CH.2 Managerial Accounting and Cost Concepts

Cost Classifications for Preparing External Financial Statements

1. Manufacturing Costs

A. Direct materials; raw material inputs

B. Direct labor; “touch labor”, workers who “touch” the product as it is being made

C. Manufacturing overhead (indirect materials + indirect labor costs); all manufacturing costs other than A+B. Not easy to trace. Ex) misc supplies such as rivets in a Boeing 777, supervisors, doorkeeper, factory facility charges, etc.

D. Prime vs. Conversion costs

- Prime cost = direct materials + direct labor

- Conversion cost = direct labor + manufacturing overhead

2. Non-manufacturing costs

A. Marketing or selling costs

B. Administrative costs

3. Period vs. Product costs

A. Period costs (all marketing + selling costs + admin costs)

; are expensed in the time period in which they are incurred. All  selling and administrative costs. Ex) administrative salary costs are “incurred” when they are earned and not necessarily when they are paid to employees.

B. Product costs (inventorial costs, direct materials + direct labor + manuf. overhead)

; are added to units of product as they are incurred and not treated as expenses until the units are sold. 

Cost Classifications for Decision-Making

1. Differential Costs

2. Opportunity Costs

3. Sunk Costs

Cost Classifications for Predicting Cost Behavior

1. Variable Cost; texting bill, cost per text = 5 cents

2. Fixed Costs; monthly fee for a cell phone, avg. fixed cost per phone call made decreases as more calls are made.

3. Mixed Costs: Variable + Fixed costs

4. Relavant Range

Analysis of Mixed Costs

1. The Scattergraph Method

2. The High-Low Method

3. Least-Squares Regression Method