Overview
This lecture reviews essential managerial accounting terms and concepts, focusing on types of costs, cost behaviors, and key distinctions relevant to management decisions.
Types of Costs
- Direct cost is easily traced to a specific cost object like a product or department.
- Indirect cost cannot be easily traced to a specific cost object.
- Product costs include all costs involved in acquiring or making a product: direct materials, direct labor, and manufacturing overhead.
- Period costs are expensed on the income statement in the period incurred; includes selling and administrative expenses.
- Fixed cost stays constant in total within the relevant range, but per unit changes inversely with activity.
- Variable cost changes in total proportionally with activity but is constant per unit.
- Mixed cost contains both variable and fixed cost elements.
- Incremental (differential) cost is the increase in cost between two alternatives.
- Opportunity cost is the potential benefit forgone by choosing one alternative over another.
- Sunk cost has already been incurred and cannot be changed by future decisions.
- Common cost supports several cost objects but cannot be traced to any one individually.
Cost Classifications and Behavior
- Cost behavior describes how a cost reacts to changes in the level of activity.
- Relevant cost/benefit should be considered in decision making because it differs between alternatives.
- Relevant range is the range of activity where cost behavior assumptions hold true.
- Discretionary fixed costs come from annual management decisions, like advertising.
- Committed fixed costs are long-term investments, not easily reduced in short periods without major changes.
Manufacturing Cost Components
- Direct materials become part of the finished product and can be conveniently traced.
- Direct labor refers to labor easily traced to products (touch labor).
- Manufacturing overhead includes all manufacturing costs except direct materials and direct labor; includes indirect materials, indirect labor, and other overhead.
- Prime cost equals direct materials plus direct labor.
- Conversion cost equals direct labor plus manufacturing overhead.
- Inventoriable costs is another term for product costs.
Organizational and Reporting Terms
- Managerial accounting provides information for internal management decisions.
- Financial accounting reports historical financial info to external parties.
- Cost object is anything for which cost data is desired (product, department, customer).
- Cost structure is the proportion of variable, fixed, and mixed costs in an organization.
Inventory Terms
- Raw materials are basic materials entering the production process.
- Work in process is partially completed products not yet ready for sale.
- Finished goods are completed products not yet sold.
Calculated Cost Totals
- Total product cost = direct materials + direct labor + manufacturing overhead.
- Total period cost = selling expenses + administrative expenses.
- Total manufacturing overhead = indirect labor + indirect materials + other overhead.
Key Terms & Definitions
- Activity base — factor causing variable cost, like number of surgeries affecting glove cost.
- Contribution approach — income statement format classifying costs by behavior (variable vs. fixed).
- Contribution margin — sales revenue minus all variable expenses.
- Selling costs — expenses to secure orders and deliver products/services.
- Administrative costs — costs related to general management, not manufacturing or selling.
Action Items / Next Steps
- Review these key terms and definitions before the next class.
- Prepare to identify examples of each cost type in assigned practice problems.