Exam 1 Flashcards
(32 cards)
The name of this course is “Cost Accounting”. What’s a “cost”?
A cost is an economic sacrifice made to get a future benefit.
What’s an expense? Is this the same as a cost or something different? If different, HOW are they different? WHY is it important?
An expense is something that is subtracted in arriving at net income on an income statement. These are costs, the benefit of which we received in that period, according to the matching principle.
What’s financial accounting? WHY is it important?
Financial accounting deals with the communication of financial information for external users.
What’s a balance sheet? What’s an income statement? What information do they each convey?
A balance sheet shows the financial condition at a point in time. An income statement shows the results of operations over a period of time.
What’s management (or managerial) accounting? WHY is it important?
Managerial accounting deals with how information is used internally for planning, controlling and decision making.
What’s cost accounting? WHY is it important?
Cost accounting deals with the accumulation of cost and other information, and the reporting of this information to the financial accounting system and management.
Behavior – variable or fixed
Describes how a cost acts in response to a change in activity. Variable costs change in direct proportion to changes. Fixed costs to not change as a result of changes in activity.
It is important to understand this for planning (budgeting), evaluating performance and decision making.
Traceability – direct or indirect
Describes whether a cost can be conveniently physically traced to a cost object. A cost that can be physically traced is direct. One that cannot is indirect. Because indirect costs cannot be traced, they must be assigned somehow, or allocated.
Function – product or period
Product costs related directly to the production of product or providing of service. In the case of a product, these costs are capitalized as inventory and become expenses (Cost of goods sold) in the period that the sale is made. Period costs do NOT relate to the product and are expensed in the period that they are incurred.
Relevance – relevant or irrelevant
When a decision needs to be made, information that is important for that decision is relevant. Other information is irrelevant. In order to be relevant, costs and revenues must be a) in the future and b) differential.
What is meant by a cost driver? WHY are they important?
A cost driver is something that causes a cost to happen. They are important as they assist us in understanding costs, and predicting cost levels.
What is a cost pool?
A cost pool is a group of costs that need to be allocated.
A cost object is a group of costs that need to be allocated.
A cost object is anything that we want to figure out costs for, such as a product line, a department, a division, etc.
What’s “allocation” mean? WHY is it needed?
Allocation is the systematic spreading of indirect costs to costs objects. It is also called assigning. It is needed so that indirect costs can be assigned to costs objects.
What’s meant by the term “value chain”? WHY is it important?
The value chain are all the areas which produce product value in the eyes of customers. Typically, the areas are R&D, product design & testing, production, marketing and distribution and service.
Calculate DM used
Beg DM + Purchases - Ending DM
Compute Prime cost
DM + DL
Compute conversation cost
DL + Factory OH
Factory OH includes
All factory expenses, including depreciation on factory building and equipment, insurance, property taxes, AND indirect labor
Statement of COGM includes:
Beg WIP + Manufacturing costs (DM, DL and OH) to get available for manufacturing.
- Ending WIP = COGM
Statement of COGS includes:
Beg FG + COGM = available for sale
- Ending FG = COGS
Income statement includes:
Sales - COGS = GP
- Selling (don’t forget commissions) & Admin Exp = Income from operations
- Income taxes
= Net income
Compute cost per unit sold:
All costs (manu, selling, admin) divided by units sold
As part of the annual audit you notice that “Indirect labor salaries” included the $20,000 salary paid to Ken, who actually works in the advertising department of the company. Does this seem reasonable? What incentive would management have to include the advertising costs as “indirect labor”? (That is, what would their motivation be to do this?) Could this have any impact on the operating income? Explain.
By including this selling expense as a manufacturing cost, income might be overstated as, if units were unsold, part of this $20,000 salary would wind up being held in inventory, either as WIP or finished goods, rather than being deducted from income in its entirety as a selling expense.
Motivation to classify this might be to make income look better than it truly is.
