Unit1 DB2 AMA
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.
Managerial Accounting and Cost Concepts
Chapter 2
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Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost Behavior
Assigning Costs to Cost Objects
Making Business Decisions
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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.
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The Product
Classifications of Manufacturing Costs
Direct
Materials
Direct
Labor
Manufacturing
Overhead
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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
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Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing Overhead
Manufacturing costs that cannot be easily traced directly to specific units produced.
Examples: Indirect materials and indirect labor
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Nonmanufacturing Costs
Administrative Costs
All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.
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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
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Prime Costs and Conversion Costs
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
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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
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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
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The Activity Base (Cost Driver)
A measure of what causes the incurrence of a variable cost
Units
produced
Miles driven
Machine hours
Labor hours
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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
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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
Monthly Cell Phone Contract Fee
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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.
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Activity
Total Cost
Economist’s
Curvilinear Cost Function
The Linearity Assumption and the Relevant Range
Relevant
Range
A straight line closely approximates a curvilinear variable cost line within the relevant range.
Accountant’s Straight-Line Approximation (constant unit variable cost)
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End of Chapter 2