Managerial Accounting Chapter 1: Managerial accounting and cost concepts

Cost Concepts
The term “COST” is used in many different ways and are classified differently according to the immediate needs of management.
Manufacturing costs
Most companies separate manufacturing costs in three broad categories:

Direct materials

Direct labor

Manufacturing overhead

Raw Materials
This term is misleading because it seems to imply unprocessed natural resources like wood, etc. But one companies final product could be another raw material (Example: 3m plastics final product is dells raw material for computer desktops.)
Direct Materials
materials that become an integral part of finished product and whose costs can be conveniently traced to the finished product.
Indirect materials
Are included as part of manufacturing overhead, which is discussed later in the section.
Direct Labor
Consists of labor costs that can be easily traced to individual units of products. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made.
Indirect Labor
labor costs that cannot be physically traced to particular produces or that can be traced only at great cost and inconvenience.
Manufacturing Overhead
includes all manufacturing costs except direct materials and direct labor manufacturing overhead includes items such as indirect materials.
Non-manufacturing costs
Often divided into two categories

1 selling costs

administrative costs

Selling Costs
A cost that has already been incurred and that cannot be changed by any decision made now or in the future (p46)
Account Analysis
A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves (p35)
Activity base
A measure of whatever causes the incurrence of a variable cost.For example, the total cost of x-ray film in a hospital will increase as the number of x-rays taken increases. Therefore, the number of x-rays is the activity base that explains the total cost of x-ray film.
Administrative costs
All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling (p26)
Committed fixed costs
Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes (p31)
Common cost
A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airline is a common cost of all the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But not part of the pilot’s wage is caused by any one passenger taking the flight(p44)
Contribution approach
an income statement format that organizes costs by their behavior. costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes (p43)
contribution margin
the amount remaining from sales revenues after all variable expenses have been deducted (p43)
conversion cost
direct labor cost plus manufacturing overhead cost (p27)
cost behavior
the way in which a cost reacts to changes in the level of activity (p27)
cost object
anything for which cost data are desired. examples of cost objects are products, customers, jobs and parts of the organization such as departments or divisions (p43)
cost structure
the relative proportion of fixed, variable, and mixed costs in an organization.
dependent variable
a variable that responds to some causal factor: total cost is dependent veriable, as represened by the letter y, in the quation y =a + bX (p35)
Differential cost
a difference in cost between two alternatives (p44)
Differential revenue
The difference in revenue between two alternatives (p44)
Discretionary fixed costs
those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research (p31)
Engineering approach
A detailed analysis of cost behavior based on an industrial engineer’s evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs (p35)
fixed costs
a cost that remains constant, in total, regardless of changes in the level of activity within relevant range. If a fixed cost is expressed on a per unity basis, it varies inversely with the level of activity.
High-low method
a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity level (p39)
Incremental cost
an increase ion cost between two alternatives.
Independent variabl
a variablethat acts as vausal facto: activity is the independent variable, as represented by the letter x in the question y = a + bX
Indirect cost
a cost that cannot be easily and conveniently traced to a specified cost object
Inventoriable costs
synonym for product costs
least-squares regression method
A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors.
Linear cost behavior
cost behavior is said to be linear whenever a straight line is reasonable approximation for the relation between cost and activity
mixed cost
a cost that contains both variable and fixed cost elements
opportunity cost
the potential benefit that is gen up when one alternative is selected over another.
Period costs
costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued
prime cost
direct materials cost plus direct labor cost
product costs
all costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.
relevant range
the range of activity within which assumptions about variable and fixed costs behavior are valid
sunk cost
a cost that has already bee incurred and that cannot be changed by any decisions made now or in the future.
Variable cost
a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.
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