Upgrade to remove ads
Chapter 2: Managerial Accounting and Cost Concepts
Terms in this set (83)
Purpose of Cost Classification
1. Assigning costs to cost objects
2. Accounting for costs in manufacturing companies
3. Preparing financial statements
4. Predicting cost behavior in response to changes in activity
5. Making decisions
Assigning costs to cost objects
1. Direct costs (can be easily traced)
2. Indirect costs (can't be easily traced)
Accounting for costs in manufacturing companies
1. Manufacturing costs (direct materials, direct labor, manufacturing overhead)
2. Non-manufacturing costs (selling costs, administrative costs)
Preparing financial statements
1. Product costs (inventoriable)
2. Period costs (expensed)
Predicting cost behavior in response to changes in activity
1. Variable cost (proportional to activity)
2. Fixed cost (constant in total)
3. Mixed cost (has variable and fixed elements)
1. Differential cost (differs between alternatives)
2. Sunk cost (should be ignored)
3. Opportunity cost (foregone benefit)
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.
Costs are classified as:
either direct or indirect
A cost that can be easily and conveniently traced to a specified cost object.
A cost that cannot be easily and conveniently traced to a specified cost object.
To be traced to a cost object
the cost must be caused by the cost object
A cost that is incurred to support a number of cost objects, but that cannot be traced to them individually. Type of indirect cost.
1. Direct materials (direct cost)
2. Direct labor (direct cost)
3. Manufacturing overhead (indirect cost)
Any materials that go into the final product.
May include both direct and indirect materials.
Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.
Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs can not be easily or conveniently traced to it.
Factory labor costs that can be easily traced to individual units of product. Also called touch labor.
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.
All manufacturing costs besides direct materials and direct labor. Also called: indirect manufacturing cost, factory overhead, and factory burden. Only costs associated with operating the factory are included. Includes: indirect materials, indirect labor, maintenance and repairs on production equipment, heat & lighting, property taxes, depreciation, and insurance on manufacturing facilities.
1. Selling costs
2. Administrative costs
All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer. Also called order-getting and order-filling costs. Includes: advertising, shipping, sales travel, sales commissions, sales salaries, cost of finished goods warehouses.
All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. Includes: executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole.
Based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized.
Product costs (inventoriable 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. Recorded as expenses in the period in which the related products are sold.
Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. Includes all selling and administrative expenses.
Direct materials cost plus direct labor cost.
Direct labor cost plus manufacturing overhead cost.
Product cost =
Direct materials + direct labor + manufacturing overhead
Period cost =
Selling expenses + administrative expenses
Conversion cost =
Direct labor + manufacturing overhead
Prime cost =
Direct materials + direct labor
The way in which a cost reacts to changes in the level of activity.
3 types of costs
The relative proportion of fixed, variable, and mixed costs in an organization.
A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit. Examples: cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.
A measure of whatever causes the incurrence of a variable cost. Sometimes referred to as a cost driver. Includes: direct labor-hours, machine-hours, units produced, and units sold.
Activity base typically used in this course
total volume of goods and services provided by the organization
A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. Examples: straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising. Can be viewed as committed or discretionary.
Average fixed cost per unit
becomes progressively smaller as the level of activity increases
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. Examples: Investments in facilities and equipment, real estate taxes, insurance expenses, and salaries of top management.
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. Examples: advertising, research, public relations, management development programs, and internships for students.
The range of activity within which assumptions about variable and fixed cost behavior are valid.
Cost behavior patterns such as salaried employees.
Mixed cost (semivariable costs)
A cost that contains both variable and fixed cost elements.
Equation to express the relationship between a mixed cost and the level of activity
Y = a + bX
In this equation:
Y=the total mixed cost
a=the total fixed cost (vertical intercept of the graph)
b=variable cost per unit of activity (slope of the line)
X=the level of activity
Steeper the slope, the higher the variable cost per unit.
Methods to estimate the fixed and variable components of a mixed cost such as
1. Account analysis
2. Engineering approach
3. High-low method
4. Least-squares regression 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 oh how the cost in the account behaves.
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.
The fixed portion of a mixed cost represents
the minimum cost of having a service ready and available for use.
The variable portion of a mixed cost represents
the cost incurred for actual consumption of the service. It varies in proportion to the amount of service actually consumed.
