Acct201B - Chapter 01: Managerial Accounting and Cost Concepts

Lockk in twin

cost object

anything for which cost data is ideal; this includes products, customers, plants, office locations, and departments

direct cost

specific cost objects that can be immediately traced

indirect cost

cannot be traced to a specific cost object

manufacturing cost

two direct cost categories, direct labor and direct materials; one indirect cost category in manufacturing overhead. [Direct labor + direct materials + manufacturing overhead]

direct materials

refers to raw materials that can be easily traced to finished products

raw materials

refers to any material used in the final product, not just wood pulp or iron ore; the finished product of one company can be raw materials for another company

direct labor

includes labor costs easily traceable to finished products; direct labor = touch labor

manufacturing overhead / manufacturing costs / factory burden

includes all manufacturing costs except direct materials and direct labor; manufacturing overhead costs are indirect costs because they cannot be traced to specific products - also includes depreciation and utility costs

indirect materials

raw materials, such as the solder to make electrical connections or glue to assemble chairs, that cannot be traced to finished products

indirect labor

refers to employees that contribute to running a manufacturing facility but their labor cannot be traced to the finished products

direct manufacturing costs

also called prime costs are the sum of direct materials cost and direct labor cost

nonmanufacturing costs

divided into two categories: selling costs and administrative costs

selling costs

all costs incurred to secure customer orders and give the finished product to the customer

administrative costs

all costs associated with the general management rather than the manufacturing or selling costs

matching principle

based on the accrual concept that costs incurred to generate revenue should be recognized as expenses in the same period the revenue is recognized

product costs / inventoriable costs

include all costs involved in acquiring or making a product; expensed once they are sold (includes manufacturing overhead)

period costs

all costs that are not product costs; expensed once they are incurred (selling and administrative expenses are treated as period costs)

cost behavior

refers to how a cost reacts to changes in level of activity

variable costs

varies in direct proportion to changes in the level of activity; includes cost of goods sold, direct materials, direct labor; variable elements of manufacturing overhead: such as indirect materials, supplies, and power

when variable cost is constant

variable cost can be constant if expressed on a per-unit basis, i.e. individual units are constant

fixed costs

remains constant regardless of changes in level of activity (includes rent and supervisory salaries); the average fixed cost per unit becomes progressively smaller

committed fixed costs

fixed costs that cannot be changed and often lock companies in mulit-year decisions; ex: investments, real estate taxes, insurance premiums, and salaries of top management

relevant range

range of activity within which the assumption that cost behavior is strictly linear is valid; fixed costs increase/decrease by discrete steps

mixed costs / semivariable costs

contains both variable and fixed cost elements

differential costs / incremental costs

a future cost that differs between any two alternatives

differential benefits

future revenue that differs between two alternatives

opportunity costs

the potential benefit given up when on option is selected over another; considered in decision making

sunk costs

already incurred nd cannot be changed by any decisions made later

contribution margin

sales revenues - variable expenses