Cost and Management Accounting Chapter 2
Cost and Management Accounting Chapter 2
Cost and Management Accounting Chapter 2
Example
Increase market share
Setting objec- year-over-year by at least
five percent
tives
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Management Functions Review
Pl a &
nn ct i ng
ing Di re ng
it o ri
Decision M on
Making
Controlling
Management Functions Review
DIRECT LABOR
Manufacturing Costs:
Indirect Labor
The wages of maintenance people, timekeepers,
and supervisors are normally categorized as indi-
rect labor because their efforts have no physical
association with the finished product or it is im-
practical to trace the costs to the goods provided.
Like indirect materials, indirect labor is part of
manufacturing overhead.
Manufacturing Costs: Man-
ufacturing Overhead
Manufacturing overhead consists of costs that are indirectly asso-
ciated with the manufacture of the finished product. These costs may
also be defined as manufacturing costs that cannot be classified as ei-
ther direct materials or direct labor.
Manufacturing overhead includes
– indirect materials;
– indirect labor;
– depreciation on factory buildings and machinery; and
– insurance, taxes, and maintenance on factory facilities.
Non-manufacturing Costs
Administrative costs . . .
– All executive, organizational, and clerical costs.
Product Costs and Period
Costs
Product costs (also called inventoriable costs) include
each of the manufacturing cost elements (direct materials,
direct labor, and manufacturing overhead). They are the
costs that are a necessary and integral part of producing
the finished product.
These costs are not expensed (as cost of goods sold) under
the matching principle until the finished goods inventory
is sold.
Product Costs:
Prime and Conversion
Direct materials and direct labor are often referred
to as prime costs due to their direct association
with the manufacturing of the finished product.
Direct labor and manufacturing overhead are often
referred to as conversion costs since they are in-
curred in converting raw materials into finished
goods.
Product Costs and Period
Costs
Period costs are identifiable with a specific time
period rather than a salable product.
Period costs are deducted from revenues in the pe-
riod in which they are incurred.
Period costs relate to nonmanufacturing, (thus, non-
inventoriable) costs, and include selling and admin-
istrative expenses.
Product Versus Period Costs
All
Costs
Product Costs Period Costs
Manufacturing Costs
(Go to Balance Sheet before
Nonmanufacturing Costs
Income Statement) (Go straight to Income Statement)
Sale
How
How aa cost
cost will
will react
react to
to changes
changes in
in the
the level
level of
of busi-
busi-
ness
ness activity.
activity.
Total
Totalvariable
variablecosts
costschange
changewhen
whenactivity
activitychanges.
changes.
Total
Total fixed
fixed costs
costs remain
remain unchanged
unchanged when
when activity
activity
changes.
changes.
Variable and Fixed costs
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Direct Costs and Indirect Costs
Direct costs Indirect costs