Chapter 2
direct cost
a cost that can be easily traced back to the cost object; e.g. cost object is prius, tire is a direct cost
indirect cost
a cost that relates to the cost object, but cannot be easily traced back to it; e.g. cost object is prius, factory utilities are an indirect costs because you need to pay them to produce the prius but they cannot be easily traced back to it
finished goods inventory
completed goods that have not yet been sold
indirect labor
cost of all employees in the plant other than those employees directly converting raw materials into finished product (forklift operators, security officers, plant janitors, supervisors)
period costs (SG&A)
costs from all other areas of the value chain; they are expenses in the period in which they occur
sunk cost
costs that have already been incurred
controllable
costs that management is able to influence or change
work in process inventory
goods that are partway through the manufacturing process but not yet complete
service company
in business to sell intangible services such as healthcare, insurance, banking, and consulting rather than tangible products; generally don't hold inventory
product costs (inventoriable costs)
include only the costs incurred at the production/purchases stage of the value chain; these costs are held in the inventory account until the product is sold, when they are moved to the COGS account
manufacturing overhead
includes all manufacturing costs other than direct materials and direct labor
total product cost
includes the costs of all resources used throughout the value chain
3 components of MOH
indirect materials, indirect labor, other indirect manufacturing costs
conversion costs
manufacturing overhead + direct labor
indirect materials
materials used in the plant that are not easily travel to individual units (janitorial supplies, machine lubricant)
other indirect MOH costs
plant related costs (depreciation, property taxes, insurance, etc)
direct materials
primary materials that become a physical part of the finished product; e.g. steel, tires
merchandising company
resell tangible products they buy from suppliers; hold inventory; inventory costs include cost of the goods plus all costs necessary to get their merchandise in place and ready to sell
three types of companies
service, merchandising, and manufacturing
fixed costs
stay constant in total over a wide range of activity levels
operating income
the company's earnings before interest and income taxes
direct labor
the cost of compensating employees who physically convert raw materials into the company's products
differential cost
the difference in cost between two alternatives
manufacturing company
use labor, plant, and equipment to convert raw materials into new, finished products; hold three inventory accounts
value chain
all of the activities that add value to the company's products and services: research and development, design, production/purchases, marketing, distribution, customer service
raw materials inventory
all raw materials used in manufacturing
cost object
anything for which managers want a separate measurement of cost; can include the actual product, marketing strategies, geographic segments of business, departments
variable costs
change in total in direct proportion to changes in volume
prime costs
combination of direct materials and direct labors
uncontrollable costs
company has little or no control over costs (ex. property tax and insurance costs of plants)