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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
 2-2

Learning Objective 2-1

Identify and give examples

of each of the three basic
manufacturing cost
categories.
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Classifications of Manufacturing
Costs
Direct Direct Manufacturing
Materials Labor Overhead

The Product
 2-4

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

Example: The flour in the dough.

 2-5

Direct Labor

Those labor costs that can be easily traced to

individual units of product.

Example: Wages paid to bakers.

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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

the production process.
Examples: lubricants and
cleaning supplies to
maintain the bakery
equipment.
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Classification of
Nonmanufacturing Costs
Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.
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Learning Objective 2-2

Distinguish between
product costs and period
costs and give examples of
each.
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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
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Classifications of Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
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Learning Objective 2-3

Understand cost behavior

patterns including variable
costs, fixed costs, and mixed
costs.
 2-12

Cost Classifications for

Predicting Cost Behavior
Cost behavior refers to
how a cost will react to
changes in the level of
activity. The most
common classifications
are:
▫Variable costs.
▫Fixed costs
▫Mixed costs.
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Variable Cost
A cost that varies, in total, in direct proportion to changes in
the level of activity. In some cases your total texting bill is
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. In some cases the
cost per text sent is constant at constant cost per text.

Cost Per Text Sent

Number of Texts Sent

 2-15

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. However, if
expressed on a per unit basis, the average fixed cost
per unit varies inversely with changes in activity.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
 2-17

Fixed Cost Per Unit

However, if expressed on a per unit basis, the average fixed cost
per unit varies inversely with changes in activity.

Monthly Cell Phone Contract

Fee

Number of Minutes Used

Within Monthly Plan
 2-18

Types of Fixed Costs

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

Examples Examples
Depreciation on Buildings Advertising and Research
and Equipment and Real and Development
Estate Taxes
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End of Chapter 2