Finance 2

The cost of goods manufactured is determined by adding the total manufacturing costs to the beginning work-in-process inventory and then subtracting the ending work-in-process inventory.

Direct labor costs refer to the wages paid to employees who are directly involved in the production process. These costs are directly tied to the creation of a specific product or service.

The contribution margin is calculated by subtracting variable selling and administrative expenses from the manufacturing margin in a variable costing income statement. It represents the amount of money each sale contributes towards covering fixed costs and generating profit.

The management process encompasses three main phases: planning and controlling, organizing and directing, and decision making and supervising. Each phase is crucial for effective management and organizational success.

Product costs are expenses directly related to the production of goods. They include direct materials, direct labor, and factory overhead. These costs are assigned to the product and recorded as inventory until the product is sold. Period costs, on the other hand, are expenses incurred during a specific accounting period and are expensed in the period they are incurred.

LIFO (Last-In, First-Out) is an inventory valuation method that assumes the last units purchased are the first ones sold. This method is advantageous during periods of rising prices because it assigns the higher recent costs to the cost of goods sold, resulting in lower taxable income and lower tax payments.

Inventory control documents are used to track and manage inventory levels. Examples include receiving reports (verifying goods received), vendor's invoices (recording purchase details), and purchase orders (authorizing purchases). Petty cash vouchers, however, are not related to inventory control.

A cost of goods manufactured statement summarizes the cost of goods produced during a specific period. It helps businesses understand the total cost of producing their products. The statement includes beginning work-in-process inventory, total manufacturing costs, and ending work-in-process inventory.

LIFO (Last-In, First-Out) assumes the last units purchased are the first ones sold, leading to lower taxable income during rising prices. FIFO (First-In, First-Out) assumes the first units purchased are the first ones sold, leading to higher reported profits in periods of inflation. Weighted Average Cost calculates an average cost for all inventory items. Specific Identification uses the actual cost of each unit of inventory, suitable for unique items.

An overstatement of ending inventory in one period will lead to an understatement of the gross margin in the next period. This is because the overstated ending inventory will be carried over as the beginning inventory for the next period, resulting in a lower cost of goods sold and a consequently lower gross margin.

Cost flow methods, like periodic and perpetual, track the movement of costs associated with goods sold and ending inventory. The specific method chosen and company-specific inventory transactions influence the exact values. It is necessary to analyze the method and specific inventory transactions for accurate calculations.

Activity cost reduction involves streamlining operations to minimize activity-base usage per unit. By optimizing processes and eliminating unnecessary activities, businesses can decrease overall costs.

Using multiple departmental factory overhead rates instead of a single plantwide rate can result in more accurate product costs. This approach allocates overhead costs based on the specific needs of each department, resulting in greater precision compared to a single rate applied across all departments.

Common allocation bases are used to assign overhead costs to products. These include direct labor dollars (wages paid to production workers), direct labor hours (time spent by production workers), and machine hours (time machines are used for production). Other bases, like machine dollars or direct material dollars, may not be considered common.

An activity rate is determined by dividing the total cost of an activity pool by the estimated total activity base for that pool. Activity rates are useful for assigning costs to products or services based on the amount of activity used.

A cost of production report summarizes production costs for a specific period. These reports help managers track and evaluate production expenses, identify areas for improvement, and make informed decisions regarding company operations.

Process costing is used to assign costs to products when a continuous production process is involved, where products are identical or nearly identical. Job order costing, on the other hand, is used for individual products or batches with unique features.

CVP (Cost-Volume-Profit) analysis examines the relationship between costs, volume, and profit. The break-even point is the level of sales where total revenue equals total costs, resulting in no profit or loss. This point increases if total fixed costs rise, unit selling price falls, or unit variable cost increases.

The contribution margin represents the difference between sales revenue and variable costs. It indicates the amount of money each sale contributes to cover fixed costs and generate profit.

On a profit-volume chart, the intersection of the profit line and the horizontal axis indicates the company's break-even point. This is the point where total revenues equal total costs, resulting in no profit or loss.

An increase in variable costs per unit, such as higher wage rates, will lead to an increase in the break-even point. This is because the company needs to sell more units to cover the higher variable costs and reach the break-even point.

The contribution margin ratio measures the percentage of each sales dollar that contributes to covering fixed costs and generating profit. A higher contribution margin ratio indicates that a larger portion of each sale is available to cover these costs.

Costs of production can be categorized as variable, fixed, or mixed. Variable costs change directly with production volume, while fixed costs remain constant regardless of volume. Mixed costs have both variable and fixed components.

Cost-plus pricing involves adding a markup to product costs to determine the selling price. This markup includes selling expenses, administrative expenses, and desired profit. The variable cost method includes only variable costs in the markup.

Negotiated cost is a transfer pricing approach where the transfer price is determined through negotiations between the supplying and receiving divisions. The price is set at a level lower than the market price but greater than the supplying division's variable cost per unit. This approach balances the interests of both divisions and helps maintain efficiency.

Job order costing is a method of cost accounting used to track costs for products or services that are unique or produced in small batches. It involves assigning costs to specific jobs or orders, allowing businesses to track and manage costs for each individual product or service.