Management accounting topic 2

define prime cost

direct material + direct labor

Name the three types of manufacturing costs

direct materials, direct labour, manufacturing overheads

What are the two categories of non-production costs

marketing/ selling costs and administrative costs

explain direct materials

those materials that become an integral part of a finished product and can be traced into it

Beginning work in progress was €125,000. Manufacturing costs incurred for the month were €835,000. There were €200,000 of partially finished goods remaining in work in progress stock at the end of the month. What was the cost of goods manufactured during the month?

835000 + 200,000-125000 you minus the beginning because obviously they were finished

Define a Schedule of cost of goods manufactured

A schedule showing the direct materials, direct labour and manufacturing overhead costs incurred for a period and assigned to Work in Progress and completed goods.

Manufacturing overheads

All costs associated with manufacturing except direct materials and direct labour. E.g. indirect materials and labour, depreciation, repairs, production equipment, light and heat, property taxes.

what is a marketing/ selling cost

All costs necessary to secure customer orders and get the finished product or service into the hands of the customer. These costs are often called order-getting or order-filling costs. E.g. advertisement, shipping, sales travel, sales commission, sales salaries and cost of finish goods warehouse.

what is an administrative cost

All executive, organizational and clerical costs associated with the general management of an organization rather than with manufacturing, marketing or selling. E.g. executive compensation, general accounting, secretarial, public relations.

define a conversion cost

Direct labour + manufacturing overhead costs

define a product cost

Product costs are all costs that are involved in the purchase or manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead

Define indirect labour

The labour costs of caretakers, supervisors, materials handlers, and other factory workers that cannot easily and conveniently be traced directly to particular products

Relevant range

The range of activity within which assumptions about variable and fixed cost behaviour are valid.

Define cost behaviour

The way in which a cost reacts or responds to changes in the level of business activity.

explain the matching principle of accounting

This principle is based on the accrual concept and states that costs incurred t generate particular revenues should be recognise as expenses in the same period that the revenue is recognised

Direct labour

Those factory labour costs that can easily be traced to individual units of product. Also called touch labour

summary of variable cost vs fixed cost

Total variable cost is proportional to the activity level within the relevant range. Cost per unit remains unchanged over a wide range of activity. Total fixed cost remains the same even when the activity level changes within the relevant range. Fixed cost per unit goes down as activity level goes up.

What are raw materials

any materials that go into the final product

State the basic equation for inventory accounts

beginning balance + additions to inventories = ending balance + withdrawals from inventory

determining cost of goods manufactured

cost of goods manufactured= closing balance + manufacturing costs - beginning balance

define a period cost

costs that are taken directly to the profit and loss account as expenses in the period in which they are incurred or accrued; such costs consist of selling (marketing) and administrative expenses.

Common costs

A common cost is a cost that is common to a number of costing objects but cannot be traced to them individually. For example, the wage cost of the pilot of a 787 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight

What is a Fixed cost

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

Define a Variable cost

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

What is the difference between a direct and indirect cost?

A direct cost can be easily or conventionally traced to the particular cost object under consideration, whereas an indirect cost cannot be easily or conventionally traced to the particular cost object under consideration.

What is an Activity base

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is an activity base for explaining the total cost of X-ray film. Also referred to as a cost driver, examples are, machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

What types of entities are costs associated with?

Business, non-business, manufacturing retail and service.

What are costs incurred to secure customers' orders called?

Marketing or selling costs.

long winded understanding explanation of a product cost

Product costs are all costs that are involved in the purchase or manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead. This concept is called absorption costing. Product costs are viewed as attaching the costs to a unit of product as goods are purchased or manufactured and they remain attached as the goods go into inventories awaiting sale. So initially product costs are assigned to inventories in the balance sheet. When the goods are sold the costs are released from the inventories as expenses (typically costs of goods sold) and matched against sales revenue. They are also known as inventoriable costs. Product costs are not necessarily treated as expenses in the period in which they are incurred but rather in the period in which they are sold.

What are indirect materials

Small items of material such as glue and nails. These items may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience