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

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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