Managerial Accounting and Cost Concepts Chapter 2 Power

Managerial Accounting and Cost Concepts Chapter 2 Power. Point Authors: Susan Coomer Galbreath, Ph. D. , CPA Charles W. Caldwell, D. B. A. , CMA Jon A. Booker, Ph. D. , CPA, CIA Cynthia J. Rooney, Ph. D. , CPA Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -2 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions

2 -3 Assigning Costs to Cost Objects Direct costs Indirect costs • Costs that can be easily and conveniently traced to a unit of product or other cost object. • Costs that cannot be easily and conveniently traced to a unit of product or other cost object. • Examples: direct material and direct labor • Example: manufacturing overhead Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

2 -4 Classifications of Manufacturing Costs Direct Materials Direct Labor The Product Manufacturing Overhead

2 -5 Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile

2 -6 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

2 -7 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor

2 -8 Nonmanufacturing Costs Administrative Costs All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

2 -9 Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Inventory Cost of Good Sold Period costs include all selling costs and administrative costs. Expense Sale Balance Sheet Income Statement

2 -10 Prime Costs and Conversion Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Prime Cost Manufacturing Overhead Conversion Cost

2 -11 Variable Cost Total Texting Bill A cost that varies, in total, in direct proportion to changes in the level of activity. Your total texting bill may be based on how many texts you send. Number of Texts Sent

2 -12 Variable Cost Per Unit Cost Per Text Sent However, variable cost per unit is constant. The cost per text sent may be constant at 5 cents per text message. Number of Texts Sent

2 -13 The Activity Base (Cost Driver) Machine hours Units produced A measure of what causes the incurrence of a variable cost Miles driven Labor hours

2 -14 Fixed Cost Monthly Cell Phone Contract Fee A cost that remains constant, in total, regardless of changes in the level of the activity. Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan

2 -15 Fixed Cost Per Unit Monthly Cell Phone Contract Fee However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. The average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan

2 -16 Types of Fixed Costs Committed Discretionary Long-term, cannot be significantly reduced in the short term. May be altered in the short term by current managerial decisions Examples Depreciation on Buildings and Equipment and Real Estate Taxes Advertising and Research and Development

2 -17 The Linearity Assumption and the Relevant Range Total Cost Economist’s Curvilinear Cost Function Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Accountant’s Straight-Line Approximation (constant unit variable cost) Activity

2 -18 End of Chapter 2