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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

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