Chapter 1: Managerial Accounting & Cost Concepts

General Cost Classifications

1. Assign Costs to Cost Objects 2. Inventoriable Product Costs 3. Prime Costs 4. Conversion Costs 5. Period Costs/Operating Expenses

Steps to use High-Low Method to estimate fixed and variable cost of a mixed cost:

1. Choose the data points pertaining to the highest and lowest activity levels or volume. ***Not $ amount 2. Determine the total costs associated with the two chosen points. 3. Calculate the change in cost between the two data points and divide it by the change in activity levels between the two data points 4. Take total cost at either activity level and deduct the variable cost component (level of activity * the result from step 3) The residual represents the estimate of total fixed costs. 5. Construct an equation that can be used to estimate the total cost at any activity level using Y=A+Bx

Inventoriable Product Costs

1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead

Period Costs/Operating Expenses

1. Selling Costs 2. Administrative Costs

Assigned Costs to Cost Objects

A direct cost as it relates to one cost object can be and indirect cost as it relates to an entirely different cost object. Include Direct Costs & Indirect Costs.

Opportunity Cost

A forgone benefit due to choosing one alternative over another alternative.

Selling Costs

All costs necessary to get the customer's order and get the customer the finished product. Ex: advertising, shipping, sales related costs, storage, etc.

Inventoriable Period Costs

All costs that are not product costs which is all your operating expenses

Inventoriable Product Costs

All costs that can be attached to an item manufactured and include all costs involved in acquiring and making the product. Includes: 1. DM 2. DL 3. MOH

Manufacturing Overhead

All other costs; Also known as factory overhead. Includes: 1. Indirect Materials 2. Indirect Labor 3. Other/Miscellaneous Costs (Maintenance & Repairs on equipment, Utilities, Rent, Taxes, Depreciation, Insurance, Etc.) ***Must relate to the manufacturing facility itself

Sunk Cost

Always irrelevant. A cost arising from a past decision that has no bearing on the decision you are trying to make.

Raw Materials

Any materials that are used to manufacture the final product. Can be assigned to either Direct or Indirect.

Cost Object

Anything for which cost data is desired

Cost Flow Chart

Consists of: 1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead Prime Costs: (1) Direct Materials +(2) Direct Labor Conversion Costs: (2) Direct Labor +(3) Manufacturing Overhead

Direct Cost

Cost that can be easily traced to a cost object

Indirect Cost

Cost that cannot be easily traced to a cost object

Discretionary Fixed Costs (managed fixed costs)

Costs that arise from annual decisions by management to spend on certain fixed costs. These costs can get changed in short period of time based on management's decisions.

Relevant Costs

Costs that different between 2 alternatives.

Irrelevant Costs

Costs that do not differ between 2 alternatives.

Administrative Costs

Executive, organizational, and clerical costs associated with the general management of the entire company. Ex: executive wages, accounting, public relations, legal, HR, etc.

Cost Behavior

How a cost reacts to changes in the level of activity. Variable: cost that varies, in total, in direct proportion to the activity level change Fixed: cost that remains constant, in total, regardless of changes in activity Mixed: cost that contains both variable and fixed cost elements

Differential/Incremental Cost

If you have relevant costs then the difference between the 2 alternatives is the differential cost.

Direct Labor

Labor costs (wages) that can be easily traced to a finished product.

Indirect Labor

Labor costs that cannot be physically traced to the finished product. Ex: janitors, supervisors, material handlers, etc.

Direct Materials

Raw Materials that become an integral part of the finished product and whose costs can be traced to the finished product.

Indirect Materials

Raw materials that cannot be easily traced to the finished product. Ex: lubricants, adhesions

Format of Income Statements: Traditional Income Statement

Sales -COGS =Gross Margin (Gross Profit) -Operating Expenses =Net Income/Loss

Format of Income Statements: Contribution Margin Income Statement (used internally only)

Sales -Variable costs =Contribution Margin -Fixed Costs =Net Income/Loss

Conversion Costs

Sum of all direct labor and manufacturing overhead costs. DL +MOH =Conversion costs

Prime Costs

Sum of direct materials and direct labor costs. **All direct costs DM +DL =Prime Costs

Common Cost

cost that isn't easily traced because it is incurred to support a number of cost objects

Committed Fixed Costs

represent the costs that a company is committed and trapped in it for years and cannot be significantly changed over short period of time