Chapter 2

direct cost

a cost that can be easily traced back to the cost object; e.g. cost object is prius, tire is a direct cost

indirect cost

a cost that relates to the cost object, but cannot be easily traced back to it; e.g. cost object is prius, factory utilities are an indirect costs because you need to pay them to produce the prius but they cannot be easily traced back to it

finished goods inventory

completed goods that have not yet been sold

indirect labor

cost of all employees in the plant other than those employees directly converting raw materials into finished product (forklift operators, security officers, plant janitors, supervisors)

period costs (SG&A)

costs from all other areas of the value chain; they are expenses in the period in which they occur

sunk cost

costs that have already been incurred

controllable

costs that management is able to influence or change

work in process inventory

goods that are partway through the manufacturing process but not yet complete

service company

in business to sell intangible services such as healthcare, insurance, banking, and consulting rather than tangible products; generally don't hold inventory

product costs (inventoriable costs)

include only the costs incurred at the production/purchases stage of the value chain; these costs are held in the inventory account until the product is sold, when they are moved to the COGS account

manufacturing overhead

includes all manufacturing costs other than direct materials and direct labor

total product cost

includes the costs of all resources used throughout the value chain

3 components of MOH

indirect materials, indirect labor, other indirect manufacturing costs

conversion costs

manufacturing overhead + direct labor

indirect materials

materials used in the plant that are not easily travel to individual units (janitorial supplies, machine lubricant)

other indirect MOH costs

plant related costs (depreciation, property taxes, insurance, etc)

direct materials

primary materials that become a physical part of the finished product; e.g. steel, tires

merchandising company

resell tangible products they buy from suppliers; hold inventory; inventory costs include cost of the goods plus all costs necessary to get their merchandise in place and ready to sell

three types of companies

service, merchandising, and manufacturing

fixed costs

stay constant in total over a wide range of activity levels

operating income

the company's earnings before interest and income taxes

direct labor

the cost of compensating employees who physically convert raw materials into the company's products

differential cost

the difference in cost between two alternatives

manufacturing company

use labor, plant, and equipment to convert raw materials into new, finished products; hold three inventory accounts

value chain

all of the activities that add value to the company's products and services: research and development, design, production/purchases, marketing, distribution, customer service

raw materials inventory

all raw materials used in manufacturing

cost object

anything for which managers want a separate measurement of cost; can include the actual product, marketing strategies, geographic segments of business, departments

variable costs

change in total in direct proportion to changes in volume

prime costs

combination of direct materials and direct labors

uncontrollable costs

company has little or no control over costs (ex. property tax and insurance costs of plants)