Managerial Accounting and Cost

Concepts
Chapter 02

PowerPoint 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

2-2

Classifications of Manufacturing Costs

Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

The Product

Manufacturing
Manufacturing
Overhead
Overhead

2-3

Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile

2-4

Direct Labor
Those labor costs that can be easily
traced to individual units of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers

2-5

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

2-6

Nonmanufacturing Costs
Administrative
Costs

All executive,
organizational, and
clerical costs.

2-7

Product Costs Versus Period Costs

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

Income
Statement

2-8

Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Material

Direct
Labor

Prime
Cost

Manufacturing
Overhead

Conversion
Cost

2-9

Variable Cost

Total Texting Bill

Your total texting bill is based on how

many texts you send.

Number of Texts Sent

2-10

Variable Cost Per Unit

Cost Per Text Sent

The cost per text sent is constant at

5 cents per text message.

Number of Texts Sent

2-11

The Activity Base (Cost Driver)

Machine
hours

Units
produced
A measure of what
causes the
incurrence of a
variable cost
Miles
driven

Labor
hours

2-12

Fixed Cost

Monthly Cell Phone

Contract Fee

Your monthly contract fee for your cell phone is

fixed for the number of monthly minutes in your
contract. The monthly contract fee does not
change based on the number of calls you make.

Number of Minutes Used

Within Monthly Plan

2-13

Fixed Cost Per Unit

Monthly Cell Phone

Contract Fee

Within the monthly contract allotment, the average fixed cost per
cell phone call made decreases as more calls are made.

Number of Minutes Used

Within Monthly Plan

2-14

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

Examples

Depreciation on Buildings
and Equipment and Real
Estate Taxes

Advertising and
Research and
Development

2-15

The Linearity Assumption and the Relevant

Range

Total Cost

Economists
Curvilinear Cost
Function
Relevant
Range

A
A straight
straight line
line
closely
closely
approximates
approximates aa
curvilinear
curvilinear
variable
variable cost
cost
line
line within
within the
the
relevant
relevant range.
range.

Accountants Straight-Line
Approximation (constant
unit variable cost)
Activity

2-16

Rent Cost in Thousands

of Dollars

Fixed Costs and the Relevant Range

90
Relevant

60

Range

30
0

The
The relevant
relevant range
range
of
of activity
activity for
for aa fixed
fixed
cost
cost is
is the
the range
range of
of
activity
activity over
over which
which
the
the graph
graph of
of the
the
cost
cost is
is flat.
flat.

1,000
2,000
3,000
Rented Area (Square Feet)

2-17

Mixed Costs

Total Utility Cost

al
t
o
T

d
e
x
mi

t
s
o
c
Variable
Cost per KW

Activity (Kilowatt Hours)

Fixed Monthly
Utility Charge

2-18

End of Chapter 02