Managerial Accounting and Cost

Concepts
• Chapter 02
 2-2

Classifications of Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
 2-3

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

 2-4

Direct Labor

Those labor costs that can be easily

traced to individual units of product.

Example: Wages paid to automobile assembly workers

 2-5

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

Examples: Indirect materials and indirect labor

 2-6

Nonmanufacturing Costs

Administrative
Costs

All executive,
organizational, and
clerical costs.
 2-7

Product Costs Versus Period Costs

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
 2-8

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

Prime Conversion
Cost Cost
 2-9

Variable Cost

Your total texting bill is based on how

many texts you send.
Total Texting Bill

Number of Texts Sent

 2-10

Variable Cost Per Unit

The cost per text sent is constant at

5 cents per text message.

Cost Per Text Sent

Number of Texts Sent

 2-11

The Activity Base (Cost Driver)

Units Machine
produced hours

A measure of what
causes the
incurrence of a
variable cost

Miles Labor
driven hours
 2-12

Fixed Cost
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.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
 2-13

Fixed Cost Per Unit

Within the monthly contract allotment, 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
 2-14

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
 2-15

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
 2-16

Fixed Costs and the Relevant Range

90
Rent Cost in Thousands

The relevant range

Relevant of activity for a fixed
60
of Dollars

cost is the range of

Range activity over which
the graph of the
cost is flat.
30

0
0 1,000 2,000 3,000
Rented Area (Square Feet)
 2-17

Mixed Costs

Y
Total Utility Cost

ost
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
 2-18

End of Chapter 02