ACC 231

What are the 3 categories manufacturers separate costs into?
1. Direct Materials
2. Direct Labor
3. Manufacturing overhead
Raw Materials
materials that go into the final product not necessarily unprocessed
What does raw material consist of?
Direct material
Direct labor
Direct Material:
materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product
Direct Labor:
consists of labor costs that can be easily traced to individual units of product
Indirect Cost:
labor costs that cannot be physically traced to particular products or that cab be traced only at great cost and inconvenience
Manufacturing Overhead
includes all manufacturing costs except direct materials and direct labor. Includes indirect materials indirect labor, maintenance and repairs
What are the categories of non-manufacturing costs?
1. Selling costs
2. Administrative costs
Selling Costs:
include all costs that re incurred to secure customer orders and get the finished product to the customer
Administrative Costs:
all costs associated with the general management of an organization rather than with manufacturing or selling
Product Costs:
include all costs involved in acquiring or making a product
Period Costs:
all costs that are not product costs.
All selling and administrative expenses aret reated as period costs
Prime Cost:
the sum of direct materials costs and direct labor cost
Conversion Cost:
the sum of direct labor cost and manufacturing overhead cost
Cost Behavior:
refers to how a cost reacts to changes in the level of activity
What are the 3 types of cost behavior changes
variable, fixed, or mixed
Variable Cost:
Varies in total, in direct proportion to change in the level of activity
Activity base:
Varies in total, in direct proportion to change in the level of activity
Mixed Cost Equation
High Low Method
Change in cost/change in activity
Gross Margin Equation
Sales - COGS=Gross Margin
Net Operating Income equation
Gross Margin-Selling and administrative costs
COGS Formula
Beginning Inventory + Purchases - Ending Inventory= COGS
What are the three cost classifications for decision making?
1. Differential Cost & Revenue
2. Opportunity Cost
3. Sunk Cost
Variable Cost =
Change in cost/change in activity