ORIE 3150 class notes Oct 28 2010

ORIE 3150 class notes Oct 28 2010 - ORIE 3150 Managerial...

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ORIE 3150 October 28, 2010 Managerial 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. A cost is the sacrifice of resources 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. 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. Product costs are shown as cost of goods sold on the income statement when goods are sold. Product costs on the balance sheet are assets. They are found in three inventory accounts: 1. Raw materials—materials that await production 2. Work in process—partially completed production 3. Finished goods—completed production that awaits sale Absorption costing merely means all of the manufacturing costs have been fully absorbed by the product. That is, 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 as assets in inventory. 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 Manufacturing Costs Direct materials—materials easily traced to a finished product (e.g., if we make bicycles, the cost of the seat on a bicycle). 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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Manufacturing overhead—all other manufacturing costs such as indirect materials (materials and supplies other than those classified as direct materials), indirect labor (personnel who do not work directly on the product), and other manufacturing costs not easily traceable to a finished good (insurance, property taxes, depreciation, and supervision).
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