managerial ch2

Conversion cost

is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.

Administrative costs

include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. can be either direct or indirect costs. For example, the salary of an accounting manager in charge of accounts receivable collections in the East region is a direct cost of that region, whereas the salary of a chief financial officer who oversees all of a company's regions is an indirect cost with respect to individual regions.

Selling costs

include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. can be either direct or indirect costs. For example, the cost of an advertising campaign dedicated to one specific product is a direct cost of that product, whereas the salary of a marketing manager who oversees numerous products is an indirect cost with respect to individual products.

direct cost

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

Direct labor

consists of labor costs that can be easily (i.e., physically and conveniently) traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made. Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience, are termed indirect labor. Just like indirect materials, indirect labor is treated as part of manufacturing overhead. Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and night security guards.

indirect cost

cost that cannot be easily and conveniently traced to a specified cost object. common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost.

Manufacturing Costs

direct materials and direct labor, and one indirect cost category, manufacturing overhead.

fixed cost

is a cost that remains constant, in total, regardless of changes in the level of activity. Examples include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising. Unlike variable costs, fixed costs are not affected by changes in activity. Consequently, as the activity level rises and falls, total fixed costs remain constant unless influenced by some outside force, such as a landlord increasing your monthly rental expense 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

direct materials

The materials that go into the final product are called raw materials. raw materials refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company. Raw materials may include both direct and indirect materials. Direct materials are those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. Sometimes it isn't worth the effort to trace the costs of relatively insignificant materials to end products. Such minor items would include the solder used to make electrical connections in a Sony HDTV or the glue used to assemble an Ethan Allen chair. Materials such as solder and glue are called indirect materials and are included as part of manufacturing overhead, which is discussed shortly

Period costs

are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are not included as part of the cost of either purchased or manufactured goods; instead, are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting.

Prime cost

is the sum of direct materials cost and direct labor cost

Manufacturing overhead

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. includes items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities. A company also incurs costs for heat and light, property taxes, insurance, depreciation, and so forth, associated with its selling and administrative functions, but these costs are not included as part of manufacturing overhead. Only those costs associated with operating the factory are included in manufacturing overhead.

product costs

include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. "attach" to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. initially assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales revenue on the income statement. initially assigned to inventories also known as inventoriable costs.

variable cost

varies, in total, in direct proportion to changes in the level of activity. Common examples include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs. An activity base is a measure of whatever causes the incurrence of a variable cost. An activity base is sometimes referred to as a cost driver. Some of the most common activity bases are direct labor-hours, machine-hours, units produced, and units sold. Other examples of activity bases (cost drivers) include the number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital.