MACCT chapter 1

Purposes of Cost Classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

Examples of manufacturing overhead

1. Depreciation of manufacturing equipment 2. Utility costs 3. Property taxes 4. Insurance premiums incurred to operate a manufacturing facility

Classifications of Manufacturing Costs

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

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.

Administrative Costs

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

Manufacturing Overhead

Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products.

discretionary fixed costs

May be altered in the short-term by current managerial decisions

Product costs

all the costs that are involved in acquiring or making a product.

Sunk costs

already been incurred and cannot be changed now or in the future.

indirect labor

cannot be easily or conveniently traced to specific units of product.

indirect materials

cannot be easily or conveniently traced to specific units of product.

Types of Fixed Costs

committed and discretionary

Managerial Accounting

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

Financial Accounting

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

Finished goods costs

consists of completed units of product that have not yet been sold to customers.

Raw materials

includes any materials that go into the final product.

MOH includes

indirect materials and indirect labor

Period costs

selling costs and administrative costs.

Differential costs (incremental costs)

the difference in cost between any two alternatives.

cost behavior classifications

variable costs fixed costs mixed costs

Opportunity Cost

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

Selling Costs

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

Direct Labor

Direct labor costs are those labor costs that can be easily traced to individual units of product.

Direct Materials

Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it.

committed fixed costs

Long-term, cannot be significantly reduced in the short term

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.

Product costs include

direct materials, direct labor, manufacturing overhead