assigning costs to cost objects
- Accounting for costs in manufacturing companies
- Preparing financial statements
- Predicting cost behavior in response to changes in activity
- Making decisions

- Costs that can be easily and conveniently traced to a unit of product or other cost object.
- Examples: direct material and direct labor

- Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
- Example: manufacturing overhead

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

1) Direct Materials
2) Direct Labor
3) Manufacturing Overhead

Direct labor costs are those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products.

Includes indirect materials and indirect labor costs that cannot be easily or conveniently traced to specific units of product.

The sum of direct materials and direct labor cost.

The sum of direct labor and manufacturing overhead.

Selling costs - Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.

Administrative costs - All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

Product costs includes all the costs that are involved in acquiring or making a product.

Product costs “attach” to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.

For manufacturing companies, product costs
include:
- Raw materials: includes any materials that go into the final product.
- Work in process: consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.
- Finished goods costs: consists of completed units of product that have not yet been sold to customers.

Variable costs
Fixed costs
Mixed costs

A cost that varies, in total, in direct proportion to changes in the level of activity.

A variable cost per unit is constant.

- 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.

We use an allocation base because:
- It is impossible or difficult to trace overhead costs to particular jobs.
- Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
- Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

- Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.

- Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.
- It is often overly-simplistic and incorrect to assume that direct-labor hours is a company’s only manufacturing overhead cost driver.
0 If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing.

Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.

A costing system used in situations where many different products, jobs, or services are produced each period.

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects.

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed using the following equation:
Predetermined overhead rate = Estimated total
manufacturing overhead cost ÷ Estimated total
amount of the allocation base

the process of assigning overhead costs to specific jobs using the following formula:
Overhead applied to a particular job = Predetermined overhead rate x Amount of allocation base incurred by the job

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

include any materials that go into the final product.

consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.

consist of completed units of product that have not been sold to customers.

includes the manufacturing costs associated with the goods that were finished during the period.

exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

In summary, there are two methods for disposing of underapplied and overapplied overhead:
- Close out to Cost of Goods Sold.
- Allocate between Work in Process, Finished Goods, and Cost of Goods Sold. (more accurate, but more complex to calculate)

- Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit product costs.
- Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
- The flow of costs through the manufacturing accounts is basically the same in both systems.

Job-Order = many different jobs during each period, with each job being unique
Process = single product is produced on a continuous basis or for long periods of time. All units are identical
Job-Order = costs are accumulated by individual job. Unit costs are computed by job on the job cost sheet.
Process = costs are accumulated by dept. Unit costs are computed by department

Any unit in an organization where materials, labor, or overhead are added to the product.

The activities are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous.

Typically flow in a sequence from one dept. to another.

- The cost of its ending work in process inventory
- The cost of its completed units that were transferred to the next stage of the production process

Weighted-average method
FIFO method (first in first out)

Process costing calculates unit costs by combining costs and outputs from the current and prior periods

The equivalent units of production for a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the department’s ending work in process inventory.

Direct labor and manufacturing overhead are often combined into one classification of product cost called conversion costs.

Defined as the product of the number of partially completed units and the percentage completion of those units.
Equivalent units need to be calculated because a department usually has some partially completed units in its beginning and ending inventories. These partially completed units complicate the determination of a department’s output for a given period, and the unit cost that should be assigned to that output.

Equivalent units = Number of partially completed units X Percentage completion

the product of the number of partially completed units and the percentage completion of those units with respect to the processing in the department. The equivalent units is the number of complete units that could have been obtained from the materials and effort that went into the partially complete units.

Operation costing is a hybrid of job-order and process costing because it possesses attributes of both approaches.

Operation costing is commonly used when batches of many different products pass through the same processing department.