The document defines and discusses key cost accounting terms and concepts. It describes how costs flow through a manufacturing company, from raw materials to work in process to finished goods. It also covers cost accumulation procedures like job order costing and process costing, and how costs move from the balance sheet to the income statement. Cost classification categories like direct vs indirect, variable vs fixed, and product vs period costs are also summarized.

1. Management Accounting: Introduction Cost Flows Cost terms & purposes

2. Cost: Definition Monetary measure of resources given up to attain an objective (such as acquiring a good or service) – Barfield, Raiborn, Kinney At the time of acquisition, the cost incurred is for present or future benefits. When these benefits are utilized, the costs become expenses. An expense is defined as a cost that has given a benefit and is now expired. Unexpired costs that give future benefits are classified as assets. – Polimeni, Fabozzi, Adelberg

3. Cost Categories } } Relevant, differential, sunk, opportunity Direct, indirect Controllable, noncontrollable Impact on decision making Unexpired, expired Product, period Prime, Conversion Classification on the F/S Variable, fixed, Mixed, step Reaction to changes in activity Historical, replacement, budgeted Time of incidence

4. Basic Cost Terms: Cost Objects and Drivers Cost A sacrifice of resources. Distinguish from “expense”. Cost Object Any activity or item for which a separate measurement of costs is desired. Cost Driver Any factor whose change “causes” a change in the total cost of a related cost object. (Note: Cost drivers can be factors other than volume.) From: ocw.mit.edu

5. Direct and Indirect Costs Direct Costs Costs that can be traced to a given cost object (product, department, etc.) in an economically feasible way. Indirect Costs Costs that cannot be traced to a given cost object in an economically feasible way. These costs are also known as “overhead”. Cost Assignment Direct costs are traced to a cost object. Indirect costs are allocated or assigned to a cost object. Direct Cost A Direct Cost B Indirect Cost C Object X Object Y From: ocw.mit.edu

6. Product and Period Costs Product Costs Costs that “attach” to the units that are produced (i.e., manufacturing costs) and are not reported as expenses until the goods are sold. Period Costs Costs that must be charged against income in the period incurred and cannot be inventoried (e.g., selling and administrative expenses.) Unit Costs Total cost of units divided by units produced. Product Costs Period Cost Direct Cost Indirect Cost Product X Inventory Income Statement From: ocw.mit.edu

7. Cost Behavior Variable Costs Costs that change directly in proportion to changes in the related cost driver. Fixed Costs Costs that remain unchanged for a given time period regardless of change in the related cost driver. Other common functions for Cost Behavior Semi-variable costs (part variable and part fixed). Step costs (give examples) Main Assumptions needed to define fixed/variable: Cost object, Time span, Linear functional form. Relevant range = the band of cost driver activity in which a specific relationship between a cost and a driver holds. From: ocw.mit.edu

8. Basic Cost Terms Product costs can be Direct or Indirect (Overhead) Not all Direct costs are variable The depreciation of a special piece of equipment bought to manufacture a single product line. Not all Overheads are fixed Processing of raw material purchase orders Electricity used in operating production equipment. From: ocw.mit.edu

9. Answer the following: Kym Manufacturing provided the following information for last month: Sales $12,000 Variable costs 4,000 Fixed costs 1,000 Operating income $7,000 If sales double next month, what is the projected operating income? a. $14,000 b. $15,000 c. $18,000 d. $19,000

10. Prime Costs and Conversion Costs Prime Costs all direct manufacturing costs. (would comprise direct material costs and direct manufacturing labor costs) As information-gathering technology improves, companies may add additional direct-cost categories. Conversion Costs all manufacturing costs other than direct materials costs. These costs are for transforming direct materials into finished goods. (would comprise direct manufacturing labor costs and indirect manufacturing costs)

11. Traditional Costing System Product Costs Direct Costs Direct labor Direct materials Overhead Costs Indirect labor Indirect materials Depreciation Traced directly Traced using allocation base, e.g. direct labor hrs, machine hrs From: ocw.mit.edu

12. Activity-Based Costing (ABC) System Product Costs Direct Costs Direct labor Direct materials Overhead Costs Indirect labor Indirect materials Depreciation Activities that drive overhead From: ocw.mit.edu

13. Movement of Expenditures into F/S Expenditure Cost Deferred Balance Sheet Expired Income Statement Expense Loss or unexpired future use capital expenditure or inventoriable costs no future use incl. period costs no benefit was derived

14. Service Company Input Output Retail Company Production Center add labor and overhead Manufacturer Purchase supplies Use supplies, labor, overhead to provide service Sell to customer Purchase products for resale Sell to customer Warehouse and/or display Purchase raw materials and supplies Sell to customer Finished Product

15. Cost Accumulation in a Manufacturing Company Cost of Goods Sold Balance Sheet Income Statement Materials Inventory Work in Process Inventory Finished Goods Inventory

16. Accumulation Procedures DM DL FOH WIP Job #1 WIP Job #2 WIP Job #3 FG Job #1 FG Job #2 FG Job #3 WIP Dept 1 WIP Dept 2 WIP Dept 3 FG Inv. DM DL FOH Job Order Costing Process Costing

17. Flow of Product Costs (entries) Raw Materials Inventory Accounts Payable Work in Process Inventory Raw Materials Inventory Work in Process Inventory Salaries/Wages Payable Fixed OH Control (actual) Salaries/Wages Payable Variable OH Control (actual) Utilities Payable Work in Process Inventory Variable OH Control (applied) Fixed OH Control (applied) Finished Goods Inventory Work in Process Inventory Accounts Receivable Sales Cost of Goods Sold Finished Goods Inventory

18. Statement of Cost of Goods Manufactured Raw Materials Used Beginning raw materials xxx Purchases of raw materials xxx Raw materials available xxx Ending raw materials <xxx> Total raw materials used xxx To Statement of Cost of Goods Manufactured

19. Statement of Cost of Goods Manufactured Beginning work in process xxxx Raw materials used xxx Direct labor xxx Variable overhead xxx Fixed overhead xxxx Current period manufacturing costs xxxx Total costs to account for xxxx Ending work in process <xxxx> Cost of goods manufactured xxxx

20. Schedule of Cost of Goods Sold Beginning Finished Good xxxx Cost of Goods Manufactured xxxx Cost of Goods Available for Sale xxxx Ending Finished Goods < xxxx> Cost of Goods Sold xxxx From Schedule of Cost of Goods Manufactured

21. Costing Approaches Actual Costing – allocates: Indirect costs based on the actual indirect-cost rates times the actual activity consumption Normal Costing – allocates: Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption Both methods allocate Direct costs to a cost object the same way : by using actual direct-cost rates times actual consumption.

22. Cost System and Cost Accumulation Procedure ACTUAL NORMAL STANDARD JOB ORDER PROCESS Actual direct materials Actual direct labor Actual OH assigned to jobs after end of period Actual direct materials Actual direct labor Actual overhead costs assigned to process at end of period using FIFO or wtd. ave. cost flow Actual direct materials Actual direct labor OH applied at completion of job or end of period (predetermined rate x actual input) Actual direct materials Actual direct labor Predetermined OH applied at the end of the process using FIFO or wtd ave. cost flow Standard direct materials Standard direct labor OH applied at completion of job or end of period (predetermined rate x standard input) Standard direct materials Standard direct labor Standard overhead applied using FIFO cost flow

23. Other Cost Terms: Several key points: Cost Objects – including responsibility centers, departments, customers, products, etc. Direct costs and Tracing – materials and labor Indirect Costs and Allocation – overhead Cost Pool – any logical grouping of related cost objects Cost-allocation Base – a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver