Chapter 1 Managerial Accounting and Cost Concepts

Elements of manufacturing costs

1. Direct materials 2. direct labor 3. manufacturing overhead

Manufacturing Costs

1. Selling costs 2. admin. costs.

methods to estimate the fixed and variable components of mixed costs

1. account analysis 2. engineering approach 3. high-low method 4. least-squares regression analysis

account analysis

an account is classified as either variable of fixed based on the analyst's prior knowledge of how the cost in the account behaves. EX. direct materials would be classified as variable and a building lease would be classified as fixxed.

cost object

anything for which cost data are desired. EX. products, customers, jobs ect.

Period Costs

are all costs that are not product costs. All selling and Admin. expenses are treated as period costs. EX. sales commission, executive salaries, and rental costs. are NOT includes as a part of the cost of EITHER purchased or manufactured goods. *expensed on the income statement in the period in which they incurred*

Indirect Materials

are includes as part of manufacturing overhead. ex. glue to make a chair

The matching principal

based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that revenue is recognized.

mixed costs

contains both variable and fixed cost elements. also known as semivariable costs. y=a+bX to find cost *the steeper the slope, the higher the variable cost per unit*

sunk cost

cost that has already been incurred and that cannot be changed by any decision now or in the future.

common cost

cost that is incurred to support a number of cost objects but cannot be traced to them individually

fixed costs

cost that remains constant, in total, regardless of changes in the level of activity. EX. rent, straight-line depreciation, insurance, and admin. salaries *only influenced by an outside force like a landlord*

engineering approch

detailed analysis of what cost behavior should be, based on a industrial engineer's evaluation of the production methods to be used.

incremental cost

diff. cost

differential cost

diff. in cost between any two alternatives

differential revenue

diff. in revenues between any two alternitives

formula for fixed cost

fixed cost= total cost- variable cost element

variable costs

in direct proportion to changes in the level of activity. EX. direct materials, direct labor, supplies, and power ect. *expressed as per unit basis*

administrative costs

include all costs associated with the general management of an organization rather than with man. or selling. ex. compensation, general accounting, public relations,

Product Costs

include all costs involved in acquiring or making a product. These costs consist of direct materials, direct labor, and manufacturing overhead. When the goods are sold, the cost are released from inventory as expenses.

Selling costs

include all costs that are incurred to secure customer orders and get the finished product. ex. advertising, sales travel, sales commissions

Manufacturing Overhead

includes all manufacturing costs except direct materials and direct labor.

activity base

is a measure if whatever causes the incurrence of a variable cost. EX. direct labor hours, machine hours, miles driven by salesperson

Indirect Labor

labor cost that cannot be physically traced to particular products; treated as manufacturing overhead. ex. janitors, supervisors, night security *impossible to accurately trace their cost to specific units of product*

Direct Labor

labor that can be easily traced to individual units of product

Raw Materials

materials that go into the final product; the finished product of one company can become the raw materials of another company; MAY INCLUDE DIRECT AND INDIRECT MATERIALS

High-low and least-squares regression

methods estimated the fixed and variable cost by analyzing past records of cost. uses rise over run formula.

contribution approach

provides managers with an income statement that clearly distinguishes between fixed and variable cost and therefore aids planning, controlling

relevant range

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

Product and Period Costs

recognized as expenses on the income statement.

Cost behavior

refers to how a cost reacts to change in the level of activity. as the activity rise and falls, a particular cost may rise and fall as well.

Committed Fixed costs

represent organizational investments with a multiyear planning horizon that can't be signifcantly reduced even over a short periods of time without making fundament changes. EX. real estate taxes, insurance expenses, and top man. salaries

Conversion Costs

sum of direct labor costs and manufacturing overhead.

contribution margin

the amount remaining from sales revenues after variable expenses have been deducted

Cost structure

the organization of the type of cost, fixed or variable

opportunity cost

the potential benefit that is given up when one alternative is selected over another

Prime costs

the sum of direct materials cost and direct labor costs

Direct Materials

those materials that become a integral part of the finished product and whose cost can be conveniently traced to the finished products: ex. seats purchased from a subcontractor to install in it airline

high-low method

use rise over run. identifying the period with the highest level of activity and the lowest level of activity

least-squares regression method

uses all of the data to separate a mixed cost into its fixed and variable components. uses the regression line (line of best fist) y=mX+b

Discretionary Fixed costs

usually arise from annual decisions by management to spend on certain fixed cost items. EX. internships, man. development programs, and research