Managerial Accounting Basics: Determining Product Costs &

School: Indiana University, Bloomington - Course: BUS A100 - Subject: Accounting

Chapter 5: managerial accounting basics The importance of determining the cost of a product -Product differentiation -Price based competition Cost of Inventory -When inventory is purchased, asset account (inventory) is increased and either accounts payable is increased or cash is decreased -When inventory is sold, 2 balancing entries are made oOne to record the sale on income statement and increase cash or accounts receivable on balance sheet oOther is to reduce inventory in balance sheet by cost of the inventory is sold and the corresponding entry is to increase the cost of goods sold Cost of inventory for manufacturing firms -Three costs oRaw materials (direct materials) inventory oDirect labor oManufacturing overhead -Factory expenses are called inventoriable expenses or product costs -Other expenses that are not related to factory expenses are called non inventoriable or period costs Manufacturing Firm's three inventory accounts -Raw material inventory -Work in process -Finished goods inventory - -Direct materials purchased go to the raw material inventory Fixed cost vs variable cost Costs get divided into 2: fixed or variable Fixed costs -Stay the same regardless of volume produced -Example: rent

Variable costs -Move with the level of production -Example: direct materials Y=mx+b -Y = total costs -M = variable cost per unit -X = number of units -B = the total fixed cost Contribution margin income statement: Sales -variable costs Contribution margin -fixed costs Net income -The amount left over after deducting variable costs are the contribution margin The breakeven point -The point at which the level of sales equals the total variable costs plus total fixed costs Tips -Sales price * number of units = VC per unit * number of units + total FC + net income