Managerial Accounting and Cost

Concepts
Chapter 2

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
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Summary of the Types of Cost

Classifications

Financial Predicting Cost

Reporting Behavior

Assigning Costs Making Business

to Cost Objects Decisions
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Assigning Costs to Cost Objects

Direct costs
• Costs that can be
easily and conveniently
traced to a unit of product
or other cost object.
• Examples: direct
material and direct labor
Indirect costs
• Costs that cannot be
easily and conveniently
traced to a unit of product
or other cost object.
• 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.
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Classifications of Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
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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

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

Example: Wages paid to automobile assembly workers

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Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.

Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors, and
security guards.
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Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to secure the All executive, organizational,

order and deliver the product. and clerical costs.
Selling costs can be either Administrative costs can be
direct or indirect costs. either direct or indirect costs.
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Cost Classifications for Preparing

Financial Statements
Product costs include Period costs include all
direct materials, direct selling costs and
labor, and administrative costs.
manufacturing
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
 2-10

Prime Costs and Conversion Costs

Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost
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Variable Cost
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.
Total Texting Bill

Number of Texts Sent

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Variable Cost Per Unit

However, variable cost per unit is constant. The cost per

text sent may be constant at 5 cents per text message.

Cost Per Text Sent

Number of Texts Sent

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The Activity Base (Cost Driver)

Units Machine
produced hours

A measure of what
causes the
incurrence of a
variable cost

Miles Labor
driven hours
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Fixed Cost
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.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
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Fixed Cost Per Unit

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.

Monthly Cell Phone

Contract Fee

Number of Minutes Used

Within Monthly Plan
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Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced in short term by current
the short term. managerial decisions

Examples Examples
Depreciation on Buildings Advertising and
and Equipment and Real Research and
Estate Taxes Development
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The Linearity Assumption and the

Relevant Range
Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
relevant range.
Total Cost

Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
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End of Chapter 2