Accounting Chapter 1

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General and administrative costs

All executive, organizational, and clerical costs

Conversion cost

Cost that consists of direct labor and manufacturing overhead

Prime cost

Cost that consists of direct materials and direct labor

Relevant Cost

Cost that has the potential to influence a decision (must be a cost incurred in the future)

Irrelevant cost

Cost that won't influence the decision

Marketing or selling costs

Costs necessary to get the order and deliver the product

Direct costs

Costs that can be easily and conveniently traced to a unit of project or other cost object (i.e. materials and labor)

Indirect costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost object (i.e. depreciation on equipment, utilities, advertising, etc.)

Variable costs

Costs that change in total in direct proportion to changes in activity level

Fixed costs

Costs that do not change in total regardless of the activity level

Nonmanufacturing costs

Costs that include marketing or selling costs and general and administrative costs

Out-of-pocket costs

Costs that involve an actual outlay of cash

Sunk costs

Costs that were incurred in the past

Manufacturing costs

Include all costs incurred to produce the physical product (includes Direct materials, direct labor, and manufacturing overhead)

Manufacturing overhead

Includes all costs other than direct materials and direct labor that must be incurred to manufacture a product (i.e. repairs, utilities, salaries, insurance, taxes, etc)

Direct materials

Major material inputs that can be physically and conveniently traced directly to the final product

Direct labor

The cost of labor that can be physically and conveniently traced to the final product

Opportunity cost

The foregone benefit of the path not taken


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