Chapter 1 - MANAGERIAL ACCT

Relevant Cost

1. Potential to influence a decision 2. Must occur in the future 3. Must differ between the various alternatives being considered

Non-Manufacturing Costs

Costs that are not related to producing a product, such as selling and administrative costs.

Irrelevant Cost

Will not influence a decision

Direct Materials

includes the major material inputs that can be directly and conveniently traced to each unit of product (the cost object). EXAMPLE: For a frozen pizza manufacturer, direct materials include the major ingredients (e.g., dough, sauce, cheese, and meat), as well as packaging materials (e.g., plastic and cardboard). Miscellaneous ingredients and materials (e.g., seasonings and glue for the cardboard box) that cannot be easily traced to the individual product would be considered "indirect materials" and included in the "manufacturing overhead" category.

Direct Costs

Costs that can be directly and conveniently traced to a specific cost object.

Conversion Costs

Direct Labor + Manufacturing Overhead

Direct Labor

Refers to the "hands on" labor that can be directly and conveniently traced to the product, such as the wages of employees on the pizza production line and in the packaging department. It does not include employees who rarely touch the product as it is being produced, such as "supervisors", "maintenance workers", and "factory engineers". The costs associated with those employees are considered "indirect labor" and counted as part of "manufacturing overhead" category.

Opportunity Costs

The benefit that you forgo when you select one alternative over another

Non-manufacturing Costs

Costs associated with running the business and selling the product as opposed to manufacturing the product. Classified into one of two groups: 1. "Marketing or selling expenses" incurred to get the final product to the customer. For Nestle, they would include advertising, sales commissions, and the cost of distributing the frozen pizzas to grocery stores. 2. "General and administrative expenses" associated with running the overall business, include general management salaries, rent and utilities for corporate headquarters, and corporate service functions such as the accounting, payroll, and legal departments.

Product Costs

Costs that are attached to the products as it is produced. Also called "inventoriable costs" because they are counted as inventory (an asset) until the product is finally sold. Follow the flow of the product as it is being produced and are initially recorded in one of the following inventory accounts, depending on where the cost is in the production process: Raw Materials Inventory, Work in Process Inventory, or Finished Goods Inventory. Once the product is finally sold, product costs are reported as Cost of Goods Sold and matched up against sales revenue on the income statement.

Period Costs

Costs that are expensed as soon as they are incurred. Include advertising, sales commission, distribution expenses, general and admin salaries

Manufacturing Costs

Costs that are incurred while making a physical product, such as direct materials, direct labor, and manufacturing overhead

Indirect Costs

Costs that cannot be directly conveniently traced to a specific cost object.

Variable Costs

Costs that change in total in direct proportion to a change in activity level.

Sunk Costs

Costs that have already been incurred and are not relevant to future decisions.

Out-of-Pocket Costs

Costs that involve an outlay of cash for items such as rent, utilities, and salaries

Fixed Costs

Costs that remain the same in total regardless of activity level

Total Conversion Cost

Direct Labor + Manufacturing Overhead

Total Prime Cost

Direct Materials + Direct Labor

Total Manufacturing Cost

Direct Materials + Direct Labor + Manufacturing Overhead

Manufacturing Overhead

Includes all manufacturing costs other than direct materials and direct labor incurred to produce a physical product. It includes all of the indirect costs that are incurred inside the manufacturing facility or factory that cannot be traced to each unit of product, such as indirect materials, indirect labor, factory rent, factory insurance, and factory utilities.

Manufacturing /Factory Overhead

Manufacturing overhead includes such things as the electricity used to operate the factory equipment, depreciation on the factory equipment and building, factory supplies and factory personnel (other than direct labor). How these costs are assigned to products has an impact on the measurement of an individual product's profitability