Managerial Accounting Ch. 2

Front 1

What are some characteristics of service companies? What accounts do they have/don't have?

Back 1

- Sell intangible services
- Make up 55% of US workforce.
- Don't have Inventory or COGS.
- Majority of their costs go to labor.

Front 2

What are characteristics of merchandising companies? What accounts do they have/don't have?

Back 2

- Resell tangible products they buy from suppliers.
- Include retailers and wholesalers.
- One inventory account.

Front 3

What are characteristics of manufacturing companies? What accounts do they have/don't have?

Back 3

- Convert raw materials into finished products.
- Sell products to retailers/wholesalers.
- 3 types of inventory: raw materials, work in process, and finished goods.

Front 4

Name the parts of the value chain and describe them.

Back 4

1. Research & Development - research and develop products and the processes for producing them.
2. Design - engineering of products and the processes for producing them, the style of the product to fit customers' needs.
3. Production - resources used to produce a product, includes raw materials, labor, and MOH.
4. Marketing - promotion and advertising of products. Also includes dealerships.
5. Distribution - delivery of products to customers.
6. Customer Service - support for customers AFTER the sale, warranties.

Front 5

What is a cost object, indirect cost, and direct cost? Do you trace or allocate them?

Give examples

Back 5

Cost object - anything for which managers want a separate measurement of cost. Ex) Individual products (Xterra/Pathfinder), strategies, geographic segments, and departments.

Direct cost - can be traced to a cost object. Trace. Ex) If an Xterra is the cost object, then tires is a direct cost.

Indirect cost - cannot be traced to the cost object. Allocate. Ex) MOH costs

Front 6

What is the difference between period costs and inventoriable product costs? (Manufacturing and merchandising firms)

Back 6

Both add up to the full product cost (full product cost is not allowed on financial statements)

Period cost - costs of the value chain excluding production. AKA operating costs. Expensed when they are incurred.

Inventoriable product cost - costs incurred during the "production or purchases" stage of the value chain. Treated as inventory and then expensed through COGS when sold.

Front 7

What is included in merchandising companies' inventoriable product cost?

Back 7

- Cost of purchasing the inventory from suppliers
- Freight-in costs (costs to get products to the merchandiser)
- Import duties or tariffs (if any)

Front 8

What is included in manufacturing companies' inventoriable product cost?

Back 8

- Direct materials
- Direct labor (assembly workers, machine operators, technicians, etc.)
Manufacturing Overhead (MOH) - includes indirect costs of production, cannot be traced to individual product. Includes indirect material (janitorial supplies, oil for machines), and indirect labor (forklift operators, security, janitors, supervisors)
- Other MOH - insurance & depreciation on plant, property taxes, plant repairs, plant utilities.

Front 9

What is the difference between a prime cost and a conversion cost?

Back 9

Prime costs = direct materials + direct labor

Conversion costs = MOH + direct labor

Front 10

How do you find operating income for a service company?

Back 10

Revenues - Operating expenses (salary, rent expense, depreciation on equipment, marketing expense, etc.) = Operating income

Front 11

How do you find operating income for a merchandising company?

Back 11

Sales revenue - COGS* = Gross profit - Operating expenses** = Operating income

*COGS: Beg. inventory + purchases and freight-in = COGavailable for sale - Ending inventory = COGS

**Operating expenses: Rent expense + Sales salary expense + etc.

Front 12

How do you find operating income for a manufacturing company?

Back 12

Sales revenue - COGS* = Gross profit - Operating expenses = Operating income

*COGS: Beg. finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = COGS

Front 13

What is cost of goods manufactured? How do you calculate it?

Back 13

It is the cost of the goods that are finished.

COGmanufactured = Beg. WIP inventory + Direct materials USED + Direct labor + MOH - Ending WIP inventory

Front 14

What is the difference between a controllable cost and an uncontrollable cost?

Back 14

Controllable cost - management can influence or change them in the short run

Uncontrollable cost - management cannot influence or change them in the short run

Front 15

What is a differential cost and a sunk cost?

Back 15

Differential cost - the difference in costs between two options of a decision.

Sunk cost - costs that have already been incurred and should not be used in decision making.

Front 16

What is the difference between a fixed cost and a variable cost?

Back 16

Fixed cost - stay constant over a wide range of activity levels. Ex) insurance, depreciation.

Variable cost - changes in direct proportion to changes in volume. Ex) cost of gas in a car

Front 17

What is total cost?
How do you calculate total cost?

Back 17

Total cost is all the fixed and variable costs that are incurred for the product(s).

Total cost = Total fixed cost + (Variable cost per unit x Number of units)

Front 18

How do you calculate the average cost of manufacturing one unit?

Back 18

Average cost = Total cost / Number of units

Note: You CANNOT find the average cost and multiply it for different number of units.

The average cost per unit will generally be lower when there are more units being produced.

Front 19

What is the marginal cost?

Back 19

It is the cost of producing one more unit. It equals the variable cost.

Front 20

How do you calculate the fixed cost per unit?

Back 20

Fixed cost per unit = Fixed cost / Number of units