High-low and least-squares repression methods
Estimate the fixed and variable elements of a mixed cost by analyzing past records of cost and activity data.
First step in applying the high-low method or the least-squares regression method
Diagnose cost behavior with a scattergraph plot. Cost is plotted on the vertical axis and the activity is plotted on the horizontal axis.
A variable that responds to some causal factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX
As the level of activity increases,
total cost will also ordinarily increase
A variable that acts as a causal factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX
When is cost behavior considered linear
Whenever a straight line is a reasonable approximation for the relation between cost and activity
When to perform and when to not perform the high-low method or the least-squares regression method
If the scattergraph reveals linear behavior, perform high-low or least-squares regression calculations to separate the mixed cost into its variable and fixed components. Do not proceed if the scattergraph does not depict linear cost behavior.
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 levels. Based on the rise-over-run formula for the slope of a straight line. Slope of the line is equal to the variable cost per unit of activity.
Formula to estimate variable cost
Variable cost = Slope of the line = Rise/Run = (Y2-Y1)/(X2-X1)
Variable cost = (Cost at the high activity level - cost at the low activity level) / (high activity level - low activity level)
Variable cost = change in cost / change in activity
To analyze mixed costs with the high-low method:
Begin by identifying the period with the lowest level of activity and the period with the highest level of activity. The period with the lowest activity is selected as the first point in the above formula and the period with the highest activity is selected as the second point.
Determining the fixed cost element
Fixed cost = Total cost - variable cost element
What are used to analyze a mixed cost under the high-low method?
Highest and lowest levels of activity
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. Unlike the high-low method, uses all of the data to separate a mixed cost into its fixed and variable components.
Regression line for least-squares regression method
Y = a + bX,
where a represents the total fixed cost and b represents the variable cost per unit of activity
Which provides more accurate cost estimates: the high-low method or the least-squares regression method? Why?
Least-squares regression method because rather than relying on just two data points, it uses all of the data points to fit a line that minimizes the sum of the squared errors.
2 categories of costs in the traditional format income statement
1. Cost of goods sold
2. Selling and administrative expenses
How to calculate gross margin in the traditional format income statement
Gross margin = Sales - cost of goods sold
How to calculate net operating income in the traditional format income statement
Net operating income = Gross margin - selling and administrative expenses
How to calculate contribution margin using the contribution format income statement
Contribution margin = Sales - (Cost of goods sold) - (variable selling) - (variable administrative)
How to calculate net operating income using the contribution format income statement
Net operating income = Contribution margin - Fixed expenses
Cost of goods sold reports
products costs attached to the merchandise sold during the period
The selling and administrative expenses report
all period costs that have been expensed as incurred
Determining cost of goods sold for a merchandising company
Number of units sold X unit cost
Limitation of the traditional income statement
It does not distinguish between fixed and variable costs. It has limitations internally in that managers need cost data organized by cost behavior to aid in planning, controlling, and decision making.
Contribution approach to constructing income statements
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.
What type of cost is cost of goods sold
Variable cost that gets included in the variable expenses portion of the contribution format income statement
The amount remaining from sales revenues after all variable expenses have been deducted.
Why use the contribution format income statement as an internal planning and decision-making tool?
Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting. Also, it helps managers organize data pertinent to numerous decisions, such as product-line analysis, pricing, use of scarce resources, and make or buy analysis.
A difference in cost between two alternatives. Encompasses both cost increases and cost decreases.
Can be either fixed or variable.
The difference in revenue between two alternatives.
An increase in cost between two alternatives. An increase in cost from one alternative to another.
The potential benefit that is given up when one alternative is selected over another.
A cost that has already been incurred and that cannot be changed by any decision made now or in the future. Not relevant in a decision, and should always be ignored.
This set is often in folders with...
usefull info,assumption, constraints 2
Financial Accounting Ch. 1-3
Ch 18: Spoilage, Rework & Scrap
You might also like...
Chapter 2: Managerial Accounting and Cost Concepts
Accounting 211 Chapter 1 Notes
Acct 311: Chapter 2
Accounting chapter 1
Other sets by this creator
Chapter 14: Human Resource Selection & Development…
Chapter 13: Leadership Across Cultures Vocab
Chapter 12: Motivation Across Cultures Vocab
Chapter 11: Management Decision & Control Vocab
Other Quizlet sets
Biochem 5615 Exam 3
Foreign Defense Policy
ATI Care of Children