MGMT 201 Chapter 1: Managerial Accounting and Cost Concepts

Financial management

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

Managerial accounting

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

Purpose of cost classification

assigning costs to cost objects, accounting for costs in manufacturing companies, preparing financial statements, predicting cost behavior in response to changes in activity, making decisions

Direct costs

costs that can be easily and conveniently traced to a unit of product or other cost object, trace these costs

Indirect costs

costs that cannot be easily and conveniently traced to a unit of product or other cost object, allocate these costs

Classifications of manufacturing costs

direct materials, direct labor, manufacturing overhead

Direct materials

raw materials that become an integral part of the product that can be conveniently traced directly to it, example is a seat installed in an aircraft

Direct labor

labor costs that can be easily traced to individual units of product, example being wages paid to automobile assembly workers

Manufacturing overhead

includes all manufacturing costs except direct material and direct labor, 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 traced or conveniently traced to specific units of products

Examples of manufacturing equipment

depreciation of manufacturing equipment, utility costs for a manufacturing facility, property taxes for a manufacturing facility, insurance premiums incurred to operate a manufacturing facility

Prime costs consist of

direct material and direct labor

Conversion costs consist of

direct labor and manufacturing overhead

Nonmanufacturing costs (period costs) consist of

selling costs and administrative costs

Selling costs

costs necessary to secure the order and deliver the product, can be either direct or indirect costs

Administrative costs

all executive, organizational, and clerical costs, can be either direct or indirect costs

Period costs

include all selling and administrative costs

Product costs

include all costs involved in acquiring or making a product, “attach” to a unit of a product as it is purchased or manufactured and they remain attached to each unit of product as long as it remains in inventory awaiting sale

For manufacturing companies, product costs include

raw materials, work in process, finished goods

Raw materials

include 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

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

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

costs are transferred from Work in Process to Finished Goods

When a manufacturer sells its finished goods to customers

costs are transferred from finished goods to cost of goods sold

Cost behavior

how a cost will react to changes in the level of activity

Common cost classifications

variable costs, fixed costs, and mixed costs

Variable cost

cost that varies, in total, in direct proportion to changes in the level of activity

Fixed cost

cost that remains constant, in total, regardless of changes in the level of activity

Types of fixed costs

committed and discretionary

Committed costs

long term, cannot be significantly reduced in the short term

Discretionary costs

may be altered in the short term by current managerial decisions

Mixed costs

contains both variable and fixed elements, example being utility costs

Differential costs (incremental costs)

difference in cost between any two alternatives, can be either fixed or variable

Differential revenue

difference in revenue between two alternatives

Opportunity cost

potential benefit that is given up when one alternative is selected over another, costs are not usually found in accounting records but must be explicitly considered in every decision

Sunk costs

already been incurred and cannot be changed now or in the future, these irrelevant costs should be ignored when making decisions