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. Managerial Accounting and Cost Concepts Chapter 2

2-2 Learning Objective 2-1 Identify and give examples of each of the three basic manufacturing cost categories.

2-3 The Product Classifications of Manufacturing Costs Direct Materials Manufacturing Overhead Direct Labor

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.

2-6 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor Wages paid to employees who are not directly involved in production work. Examples: clean-up workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies to maintain the bakery equipment.

2-7 Classification of Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.

2-8 Learning Objective 2-2 Distinguish between product costs and period costs and give examples of each.

2-9 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

2-10 Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost

2-11 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.

2-13 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. Number of Texts Sent Total Texting Bill

2-14 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. Number of Texts Sent Cost Per Text Sent

2-15 The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost Labor hours Units produced Machine hours Miles driven

2-16 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. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

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. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

2-18 Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Examples Depreciation on Buildings and Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short-term by current managerial decisions Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Committed Long-term, cannot be significantly reduced in the short term.

2-19 End of Chapter 2