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Managerial Accounting

directed towards providing info to managers inside the organization

Financial Accounting

Reports are provided outside the organization-external reports

Financial Accounting

Must follow GAAP which has specific required external reports

Managerial Accounting

Does not follow GAAP and has no reporting regulations

Product Costs

Include all costs that are required to make a product. Include Direct Material, Direct Labor, and Manufacturing Overhead

Period Costs

Selling and Administrative costs. These costs are reported on the income statement they are incurred. Not a part of manufacturing overhead, not related to making the product.

Selling Costs

all cost associated with marketing the finished products and getting the product to the customer.

Administrative Costs

costs incurred for the general administration of the organization

Prime Costs

direct materials + Direct Labor

Conversion Costs

Direct Labor + Manufacturing Overhead. What it costs to take the materials and convert them into a finished product.

Direct Cost

a cost that can be easily and conveniently traced to one product. They are direct materials and direct labor

Indirect Cost

a cost that cannot be easily and conveniently traced to one product. Ex: manufacturing overhead and period costs

Product costs

costs that are incurred to manufacture products. They include anything that becomes part of the product, anyone who touches teh product to make it, and all the costs of the facilities and management incurred to make the product.

Direct Materials, Direct Labor, Manufacturing Overhead

The three major categories of product costs

Direct Materials

raw materials that become part of the finished product.

Direct Labor

workers that touch the product to make the product- also includes workers who operate the machine if the product is made by the machine

Manufacturing Overhead

all costs of manufacturing the product except direct materials and direct labor. Ex: utilities support personnel, human resources, computer support

Indirect Labor

involved in making the product at teh plant but do not touch the product to make it. Ex: salaries, supervisors and quality inspectors

Indirect Material

low cost materials that end up in the product or are used to make the product. Ex: glue, tape, screw

Cost Sheet

a detailed listing of what is estimated to be required and what is estimated to cost to make one product or provide one service.


the amount you expect to pay and the quantity you expect to use to make one product.

Quantity Standard

how much is expected to be used to makle one product

Cost Standard

how much is expected to be paid for one quantity.

Ideal Standards

can be achieved only under ideal perfect circumstances

Practical Standards

are tight but attainable and allow for normal downtime and waste

Variable Cost

Changes in total, in direct proportion to changes in the level of activity. The total cost increase/decreases as units made increases/decreases. It is constant if expressed on a per unit basis. Costs that vary with sales.

Variable cost

if it costs you more if you make or sell one more

Fixed Cost

Total cost does not change with changes in the volume of activity (within a relevant range) The cost per unit will change as teh number of units change. Ex: rent, insurance

Mixed Costs

one that contains both variable and fixed costs elements.


minimum cost of having a service ready and available for use


cost incurred for actual consumption of the service.

Total Mixed Costs

Total fixed cost $ + (Variable cost $ per activity X the number of the activity)

Relevant Range

The range of activity where the assumption about cost behavior is valid.

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another alternative. They are not recorded/reported because they do not occur. The cost is the benefit that you gave up.

Sunk Cost

Cost that is already paid for and can not be changed by a decision made now or in the future.


Investment in facilities, equipmnt and the basic operations of the company. They are long term in nature and can't be significantly reduced.


annual decisions made by management to spend in certain areas for certain things

Total Variable Cost

Total Cost $-Fixed Cost$

Variable Cost Per unit of activity

Total Variable Cost/ Total Activity

Total Cost

Total Fixed Cost + (variable cost per activity X # activity

Variable Cost

(Cost at high activity level- cost at the low activity level) / (High activity level-low activity level)

Fixed Cost

Total Cost - (variable cost per X # of activity)

Contribution Margin

The amount available to cover fixed costs and give profit

Contribution Margin per unit

Sales price per unit - all variable costs per unit

Contribution Margin ratio

contribution margin (in total per unit) /Sales

Change in Contribution Margin

Change in Sales X Contribution Margin Ratio

Break Even

Occurs when profit = 0 which occurs when contribution margin = fixed cost

Break Even in Units

Fixed Costs/ Contribution Margin Per unit

Break Even in Sales

Fixed Costs / Contribution Margin Ratio (%)

% increase in profits

operation leverage factor X % increase in sales

added profits

% increase in profits X current profits

expected profits

added profits + current profits

Sales Mix

The Percentage of total sales for each product. This is important when a company has more than one product. A change in sales mix can change the total profit.

Total Contribution Margin %

Total Contribution Margin for the Company / total sales for the company

Expected Contribution Margin

Expected Sales X CM Ratio

Current Contribution Margin

Less Current Sales X % CM ratio

Manufacturing Overhead

Costs to operate the manufacturing facility


finished goods: product not yet sold

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