Ch. 1

Incremental Manufacturing Cost

(direct material + direct labor + variable manufacturing overhead) / units sold

Non-manufacturing costs

1) selling costs 2) administrative costs

5 types of cost classifications

1. assigning costs to cost objects 2. accounting for costs in manufacturing companies 3. preparing financial statements 4. predicting cost behavior in response to changes in activity 5. making decisions

Prime Cost

Direct Materials + Direct Labor

Sunk Cost

a cost that has already been made and can not be changed now or in the future. if you purchase a $50,000 machine to make a product that is now obsolete, the price is sunk and should be ignored. you can not change it. think "no refund"

Variable Costs

a cost that varies, in total, in direct proportion to changes in the level of activity. constant per unit. the *activity base* is whatever causes the change in the variable cost. ex. the total cost of surgical gloves increases as the number of surgeries increases. the number of surgeries is the activity base that causes the change in the cost of gloves. other ex. as more guests come to your party where the food per person is a set cost, the more money you will spend. the guests are the activity base. -variable cost per unit remains constant

Administrative costs

all executive, organizational, and clerical costs. general management. (also can be direct or indirect) ex. general accounting, public relations, secretarial, executive compensation. -the accounting manager in charge of the East region is a direct cost of that region. but the CFO who oversees all of the companies regions is an indirect cost to each specific region.

Manufacturing Overhead

all manufacturing costs except direct materials and direct labor. can be *indirect* materials such as glue or nails, which are integral parts of the final product but are not easily traced to the finished product. or *indirect labor* such as janitors, supervisors, maintenance workers, etc. whose compensation can not be easily traced to the product. - can also include things like depreciation, utility costs, property taxes, and insurance premiums that are ASSOCIATED WITH OPERATING THE FACTORY. these things can be associated with other departments as well, but are not considered manufacturing overhead.

Product Costs

all the costs involved in acquiring and making a product. -direct materials, direct labor, manufacturing overhead (indirect materials and labor) -"attach" to a unit or product as it is bought or manufactured and stay attached as long as it remains in inventory. -start off as raw materials inventory (balance sheet) and then as they are being assembled they become "work in process." when they are finished they become "final goods inventory" (balance sheet) until they are sold. when they are sold, they are "cost of goods sold." (income statement)

Direct Labor

also known as "touch labor" and is the factory labor that can easily be traced to individual units of a product. some examples are the assembly line workers at toyota, carpenters at KB home, or electricians who install equipment onto an aircraft.

Manufacturing costs

another name for "product costs." two direct costs= direct materials, direct labor. one indirect cost= manufacturing overhead

Cost Object

anything for which cost data is desired. can be people, products, organizational subunits, etc.

Period Costs

basically the "non-manufacturing" costs like sales and administrative costs. taken directly to income statement as expenses in the period that they are incurred or accrued. -anything that is a sales or administrative cost is a period cost

Cost of Goods Sold

beginning merchandise inventory + purchases - ending inventory

Direct Cost

can be easily and conveniently traced to a specified cost object. ex. salary of a sales manager is a direct cost of a sales office. ex. if a company makes brochures for a specific customer, then the cost of the papers used to make the brochure is a direct cost of the customer. - all professors salaries at Auburn are direct costs to the university.

Indirect Cost

can not be easily traced to a specified cost object. ex. if a soup factory produces many different kinds of soups, the factory managers salary can not be traced to a specific kind of soup like chicken noodle. the factory managers salary is a consequence of the entire factory not just any one kind. *to be traced to a cost object, the cost must be caused by the cost object* - president of Auburn's salary is an indirect cost to the college of business, can not be easily traced to

Mixed Costs

contains both variable and fixed elements. an example of this can be "fees paid to state." if a rafting company has to pay $25,000 per year for a license fee and $3 per rafting party to a state department, their total yearly cost = $25,000 + $3X where X= # of rafting parties Y=a + bX Y= total mixed cost, a=fixed cost (vertical intercept), b=variable cost (slope), X=activity level

Selling costs

costs needed to secure the order and deliver the product. can be direct or indirect. ex. advertising, shipping, sales travel, sales commissions , sales travel, sales salaries. - the costs of an advertising campaign for a specific cost is a direct cost to that object. however, the sales manager's salary is an indirect cost of individual products.

Discretionary Fixed Costs

costs that can be modified in the short run by managerial decisions. (advertising, research, PR etc.) a company can easily decide to cut back on advertising costs from year to year.

Conversion Cost

direct labor + manufacturing overhead

Conversion Costs

direct labor + manufacturing overhead

Total Variable Cost per. Unit Sold

direct material + direct labor + all categories of variable exp. / units sold

Prime Cost

direct materials + direct labor

Total Product Cost

direct materials + direct labor + manufacturing overhead

Variable Manufacturing Cost

direct materials + direct labor + variable manufacturing overhead

Relevant Range

important in understanding fixed costs. this is the range where assumptions about variable and fixed cost behavior are valid. say the rent on a machine that takes blood samples is $20,000 per machine. the machine can only produce up to 3,000 samples. the assumption that the rent for the machine is $20,000 per month is only valid for 0-3,000 samples. The relevant range is 0-3,000 samples. if you need to produce 5,000 samples, you need another machine. the fixed rental cost of $40,000 per month (two machines). the rental cost of $40,000 per month is valid for 3,001-6,000 tests.

Common Costs

incurred to support a number of cost objects. ex. a factory managers salary and the number of products produced in the factory. (type of indirect cost)

Committed Fixed Cost

long term fixed costs that can not be modified in a short period of time. ex. facilities, equipment, basic organizational structure, real estate tax, insurance premiums, salaries of top management. a company can not easily decide to reduce the size of a factory within a year or reduce the salary of its CEO.

Contribution Format Income Statement

organizes costs between "fixed" and "variable" (behavior) *Sales- variable expenses= contribution margin (COGS is a variable cost) *contribution margin-fixed expenses=net operating income -useful for internal reporting

Traditional Format Income Statement

organizes costs into two categories by function, "costs of good sold,"(product costs) and "selling and administrative." (period costs) *sales - costs of good sold = gross margin *gross margin-selling/administrative = net operating income - useful for external reporting.

Fixed Costs

remains constant, *in total*, regardless of changes in total activity. some examples are depreciation, insurance, salaries, rent, and property tax. ex. the total amount of rent paid on a company building is the same regardless of how many guests come in and out per month. -average fixed cost per unit varies inversely with level of activity. (fixed cost/activity base)

Total Period Cost

selling cost + administrative cost

Opportunity Cost

the benefit that is given up when one option is chosen over another. not in accounting records, but should be considered in business decisions. if you have a job where you get paid $200 a week and you choose to go to the beach one week instead, your opportunity cost of going to the beach is the $200 you could have made.

Direct Materials

the parts that go into making a product and whose costs can be conveniently traced to it. this does not have to be "raw materials" in the actual sense like wood or iron ore. it can also be the plastic used to make computers or the seats that are put in airplanes.

Cost Behavior

the way a cost reacts to a change in the level of activity. for example, if sales rises or falls, other costs may also rise or fall, or stay the same. -fixed, variable, mixed costs -cost structure: a company may have a specific amount of fixed, variable, and mixed costs.

Differential cost/revenue

when making a decision, any future cost/revenue that differentiates between two choices. incremental: increase in cost between options decremental: decrease in cost between options