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 Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
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:
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 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 AA straight
straight line
line
closely
closely
Curvilinear Cost approximates
approximates aa
Function curvilinear
curvilinear
variable
variable cost
cost
line
line within
within the
the
Relevant
relevant
relevant range.
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
The relevant
relevant range
range
Relevant of
of activity
activity for
for aa fixed
fixed
60
of Dollars

cost
cost is
is the
the range
range of of
Range activity
activity over
over which
which
the
the graph
graph ofof the
the
cost
cost is
is flat.
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