Management Accounting chapter 2

Cost

Sacrifice of resources that is either an opportunity cost or an outlay cost

Expense

A cost that has been used up or consumed during a specific accounting period to generate revenue

Product cost

Costs related to products

Period costs

Costs related to time periods

Why is cost of sales an expense?

They provide revenues for the period in which the goods were sold

Direct material

Raw materials, components, and other parts that can be traced to a specific product

Direct labour

Payments and benefits for those employees who convert direct materials into finished products

Manufacturing overhead

Indirect material and labour, and other overhead

Variable cost

Costs that vary in direct proportion to the production values

Fixed cost

Costs that do not change within a defined range of underlying productive activity

Material resources

Tangible, physical resources that are added or converted into products

Conversion resources

Resources used in processes to convert materials into products

Operating resources

Provide the infrastructure necessary to provide logistical support and support for the conversion process

Production resources

Resources used in an observable way (labour, bank-loan supervision, buildings that house production processes)

Non-production resources

Resources used to provide the logistical, administrative, and marketing infrastructure necessary to manage the flow of resources and finished products (management salaries, distribution costs, legal services)

Opportunity cost

The potential benefit that is given up when one alternative is selected over another

Outlay cost

The value of actual resources that you give up in order to obtain other resources or consumption

Direct cost

Cost of resources used that can be traced directly to decisions

Indirect costs

Cost of resources used that cannot be traced directly to specific products or services provided

Committed costs

Are incurred because of policies or contractual obligations

Cash or out of pocket cost

The incremental cost paid by cash or credit to achieve a particular purpose

Accrual cost

Total cost of resources used during an extended time period divided by a measure of the resources used to pick up orders

Sunk costs

Past payments for resources that cannot be changed by any current or future decision

Total costs

Direct costs + indirect costs

Gross margin ratio

(sales turnover - cost of sales) / sales turnover

Operating income

Gross margin - period expenses

Return on sales ratio

Operating income / sales

Prime costs

Direct materials + direct labour

Conversion costs

Direct labour + manufacturing overhead

Ending balance (EB)

Beginning balance (BB) + transfers-in (TI) - transfers-out (TO)

Work-in-progress (WIP)

Cost of partially completed products in process

Raw materials inventory

Costs of material that not yet have been put into production

Finished goods inventory

Cost of products ready for sale or delivery to customers

Overtime premium

Extra hourly compensation paid to an employee who works beyond the time normally allowed by regulation or labour contracts

Idle time

Time that employee spend unproductively because of events such as equipment breakdowns or new set-ups of production runds

Waste

Cost of unrecovered resources applied to defective products that cannot be sold

Shrinkage

Cost of unrecovered stolen or misshipped finished products

Selling costs

Sales commissions, sales personnel, salaries, and the sales departments building occupancy costs

Administrative costs

Costs incurred to manage the organisation and provide staff support