321. Even though in hindsight purchasing the machine may have been unwise, the $50,000 cost has already been incurred and cannot be undone.322. Opportunity costs are not usually found in accounting records, but they are costs that must be explicitly considered in every decision a manager makes.323. The two different purposes served by these income statements highlight what is arguably the most important difference between financial accounting and managerial accounting—an emphasis on recording past performance versus an emphasis on making predictions and decisions that affect future performance.324. The unique thing about the contribution approach is that it provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making.325. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.326. It is much less costly to prevent a problem from ever happening than it is to find and correct the problem after it has occurred.327. Consequently, companies that use JIT often require that their suppliers use sophisticated quality control programs such as statistical process control and that their suppliers certify that they will deliver parts and materials that are free of defects.328. Of course, the more effective a company’s appraisal activities, the greater the chance of catching defects internally and the greater the level of internal failure costs.329. The best way to prevent defects from happening is to design processes that reduce the likelihood of defects and to continually monitor processes using statistical process control methods.330. This resulted in more cost for scrap, rework, and so forth, but saved huge amounts in warranty repairs, warranty replacements, and other external failure costs.331. In general, quality costs should be distributed more toward prevention and appraisal activities and less toward failures.332. Under ISO 9000, this documentation must be so detailed and precise that if all the employees in a company were suddenly replaced, the new employees could use the documentation to make the product exactly as it was made by the old employees.333. The costs attached to products that have not been sold are included in ending inventories on the balance sheet, whereas the costs attached to units that have been sold are included in cost of goods sold on the income statement.334. In the next chapter, we will explain how job-order costing systems can be used to determine the value of ending inventories and cost of goods sold for external reporting purposes.335. In a job-order costing system, costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit.336. Although the detailed example of job-order costing provided in the following section deals with a manufacturing company, the same basic concepts and procedures are used by many service organizations.337. For example, the costs of heating and cooling a factory in Illinois will be highest in the winter and summer months and lowest in the spring and fall.338. For these reasons, most companies use predetermined overhead rates rather than actual overhead rates in their cost accounting systems.339. First, the totals for direct materials, direct labor, and manufacturing overhead are transferred to the Cost Summary section of the job cost sheet and added together to obtain the total cost for the job.340. As indicated earlier, this unit product cost is an average cost and should not be interpreted as the cost that would actually be incurred if another unit were produced.
