Chapter 1 ACG2071 (Managerial Accounting) Holly Sudano FSU

Service Companies

Sell (provide) intangible services. (Examples: Health care, consulting, banking, insurance, legal, etc.)

Merchandising Companies

Resell tangible products purchased from suppliers. (Examples: Walmart, Target, Best Buy, Sports Authority, etc.)

Manufacturing Companies

Convert raw materials into new finished products by using labor, plant, and equipment. (Examples: Toyota, Ben and Jerry's, Jelly Belly, etc.)

What is a Cost Object?

Anything we want to know the cost of.

Direct Costs

Costs that can easily be traced to the cost object. (Example: A football coach's salary can be easily traced to the cost of having a football team.)

Indirect Costs

Costs that canNOT be easily traced to the cost of the object. Costs must be allocated. (Example: The cost of the Athletic Director or a shared athletic training facility cannot be directly traced to the cost of having a football team. These costs are common costs that are incurred to support a number of cost objects (not just the football team) but cannot be traced to them individually.)

Product Costs

All of the costs incurred in acquiring or producing a product.

What are the product costs for a merchandising company?

- Cost of the merchandise

- Freight-in

- Customs/duties

- Costs of getting the product ready for sale

What are the product costs for a manufacturing company?

- Direct Materials (DM)

- Direct Labor (DL)

- Manufacturing Overhead (MOH)

Direct Materials (DM) [This is a Prime Cost]

The primary raw materials that become an integral part of the finished product and whose costs can be easily traced to the finished product.

Direct Labor (DL) [This is a Prime Cost and a Conversion Cost]

Labor costs of employees who physically convert raw materials into a finished product. These costs can be easily traced to the finished product.

Manufacturing Overhead (MOH) [This is a Conversion Cost]

All other manufacturing costs, including indirect materials, indirect labor, and other indirect manufacturing costs (Examples: depreciation, insurance, and utilities incurred in the manufacturing process or at the manufacturing factory or plant).

What are the 3 categories of inventory?

- Raw Materials (RM) Inventory

- Work in Process (WIP) Inventory

- Finished Goods (FG) Inventory

Raw Materials (RM) Inventory

All raw materials used in the manufacturing process.

Work in Process (WIP) Inventory

Goods that have been started but not yet finished.

Finished Goods (FG) Inventory

Completed goods that have not been sold.

Period Costs

All costs that are associated with the selling of products and the administration of the business. They are often referred to as "operating expenses" or "selling and administrative expenses". They are expensed on the Income Statement in the period incurred. They do not become a part of inventory.

Cost Behavior

How a cost "behaves" or reacts to changes in activity levels.

Cost Driver/Activity Base

The activity that "drives" or causes costs to change.

Variable Costs

Costs that change in total with changes in activity. These costs change in direct proportion to changes in activity.

Fixed Costs

Costs that remain constant in total regardless of changes in activity. These costs can be further classified...

Committed Fixed Costs

Fixed costs that the company cannot change in the short run.

Discretionary Fixed Costs

Fixed costs that management has the ability to change or influence in the short run.

Mixed Costs

Costs that have both a fixed component and a variable component.

Step Costs

Costs that remain constant for a small range of activity but then jump to a different fixed level with moderate changes in activity.

Direct materials and direct labor are?

Variable Costs

Manufacturing Overhead (MOH) and operating expenses (Example: selling and administrative expenses) can be...?

Fixed and Variable

Contribution Margin Income Statements

Prepared for internal use only. They break down costs into variable costs and fixed costs.

Cost Classifications for Decision Making

- Relevant Costs

- Irrelevant Costs

- Differential Costs

- Differential Revenues

- Incremental Costs

- Incremental Revenues

- Sunk Costs

- Opportunity Costs

Relevant Costs

Costs that impact a decision.

Irrelevant Costs

Costs that have no impact on a decision.

Differential Costs

The difference in cost between two alternatives.

Differential Revenues

The difference in revenue between two alternatives.

Incremental Costs

The additional cost of one alternative over another.

Incremental Revenues

The additional revenue generated by one alternative over another.

Sunk Costs

Costs that have already been incurred and cannot be changed.

Opportunity Costs

The potential benefit forgone by choosing one alternative over another.