Chapter 2 - Managerial accounting and cost concepts. This chapter begins by describing the work of management and the need for managerial accounting information followed by a discussion of the differences and similarities between financial and managerial accounting. Next, we explain that in managerial accounting, the term cost is used in many different ways. | Managerial Accounting and Cost Concepts Chapter 2 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions Assigning Costs to Cost Objects Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object. The Product Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor Nonmanufacturing Costs Administrative Costs All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs. Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement Prime Costs and Conversion Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Variable Cost A cost that varies, in total, in direct proportion to changes in the level of activity. Your total texting bill may be based on how many texts you send. Number of Texts Sent Total Texting Bill Variable Cost Per Unit However, variable cost per unit is constant. The cost per text sent may be constant at 5 cents per text message. Number of Texts Sent Cost Per Text Sent The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost Units produced Miles driven Machine hours Labor hours Fixed Cost A cost that remains constant, in total, regardless of changes in the level of the activity. Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee Fixed Cost Per Unit However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. The average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost) End of Chapter 2
