Accounting Principles and Cost Concepts

These flashcards cover key concepts in accounting from financial and managerial perspectives, cost concepts, cost classifications, income statement formats, and profitability measures.

Financial Accounting

Primary source of information for stakeholders; focused on an external audience.

Managerial Accounting

Basis for operational, marketing, and strategic decisions; focused on an internal audience.

Cost Object

Anything for which cost data are desired, e.g., products, plant, departments.

Direct Cost

Costs that can be easily traced to a cost object, e.g., raw materials, direct labor.

Indirect Cost

Costs that cannot be easily traced to a cost object, e.g., rent, utilities.

Direct Materials

Raw materials that become part of the finished product, e.g., wood for a table.

Direct Labor

Costs that can be easily traced to the product, e.g., wages of workers assembling furniture.

Manufacturing Overhead

All manufacturing costs except direct materials and labor, e.g., factory rent.

Prime Costs

Sum of direct materials and direct labor.

Conversion Costs

Sum of direct labor and manufacturing overhead.

Product Costs

Include direct materials, direct labor, and manufacturing overhead; also known as inventoriable costs.

Period Costs

All operating expenses such as R&D and marketing; expensed immediately in the income statement.

Raw Materials

Materials going into the final product, e.g., metal sheets for machinery.

Work in Process

Partially completed units, e.g., half-assembled cars.

Finished Goods

Completed units not yet sold, e.g., packaged smartphones in storage.

Selling Costs

Costs necessary to secure orders and deliver products, e.g., advertising, shipping.

Administrative Costs

Costs related to general management, e.g., accountant salaries.

Variable Cost

Changes in direct proportion to activity level, e.g., cost of materials per unit produced.

Fixed Cost

Remains constant in total but decreases per unit as production increases, e.g., rent.

Committed Fixed Costs

Long-term costs that cannot be reduced in the short term, e.g., lease on a factory.

Discretionary Fixed Costs

Costs that may be adjusted in the short term, e.g., training programs.

Common Cost

A type of indirect cost that supports multiple cost objects.

Contribution Margin

Sales revenue minus all variable expenses.

Mixed Costs

Contain both variable and fixed components.

Opportunity Cost

Benefit lost when choosing one option over another.

Sunk Cost

A past cost that cannot be recovered and is irrelevant to decisions.

Gross Margin

Sales minus Cost of Goods Sold, measures profitability after direct costs.

Contribution Format Income Statement

Internal management format that focuses on contribution margin.

Differential costs

Difference in cost between any two alternatives

Traditional Format Income Statement

Used for external reporting, focuses on gross margin

Contribution Format Income Statement

Used by management, internal, uses contribution margin

Gross margin

Sales - COGS

Contribution Margin

Sales - Variable Costs

Product cost

Costs that are directly associated with the production of goods, including direct materials, direct labor, and manufacturing overhead.

Period Costs

Costs that are not directly tied to production, including selling and administrative expenses.

Selling costs

Expenses incurred to promote and distribute products, including advertising, sales salaries, and commissions.

Administrative costs

Expenses related to the general administration of a business, such as office salaries, utilities, and office supplies.

Committed fixed cost

A fixed cost that is legally or contractually obligated and cannot be easily altered in the short term, such as leases or long-term contracts.

Discretionary Fixed Cost

A fixed cost that can be adjusted or eliminated in the short term without legal or contractual consequences, such as advertising or research expenditures.

Mixed cost equation

Y = a + bX, a = total fixed cost, b = variable cost per unit, X = level of activity

Cost of Goods Sold

Beginning inventory + purchases - ending inventory