REVIEW: Asset- something that will give us value in the future.

Expense- something whose usefulness has expired, we used it in the current period so we call it a period cost. ASSETS= LIABILITIES + EQUITY When a manufacturer purchases inventory, it travels through three inventory accounts. 1) Raw materials inventory (hasnt been touched) 2) Work in process 3) finished goods. When the FINISHED GOODS INVENTORY is sold, it is moved to COST OF GOODS SOLD, an EXPENSE, which is an EQUITY account. Equity accounts, on the right side of the accounting equation, are increased on the right side and decreased on the left side. Since cost of goods sold DECREASES equity, we show increases to cost of goods sold on the left (debit) side (thus decreasing equity). The sale itself, since it increases equity, is recorded on the right side of the sales account. Beginning finished goods inventory + Cost of goods manufactured = Goods available for sale- Ending finished goods inventory = Cost of goods sold (purchase line is not included) CHAPTER 1: strategy- plan to attract customers by distinguishing itself from competitors, customer value proposition-reason to choose company over competitors; customer intimacy choose us bc we understand and respond to your needs better. Operational excellence-faster, more convenient, lower price Product leadership-best quality. Improve business through lean production, theory of constraints and Six Sigma (Define, Measure, Analyze, Improve, Control) IMA Guidelines for Ethical behavior Competence, Confidentiality, Integrity, Credibility CHAPTER 2: The 7 key differences between managerial and financial: 1) users, financial is for external parties, managerial is for internal 2) emphasis on future: financial summarizes past transactions, managerial has strong future orientation 3) relevance of data: financial is more objective and verifiable, managerial is focused on providing relevant data 4) less emphasis on precision: financial is precision where managerial is to aid decision makers by providing good estimates 5) segments of an organization: financial is concerned with whole company, managerial is focused on segments 6) GAAP- Managerial is not bound 7) managerial accounting- not mandatory.

Manufacturing costs- Direct Materials (part of finished product and costs can be traced to it ex: radio in car), Direct Labor and manufacturing overhead [includes all manufacturing costs except direct materials and labor, cannot be traced to specific units] (includes lube for machines, janitors, security guards, maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on facilities) (all incurred to make a product) Selling costs- all costs needed to secure orders and get it delivered (order getting/filling) ex: advertising, shipping, sales travel, sales commissions, sales salaries and costs of finished goods warehouses. Administrative costs- all executive, organizational, and clerical costs. Ex: executive compensation, general accounting, secretarial, public relations etc. Product Costs- all costs involved in making a product- includes direct materials, direct labor and manufacturing overhead. Consistent with matching principle, they are recognized as expenses when products are sold and this can result in delay of one or more periods between the time in which cost is incurred and when it appears as an expense on income statement. Period Costs- includes all selling and administrative costs, are expensed on income statement in period incurred. Prime Cost-sum of direct materials and direct labor cost Conversion cost-sum of direct labor cost and manufacturing overhead cost (used to describe direct labor and manufacturing overhead bc these costs are incurred to convert materials into finished product) Schedule of COGM: Direct materials: Beginning raw materials inventory + Purchases of raw materials Raw Materials Available for use -Ending raw materials inventory Raw materials used in production +Direct Labor +Manufacturing Overhead Total manufacturing cost + beginning work in process inventory Products used in production -ending work in process inventory Costs of goods manufactured Gross Margin (take your calculated Gross Margin (take your calculatedcogs and subtract it from sales) cogs and subtract it from sales)

Basic Equation for inventory accounts= B.B. + Additions to inventory = E.B. + Withdrawals from inventory

-Selling and administrative expenses COGS for Merchandising = Beginning merchandise inventory + purchases = ending merchandise inventory + COGS

-Selling and administrative expenses COGS for manufacturing = Beginning finished goods inventory + COGS manufactured = ending finished goods inventory + COGSNet Operating Income Net Differential Costs- difference in cost between any two alts.
Behavior of Cost (within the relevant range)
C o s t V a r i a b l e F i x e d In Total Total variable cost changes as activity level changes. Per Unit Variable cost per unit remains the same over wide ranges of activity.

Operating

Income

Total fixed cost remains the same even when the activity level changes.

Average fixed cost per unit goes down as activity level goes up.