Lecture 15 0329 - ORIE 350 Managerial Accounting Job Order...

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ORIE 350 March 29, 2007 Managerial Accounting Job Order Costing
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MANAGERIAL VERSUS FINANCIAL ACCOUNTING Financial accounting is intended for external users (investors, creditors, etc.); is highly regulated [in theory] by the FASB, SEC; is mandatory for publicly-traded companies; is historic in nature. Managerial accounting is intended for internal users (managers); is not highly regulated; is not mandatory but rather is adopted based on costs/benefits; is future- oriented.
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Costs and Stuff A cost is the sacrifice made to achieve a particular purpose. An expense is defined as the cost incurred when an asset is used up or sold for the purpose of generating revenue. The terms “product cost” and “period cost” are used to describe the timing with which expenses are recognized.
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Costs Product costs are the costs of goods manufactured or the cost of goods purchased for resale. These costs are inventoried until the goods are sold. Period costs are all the other non-product costs in an organization (e.g., selling and administrative). Such costs are not inventoried but are expensed as time passes.
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Product Costs Product costs are shown as cost of goods sold on the income statement when goods are sold. Product costs on the balance sheet are found in three inventory accounts: Raw materials— materials that await production Work in process— partially completed production Finished goods— completed production that awaits sale
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Absorption Costing Absorption costing merely means all of the manufacturing costs have been fully absorbed by the product. There are no manufacturing costs that have not been assigned to each product. This is required by GAAP. It may be misleading. Since all costs are spread over all products produced, some costs can be stored in inventory.
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Absorption Costing Some of these costs are period costs, like factory rent. We have to assign these costs to products. If we produce a bunch of products but don’t sell any, then “factory rent” is stored with those products as an asset (not an expense). We only recognize these expenses when the item is sold, then it becomes part of Cost of Goods Sold.
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There are various types of production processes; Job shop— low production volume, little standardization; one-of-a-kind products Batch— multiple products; low volume Assembly line— few major products; higher volume Mass customization— high production volume; standardized components; customized combinations of components Continuous flow— high volume; highly standardized commodity products
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Manufacturing Costs 1. Direct materials— materials easily traced to a finished product (e.g., the seat on a bicycle). 2. Direct labor— the wages of anyone who works directly on the product (e.g., the assembly-line wages of the bicycle manufacturer).
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