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 • BECAUSE THE PREDETERMINED OVERHEAD APPLI-CATION RATE IS BASED ON ESTIMATES, THERE WILL PROBABLY BE “OVERAPPLIED” OR “UNDERAPPLIED” OVERHEAD AT THE END OF THE YEAR. THIS AMOUNT USUALLY BECOMES PART OF COST OF GOODS SOLD.

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: • FINISHED GOODS INVENTORY, BEGINNING + COST OF GOODS MANUFACTURED • - FINISHED GOODS INVENTORY, ENDING • = 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 MANAGEMENT’S ATTENTION IS DIRECTED TO THE ACTIVITIES THAT CAUSE THE INCURRANCE OF COST.