Managerial Accounting and Cost Concepts

Chapter 2 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Summary of the Types of Cost Classifications

Financial Reporting Predicting Cost Behavior

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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 2-3 Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

Classifications of Manufacturing Costs Direct Materials Direct Labor Manufacturing Overhead 2-4

The Product

Direct Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

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Example: A radio installed in an automobile

Direct Labor

Those labor costs that can be easily traced to individual units of product.

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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 Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards.

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Nonmanufacturing Costs

Selling Costs Administrative Costs

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Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect 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 .

Inventory Cost of Good Sold Sale Period costs include all selling costs and administrative costs.

Expense

2-9 Balance Sheet Income Statement Income Statement

Prime Costs and Conversion Costs

Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead 2-10 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.

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Number of Texts Sent

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.

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Number of Texts Sent

The Activity Base (Cost Driver)

Units produced Machine hours A measure of what causes the incurrence of a variable cost Miles driven Labor hours 2-13

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. 2-14

Number of Minutes Used Within Monthly Plan

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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

Types of Fixed Costs

Committed Long-term, cannot be significantly reduced in the short term.

Discretionary May be altered in the short term by current managerial decisions 2-16 Examples Depreciation on Buildings and Equipment and Real Estate Taxes Examples Advertising and Research and Development

The Linearity Assumption and the Relevant Range Relevant Range Economist’s Curvilinear Cost Function A straight line closely approximates a curvilinear variable cost line within the relevant range. Accountant’s Straight-Line Approximation (constant unit variable cost) 2-17 Activity

End of Chapter 2

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