Managerial Accounting Terms

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of the activity. If expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost per unit is constant.

An Activity Base (Cost Driver)

A measure of what causes the incurrence of a variable cost. Examples: units produced, machine hours, miles driven, labor hours.

Administrative Costs

All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.

B and E

Types of Fixed Costs

Committed and Discretionary

Selling Costs

Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.

Direct costs

Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor

Direct Materials

Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: Radio installed in a car.

Manufacturing Overhead Examples

Examples of manufacturing overhead: Depreciation of manufacturing equipment,Utility costs, Property taxes, Insurance premiums incurred to operate a manufacturing facility. Only those indirect costs associated with operating the factory are included in manufacturing overhead.

Committed Costs

Fixed Costs that are long term and cannot be significantly reduced in the short term. Examples: Depreciation on Buildings and Equipment and Real Estate Taxes

Manufacturing Overhead

Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products. Includes indirect materials that cannot be easily or conveniently traced to specific units of product. Includes indirect labor costs that cannot be easily or conveniently traced to specific units of product.

Product Costs

Product costs includes all the costs that are involved in acquiring or making a product. Product costs "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.

Cost behavior

Refers to how a cost will react to changes in the level of activity. The most common classifications are: Variable costs, Fixed costs, Mixed costs.

PPT26

Resume

Period Costs Include:

all selling costs and administrative costs

Product Costs Include:

direct materials, direct labor, and manufacturing overhead

Conversion Cost

Direct Labor + Manufacturing Overhead

Discretionary Costs

May be altered in the short term by current managerial decisions. Examples: Advertising and Research and Development

Indirect costs

Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor

Direct Labor

Direct labor costs are those labor costs that can be easily traced to individual units of product. Example: Wages paid to assembly workers

Manufacturing Product Costs

For manufacturing companies, product costs include: Raw materials: includes any materials that go into the final product; work in process: consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer; finished goods costs: consists of completed units of product that have not yet been sold to customers.

Transfer of Product Costs

When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

Prime Cost

Direct Material + Direct Labor