CHAPTER 1 ACCT 202 COST CLASSIFICATIONS FOR DIFFERENT PURPOSES

How to get net operating income traditional style

2 categories: cost of goods sold, selling and administrative expenses. Sales minus cost of goods sold = gross margin. Gross margin- selling and administrative expense equals net operating income.

Differential Cost

A future cost that differs between any two alternatives , they are always relevant

Activity base

Cost driven e.g. direct-labor hours, machine-hours, units produced and units sold. e.g. the number of surgeries is the activity base that explains the total cost of surgical gloves.

Incremental Cost

Differential cost, only refers to an increase in cost from one alternative to another. can either be fixed or variable.

Opportunity Cost

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

Work in Process

Units of product that are only partially complete and will require further work before they are ready for sale to the customer

Variable Cost

Variable Costs varies in total, in direct proportion to changes in the level of activity. Eg. cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as materials, supplies, power, commissions and shipping costs

direct cost

a cost that can easily and conveniently traced to a specific cost object

indirect cost

a cost that cannot be easily and conveniently traced to a specified cost object. TO BE TRACED TO A COST OBJECT SUCH AS A PARTICULAR PRODUCT THE COST MUST BE CAUSE BY THE COST OBJECT

Sunk Cost

a cost that has already incurred and that cannot be changed by any decision, they are not differential costs. Sunk costs should always be ignored

common cost

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

Fixed Cost

a cost that remains constant, in total, regardless in the level of activity. Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, property, taxes, rent, and supervisory salaries.

Managerial Accounting

concerned with providing information to managers within an organization so that they can formulate plans, control operations, make decisions.

financial accounting

concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.

Direct Labor

consists of labor costs that can be easily traced to individual units of product (TOUCH LABOR)

Mixed Costs

contains both variabl e and fixed cost elements y = a + bX

Administrative costs (Non manufacturing Costs)

include all costs associated with the general management (executive, organizational, and clerical costs) of an organization rather than with manufacturing or selling

Selling Costs (Non manufacturing Costs)

include all costs that are incurred to secure customer orders and get the finished product to the customer

Contribution approach

it provides managers with an income statement that clearly distinguished between FIXED and VARIABLE costs and therefore aids planning, controlling, and decision making.

Traditional income statement

prepared primarily for external reporting purposes reliant on cost classifications for preparing financial statements (product and period costs). organizing cost into two categories

Indirect materials

raw materials that cannot be easily traced

Raw materials

refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company

Direct Materials

refers to a raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product

Indirect Labor

refers to employees such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility

Cost Behavior

refers to how a cost reacts to changes in the level of activity (variable, fixed, or mixed)

Conversion Cost

refers to the sum of direct labor and manufacturing overhead. The term _____ is used to describe direct labor an manufacturing overhead because these costs are incurred to convert direct materials into finished products

The contribution margin

the amount remaining after variable expenses have been deducted from sales revenue; contributing toward covering fixed expenses and then toward profits for the period.

Prime cost

the sum of direct materials costs and direct labor costs

Manufacturing overhead

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor.