ACCT 303 : Chapter 4, Part 2 Managerial Accounting & Cost Concepts - Study Guide

Managerial Accounting & Cost Concepts - Study Guide

Chapter 4, Part 2 Overview

1. Needs of Management

• Financial Accounting: External reporting (e.g., stockholders, creditors).

• Managerial Accounting: Internal use for planning, controlling, decision-making.

2. Cost Classification Purposes

• Assigning costs to cost objects.

• Accounting for manufacturing costs.

• Preparing financial statements.

• Predicting cost behavior.

• Making decisions.

3. Assigning Costs to Cost Objects

• Direct Costs: Easily traced (e.g., direct materials, direct labor).

• Indirect Costs: Cannot be easily traced (e.g., manufacturing overhead).

• Common Costs: Indirect costs supporting multiple cost objects.

4. Manufacturing Cost Classifications

• Direct Materials: Integral to product (e.g., radio in a car).

• Direct Labor: Easily traced labor costs (e.g., assembly line wages).

• Manufacturing Overhead: Indirect materials & labor, factory expenses (e.g., utilities, depreciation).

5. Prime Costs vs. Conversion Costs

• Prime Costs = Direct Materials + Direct Labor.

• Conversion Costs = Direct Labor + Manufacturing Overhead.

6. Nonmanufacturing Costs

• Selling Costs: Order securing and delivery costs.

• Administrative Costs: Executive, clerical, and organizational costs.

7. Cost Classifications for Financial Statements

• Product Costs: Direct materials, direct labor, and manufacturing overhead (attached to inventory).

• Period Costs: Selling and administrative costs (expensed immediately).

8. Cost Flow in Manufacturing

• Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold.

9. Predicting Cost Behavior

• Variable Costs: Change in total with activity level but remain constant per unit.

• Fixed Costs: Remain constant in total, but vary per unit.

• Mixed Costs: Contain both variable and fixed elements (Y = a + bX).

10. Decision-Making Costs

• Differential Costs: Difference in cost between alternatives.

• Opportunity Cost: Foregone benefit from an alternative.

• Sunk Costs: Already incurred and irrelevant to decisions.

11. Income Statement Formats

• Traditional Format: Used for external reporting.

• Contribution Format: Used for internal decision-making.

Key Exam Questions to Review

1. What is the difference between direct and indirect costs?

2. How are product and period costs treated in financial statements?

3. What is the formula for mixed costs?

4. How do opportunity and sunk costs impact decision-making?

5. How do variable and fixed costs behave with activity changes?

Quick Tips for Success

• Understand the flow of costs in manufacturing.

• Memorize cost classification definitions.

• Practice applying cost formulas (e.g., Y = a + bX).

• Work through Quick Check questions for reinforcement.