Managerial Chapter 2

relevant range

sweet spot in a game of darts. It's the range where costs behave predictably. Outside this range, costs may change.

What happens to fixed costs outside the relevant range?

They may change

Cost drivers

hidden forces that influence costs. They are metrics that cause costs to change. For example, the number of cars produced at Tesla drives the cost of steering wheels.

Fixed Costs Examples

Salaries,

Why is calculating the unit cost important for decision-making in business?

It provides a simple way to understand costs per unit, aiding in pricing and budgeting decisions.

Managers should focus on…—including both fixed and variable costs—before calculating unit costs.

total costs

What is a potential risk of relying solely on unit costs for budgeting?

It may result in underestimating total costs if production levels change.

Manufacturing Sector

Toyota and Samsung; taking raw materials and crafting them into finished goods, like cars and smartphones.

Merchandising Sector

Best Buy and Target. These companies are the savvy traders, buying products in their original form and selling them without altering their essence.

Service Sector

law firms and banks thrive. This neighborhood is all about providing intangible products—services that cater to the needs of the town's residents.

Direct Materials Inventory

all the raw materials waiting to be transformed into something amazing, like computer chips for smartphones.

Work in Process Inventory

place where goods are partially completed, like a cake that's still in the oven.

Finished Goods Inventory

These are the completed products, like shiny new smartphones, ready to be sold and bring joy to their new owners.

Direct Materials Cost

can be easily traced to the final product, like the steel in a Tesla or the chips in a smartphone.

Direct Manufacturing Labor Costs

hardworking individuals who transform materials into finished goods. These are the wages and benefits of the assembly-line warriors.

Indirect Manufacturing Costs

unsung heroes that support the production process but can't be directly traced to a single product. These include plant maintenance, rent, and the salaries of plant managers. Often referred to as manufacturing overhead costs, these costs ensure the smooth operation of the manufacturing kingdom.

Inventoriable Costs

the costs of a product that remain hidden as assets until the product is sold. For manufacturing companies, this includes all manufacturing costs, from direct materials to manufacturing overhead.

Period Costs

appearing in the income statement as expenses in the period they occur. These costs, such as marketing and customer service, are expected to boost revenues only in the current period, not in the future. For manufacturing companies, ______ include all nonmanufacturing expenses

Why are R&D expenses considered period costs?

They are uncertain and difficult to match with future revenues.

In a manufacturing setting Inventoriable costs start in…

start in the work-in-process account, then move to finished goods, and finally, when the products are sold, they become part of the cost of goods sold on the income statement.

In a manufacturing setting, period costs are like sprinters, they…

don't linger in inventory but are expensed immediately as they occur.

Prime Costs 

the direct costs that are easy to trace to a product, like the cost of raw materials and direct labor.

Conversion Costs

They include direct labor and manufacturing overhead, like the electricity to power the ovens and the maintenance of the kitchen equipment. Think of them as the magic that transforms ingredients into a cake.

Which of the following is included in both prime costs and conversion costs?

Direct Manufacturing Labor

Why is it important for management accountants to clearly define and understand how costs are measured?

To address specific management questions and situations effectively.

Why is it important for companies to clearly define what direct labor includes?

Prevent disputes regarding cost-reimbursement contracts and tax payments.

Product Cost

is like a chameleon, changing its colors based on the context. For pricing and product-mix decisions, managers look at the total profitability, considering costs from all business functions. It's like evaluating a car by looking at its design, performance, and features.

What does 'product cost' include when preparing financial statements under GAAP?

All business Function Costs

The three key features of cost accounting and cost management

Calculating Cost, Planning and Control, Decision Analysis

Manufacturing organization

Cost object
 Product
Direct costs
 Costs of materials and labor
Indirect costs
 Utilities, depreciation of plant equipment, insurance,
property taxes, inspection, supervision, maintenance of
machinery, storage, and handling

Service Organization

Cost object
 Preparation of tax returns
Direct costs
 Paper, computer usage, and accountant's labor
Indirect costs
 Supplies, office rental, utilities, secretarial labor, telephone
usage, and depreciation of office furniture

Indirect costs are not traced to cost objects for one of two
reasons:

• A company may lack the technical ability to trace indirect
costs to cost objects.
• A company may decide that tracing costs is not
economically feasible.

Cost Behavior

how a cost will react to changes
in the level of activity.
 The most common classifications are:
• Variable costs—changes in total in proportion to
changes in the related level of activity or volume.
• Fixed costs—remain unchanged in total regardless
of changes in the related level of activity or volume.
• Mixed costs--- A Mix of Both above.
 Costs are fixed or variable only with respect to a
specific activity or a given time period.

Nonmanufacturing Costs

selling costs (costs necessary to secure and deliver the product) and administrative costs (executive organizational and clerical costs)