Managerial Accounting: Chapter 1

product costs

- all costs involved in acquiring or making a product - direct materials, direct labor, and manufacturing overhead - assigned to an inventory account on the balance sheet - also known as inventoriable costs - they are treated as expenses in the period in which the related products are sold

period costs

- all costs that are not product costs - all selling and administrative expenses are treated as period costs -sales commissions, advertising, executive salaries, public relations - expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting

cost object

- anything for which cost data are desired--products, customers, jobs and organizational subunits

mixed cost

- contains both variable and fixed cost elements - semivariable costs - y= a +bX--makes it easy to calculate the total mixed cost for any level of activity within the relevant range

indirect materials

- included as part of manufacturing overheard

direct labor

- labor costs that can be easily traced to individual units of product - also known as touch labor because direct labor workers typically touch the product while it is being made

indirect labor

- labor costs that cannot by physically traced to particular products, or that can be traced only at great cost and inconvenience

committed fixed costs

- represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

cost structure

- the relative proportion of each type of cost in an organization

variable cost

- varies, in total, in direct proportion to changes in the level of activity - cost of goods sold, direct materials, direct labor, variable elements of MOH - must be variable with respect to something--in its activity base - while total variable costs change as the activity level changes, it is important to note that a variable cost is constant if expressed on a per unit basis

contribution margin

-the amount remaining from sales revenues after variable expenses have been deducted - internal planning and decision-making tool - helps managers organize data pertinent to numerous decisions

nonmanufacturing costs

1) selling costs 2) administrative costs

direct cost

a cost that can be easily and conveniently traced to a specified cost object

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity - straight-line depreciation, insurance, property taxes, rent - not affected by changes in activity - as the activity level rises and falls, total fixed costs remain constant unless influenced by some outside force - because total fixed costs remain constant for large variations in the level of activity, the average fixed cost per unit becomes progressively smaller as the level of activity increases

activity base

a measure of whatever causes the incurrence of a variable cost - sometimes referred to as a cost driver - direct labor hours, machine hours, units produced, and units sold

administrative costs

all costs associated with the general management of an organization rather than with manufacturing or selling - executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole

selling costs

all costs that are incurred to secure customer orders and get the finished product to the customer - advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses

matching principle

based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized - if the cost is incurred to acquire or make something that will eventually be sold, then the cost should be recognized as an expense only when the sale takes place

indirect cost

cost that cannot be easily and conveniently traced to a specified object

cost behavior

how a cost reacts to changes in the level of activity - as the activity level rises and falls, a particular cost may rise and fall as well or it may remain constant - costs are often categorized as variable , fixed, or mixed

manufacturing overhead

includes all manufacturing costs except direct materials and direct labor - indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities - only costs associated with operating the factory

raw materials

the materials that go into the final product - may include both direct and indirect materials

relevant range

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

conversion cost

the sum of direct labor cost and manufacturing overhead cost - used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials in to the finished product

prime cost

the sum of direct materials cost and direct labor cost

direct materials

those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product

discretionary fixed costs

usually arise from annual decisions by management to spend on certain fixed cost items