Accounting: What the Numbers Mean

1
Accounting What the Numbers Mean

• Study Outlines and Overhead Masters
• Chapter 13

2
COST MANAGEMENT

• KEY IDEAS
•  
• COST INFORMATION FROM THE ACCOUNTING SYSTEM IS
  USED TO MANAGE THE ACTIVITIES OF THE
  ORGANIZATION.
• VALUE CHAIN FUNCTIONS
•  
• RESEARCH AND DEVELOPMENT
• DESIGN
• PRODUCTION
• MARKETING
• DISTRIBUTION
• CUSTOMER SERVICE

3
COST ACCUMULATION AND ASSIGNMENT

• KEY CONCEPTS
•  
• COST OBJECT
•  
• COST ACCUMULATION ? COST POOL
•  
• COST ASSIGNMENT ? COST OBJECT

4
COST ACCOUNTING SYSTEMS

• KEY IDEAS
•  
• PERIOD COSTS (SELLING, GENERAL, AND
  ADMIN-ISTRATIVE) ARE ACCOUNTED FOR AS EXPENSES IN
  THE PERIOD INCURRED.
•  
• PRODUCT COSTS FLOW THROUGH INVENTORY (ASSET)
  ACCOUNTS, AND THEN TO THE COST OF GOODS SOLD
  (EXPENSE) ACCOUNT.
•  
• RAW MATERIAL, DIRECT LABOR, AND
  MANUFACTURING OVERHEAD COSTS ARE CAPITALIZED AS
  INVENTORY ?
• UNTIL THE PRODUCT THEY RELATE TO IS SOLD.
• RAW MATERIAL AND DIRECT LABOR COSTS ARE RATHER
  EASILY IDENTIFIED WITH THE PRODUCT.
• MANUFACTURING OVERHEAD IS APPLIED TO PRODUCTION
  BASED ON A PREDETERMINED
  OVERHEAD APPLICATION RATE, DETERMINED AS
  FOLLOWS
• ESTIMATED OVERHEAD COSTS FOR THE YEAR
• ESTIMATED ACTIVITY FOR THE YEAR
• KEY POINT
•  

5
COST OF GOODS MANUFACTURED AND COST OF GOODS SOLD

• KEY IDEA
•  
• BECAUSE OF THE INVENTORY ACCOUNTS, COST OF GOODS
  MANUFACTURED AND COST OF GOODS SOLD ARE
  NOT SIMPLY THE TOTALS OF COSTS INCURRED
  DURING THE PERIOD.
•  
• KEY MODELS
•  
• COST OF GOODS MANUFACTURED
• RAW MATERIALS INVENTORY, BEGINNING
• RAW MATERIALS PURCHASES
• - RAW MATERIALS INVENTORY, ENDING
• COST OF RAW MATERIALS USED
• WORK-IN-PROCESS INVENTORY, BEGINNING
• DIRECT LABOR COSTS INCURRED
• MANUFACTURING OVERHEAD APPLIED -
  WORK-IN-PROCESS INVENTORY, ENDING
• COST OF GOODS MANUFACTURED
• COST OF GOODS SOLD

6
ACTIVITY BASED COSTING

• KEY POINT
•  
• AN ABC SYSTEM INVOLVES IDENTIFYING THE KEY
  ACTIVITIES THAT CAUSE THE INCURRANCE OF COST
  THESE ACTIVITIES ARE KNOWN AS COST DRIVERS.
•  
• EXAMPLES OF COST DRIVERS INCLUDE MACHINE
  SETUP, QUALITY INSPECTION, PRODUCTION
  ORDER PREPARATION, AND MATERIALS HANDLING
  ACTIVITIES.
•  
• KEY RELATIONSHIPS
•  
• THE NUMBER OF TIMES EACH ACTIVITY IS TO BE
  PERFORMED DURING THE YEAR AND THE TOTAL
  COST OF EACH ACTIVITY ARE ESTIMATED, AND A
  PREDETERMINED COST PER ACTIVITY IS
  CALCULATED.
•  
• ACTIVITY BASED COSTS ARE THEN APPLIED TO
  PRODUCTS, RATHER THAN USING A TRADITIONAL
  METHOD OF OVERHEAD APPLICATION SUCH AS
  DIRECT LABOR HOURS OR MACHINE HOURS.
•  
• KEY IDEA
•  
• ABC SYSTEMS OFTEN LEAD TO MORE ACCURATE
  PRODUCT COSTING AND MORE EFFECTIVE COST
  CONTROL, BECAUSE MANAGEMENTS ATTENTION
  IS DIRECTED TO THE ACTIVITIES THAT CAUSE THE
  INCURRANCE OF COST.