Direct Materials - Raw materials that become an integral part of the product and that can be conveniently traced DIRECTLY to it.
Examples: The flour
... [Show More] in the dough.
Direct Labor - Labor costs that can be easily traced to individual units of product.
Example: Wages paid to bakers.
Manufacturing Overhead - Costs that CANNOT be easily traced directly to specific units produced.
Examples: Indirect materials and indirect labor
Indirect materials - Used to support the production process
Examples: Lubricants and cleaning supplies to maintain the bakery equipment
Indirect Labor - Wages paid to EMPLOYEES who are not directly involved in production work
Examples: Clean-up, workers, janitors, and security guards.
Selling Costs - Costs necessary to secure the order and deliver the product
Administrative Costs - All executive organizational and clerical costs
Product Costs - Direct materials, direct labor, and manufacturing overhead
1.Inventory-->Balance Sheet
2. Sale
3. Cost of Good Sold-->Income Statement
Period Costs - Includes ALL selling costs and administrative costs
Expense--->Income Statement
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions. - B. Property taxes on corporate headquarters.
E. Sales commissions.
Prime Cost - Direct Material & Direct Labor
Conversion Cost - Direct Labor & Manufacturing Overhead
Cost Behavior - Refers to how a cost will react to changes in the level of activity. (Most Common= Variable Costs, Fixed Costs, Mixed Costs)
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.
Variable Cost per Unit - Constant
Fixed Costs - Constant within the "relevant range." Fixed costs do not change for changes in activity that fall within the "relevant range." Example: Going over the monthly minutes exceed the relevant range therefore will be charged extra.
Activity Base - (Cost Driver) is a measure of what causes the incurrence of variable costs. As the level of the acitvity base increases, the total variable cost increases proportionally.
Fixed Cost Per Unit - Average fixed cost per unit varies inversely with changes in activity.
(Graph=Half of Parabola)
Committed Fixed Costs - Long-term, cannot be significantly reduced in the short term.
Examples: Depreciation on buildings and Equipment and Real estate Taxes
Discretionary Fixed Costs - May be altered in the short-term by current managerial decisions
Examples: Advertising and Research and Development
Linearity Assumption and Releveant Range - Accountants assume costs are strictly linear; however, economists point out that many costs are actually curvilinear. Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be satisfactorily approximated by a straight line. The relevant range is that range of activity within which the assumptions made about cost behavior are valid.
Fixed Costs and the Relevant Range - Range of activity over which the graph of the cost is flat.
Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers. - C. The cost of ice cream.
D. The cost of napkins for customers.
Mixed Costs (Semivariable costs) - Contain both variable and fixed cost elements
Example: Utility bill contains a fixed and a variable cost component.
-Fixed (represents the minimum cost that is incurred to have the service ready and available for use)
-Variable (Varies in direct proportion to the consumption of kilowatt hours.
Y=a+bX - Mixed Costs Equation
Y= Total Mixed Cost
a= Total fixed cost (Vertical intercept)
b= Variable cost per unit (slop)
X= Level of Activity
If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? - Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
Account Analysis - Each account is classified as either variable or fixed based on the analyst's knowledge of how the account behaves
(Limited in value in the sense that it glosses over the fact that some accounts may have both fixed and variable components)
Engineering Approach - Based upon an industrial engineer's evaluation of production methods, and material, labor and overhead requirements, equipment usuage and so on.
(Useful when no past experience is available concerning activity and costs.)
The High- Low Method - The first step is to choose the data points pertaining to the highest and lowest activity levels. This method relies upon two data points to estimate the fixed and variable portions of a mixed cost, as opposed to one data point with the scattergraph method.
The second step is to determine the total costs associated with the two chosen points.
The third step is to calculate the change in cost between the two data points.
The fourth step is to take the total cost at either activity level. Deduct the variable cost component. The difference represents the estimate of total fixed costs. The variable cost component is determined by multiplying the level of activity by the estimated variable cost per unit of the activity
The fifth step is to construct an equation that can be used to estimate the total cost at any activity level
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit - b. $0.10 per unit
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the FIXED portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000 - a. $ 2,000
Least Squares Regression Method - Method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables. This method uses all of the
data points to estimate
the fixed and variable
cost components of a
mixed cost. The goal of this method is
to fit a straight line to the
data that minimizes the
sum of the squared errors.
The cost analysis objective is the same: Y = a + bX
Least-squares regression also provides a statistic, called the R2, which is a measure of the goodness [Show Less]