Managerial Accounting

Chapter 2

Manufacturing Costs Direct Materials

Materials that can be easily traced to the product

Direct Labor Labor costs that can be easily traced to the

product Manufacturing Overhead

All manufacturing costs other than Direct Materials and Direct Labor

Prime Costs Direct Materials Plus direct labor

Conversion Costs Direct labor plus manufacturing

overhead Refer to Exhibit 2-1 on page 47

Non-manufacturing costs Marketing or selling expenses Administrative Costs

Period Costs Expensed in the period incurred Typically are marketing and

administrative costs Product Costs—Inventoriable Costs

Reported on the income statement when sold

Manufacturing inventories On the Balance Sheet as an asset:

Raw materials Work-in-process Finished Goods

On the Income statement as cost of goods sold When finished goods are sold, it shifts from

the balance sheet to the income statement.

Schedule of goods manufactured Plus Direct Materials used in production

Beginning raw materials inventory Plus raw materials purchased Less Ending raw materials inventory Equals materials used in production

Plus Direct Labor Plus Manufacturing overhead Plus Beginning work-in-process inventory Less Ending work-in-process inventory Equals Cost of goods manufactured

Cost of goods sold Beginning finished goods inventory Plus Cost of goods manufactured Less Ending finished goods

inventory Equals Cost of goods sold

Refer to Exhibit 2-5 page 2-5

Cost Behavior Variable Cost – is constant per unit

of activity but changes in total as the activity level rises and falls.

Fixed Cost – is constant in total for changes in activity within the relevant range. Fixed costs do not change with with changes in activity that fall within the “relevant range.”

Direct Cost – a cost that can be conveniently and easily traced to a particular cost object.

Indirect cost – All other costs (costs that cannot be easily and conveniently traced to a particular cost object.

Cost Classifications for Decision-making Differential Costs – one that differs

between alternatives. Are also called incremental costs.

Opportunity Costs – the potential benefit that is given up by selecting one alternative over another.

Sunk Cost – a cost that has already been incurred and cannot be changed by any decision made now or in the future.

Assignment In class – Ex 4, 6 Student assignment Ex 1, 5, Pr 14