Chapter 1: Managerial Accounting and Cost Concepts

Question 1

Cost Object

Answer 1

Anything for which cost data are desired - including products, customers, plants, office locations, and departments

EX: HR department, Target in Anderson, 12 pack of Coke

Question 2

Direct Costs

Answer 2

A cost that can be easily traced to a specific cost object

EX: 12 pack of Coke:
> Cans
> Water
> Secret Formula
> Sweetener

Question 3

Indirect Costs

Answer 3

A cost that cannot be easily and conveniently traced to a specific cost object

EX: 12 pack of Coke
> Plant manager salary
> Maintenance costs
> Plant depreciation

Question 4

Product Costs

Answer 4

All costs required to purchase or manufacture inventories. Includes direct materials(DM), direct labor(DL), and Manufacturing Overhead(MOH)

Question 5

Direct Materials(DM)

Answer 5

Raw Materials that become an integral part of the finished product and whose costs can be conveniently traced to it

EX:
>Table - lumber
> 12 pack of Coke - cans, water, sweetener

Question 6

Direct Labor(DL)

Answer 6

Labor costs that can easily be traced to individual units of product. Aka “Touch Labor” - someone touches the product

EX: Table - Carpenters

Question 7

Manufacturing Overhead(MOH)

Answer 7

Includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced

EX:
> Maintenance and repairs or production equipement
> Heat and light
> Property taxes
> Depreciation
> Insurance on manufacturing facilities

Question 8

Indirect Materials

Answer 8

Materials that are relatively insignificant to the product and not worth tracing to each unit - treated as part of manufacturing overhead(MOH)

EX:
> Glue
> Lubricants

Question 9

Indirect Labor

Answer 9

Factory Labor that is difficult to trace to each unit - treated as part of manufacturing overhead(MOH)

EX:
> Plant manager
> Maintenance staff

Question 10

Period Costs
(Non-manufacturing costs)

Answer 10

Includes selling costs and administrative costs

Opex, S&A, SG&A

Question 11

Selling Costs

Answer 11

All costs necessary to secure customer orders and get the finished product into the hands of the customer - included as a part of period costs

EX:
> Shipping
> Advertising
> Sales salaries

Question 12

Administrative Costs

Answer 12

all executive, organizational, and clerical costs associated with the general management of an organization - included as part of period costs

EX:
> Executive salaries
> HR
> Accounting

Question 13

Prime Costs

Answer 13

Direct product costs
DL + DM

Question 14

Conversion Costs

Answer 14

Costs incurred to convert direct materials into finished products
DL + MOH

Question 15

Cost Structure

Answer 15

The relative proportion of variable, fixed, and mixed costs in an organization

Question 16

Cost Behavior

Answer 16

How a cost will react to changes in the level of activity(volume)`

Question 17

Activity Base

Answer 17

A measure of what causes variable costs to change

EX:
> Units produced
> Units Sold
> Labor Hours
> Number of customers

Question 18

Relevant Range

Answer 18

The range of activity within which the assumptions about cost behavior are valid

EX:
> outside the relevant range, total rent, a fixed cost, many not remain constant

Question 19

Variable Cost(VC)

Answer 19

A cost that varies, in total, directly and proportionally to changes in the level of activity

EX: Caterer charges a company $20 per meal-per day per guest
> The MEAL COST/GUEST remains constant, but the TOTAL meal cost increases as the number of guests increases

Question 20

Fixed Cost(FC)

Answer 20

A cost that remains constant, IN TOTAL, regardless of changes in the level of activity

EX: A company pays $500 per month to rent storage space for equipment
> The TOTAL rent cost remains constant, but the COST/GUEST decreases as the number of guests increases

Question 21

Committed Fixed Costs

Answer 21

Represent investments with a multi-year planning horizon that cannot be easily adjusted in the short term

EX:
> Build a plant/factory
> Corporate structure i.e. executive positions

Question 22

Discretionary Fixed Costs

Answer 22

Usually arise from annual decisions by management and they can easily be adjusted in the short term

EX:
> Travel
> Training
> Advertising
> Performance bonuses

Question 23

Mixed Cost(MC)

Answer 23

A cost that contains both variable and fixed elements

The fixed portion is constant (in total) regardless of the level of activity and the variable portion will vary in direct proportion to activity

Uses the Equation of a line to calculate the total mixed cost
> Y=mx + b
> Total Cost = [VC/unit of activity * activity] + Total FC

Question 24

Traditional Format Income Statement

Answer 24

Separates product costs(COGS) from period costs(selling and administrative expenses) as required for external reporting

PROBLEM: does not distinguish between variable and fixed csots

Traditional Format:
Sales
Less: COGS (product costs)
= Gross Margin
Less: SG&A (period costs)
Net Operating Income(NOI)

Two ways to compute COGS:
> # of units sold * unit cost OR
> COGS=Beg Inv. + purchases - End Inv.

Question 25

Contribution Margin Approach

Answer 25

Separates costs into fixed and variable categories and computes a contribution margin Emphasises cost behavior *which is important to managers* Used as an internal planning and decision making tool Contribution Margin Format: Sales Less: Variable costs (product and period) = Contribution Margin Less: Fixed costs =Net operating income(NOI)