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August 18th-25th Notes

by: Callisa Ruschmeyer

August 18th-25th Notes Acct 2210- 001

Marketplace > Auburn University > Accounting > Acct 2210- 001 > August 18th 25th Notes
Callisa Ruschmeyer
GPA 4.0
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About this Document

Chapter 2 Notes Fixed Cost Variable Cost Mixed Cost Rates
Managerial Accounting
Mr. Fetsch
Class Notes
managerial accounting, auburn, fetsch




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This 4 page Class Notes was uploaded by Callisa Ruschmeyer on Thursday August 25, 2016. The Class Notes belongs to Acct 2210- 001 at Auburn University taught by Mr. Fetsch in Fall 2016. Since its upload, it has received 21 views. For similar materials see Managerial Accounting in Accounting at Auburn University.


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Date Created: 08/25/16
August 18 -25 Notes Chapter 2 Types of Cost Classification  Financial reporting  Predicting cost behavior  Assigning costs to cost objects  Making business decisions Assigning Costs to Cost Objects  Direct costs o Those that can be easily and conveniently traced to a unit of product or other cost object o Example  direct material  direct labor  Indirect costs- those that cannot be easily and conveniently traced to a unit of product or other cost object o Example- manufacturing overhead o Common costs- indirect costs incurred to support a number of cost objects; cost that cannot be traced to an individual object Classifications of Manufacturing Costs  Direct materials- raw materials that become an integral part of the product and that can be conveniently traced directly to it  Direct labor- the many different people doing specialized tasks; can be easily traced to individual units of product- who did which part? o Also known as "touch" labor- because it refers to the people who actually touch the product  Manufacturing overhead- special equipment needed; extra materials; costs that cannot be easily traced directly to specific units produced o Indirect materials, indirect labor, maintenance and repairs on production equipment, heat and light, property taxes, depreciation, insurance on manufacturing facilities o Indirect materials- used to support the production process (example- lubricants and cleaning supplies) o Indirect labor- wages paid to employees who are not directly involved in production work (example- maintenance workers)  Nonmanufacturing costs o Selling costs- costs necessary to secure the order and deliver the product; can be either direct or indirect  Examples- advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses  Do not get confused: advertising is direct, but the advertising manager is indirect o Administrative costs- all executive, organization, and clerical costs; can be either direct or indirect costs August 18 -25 Notes  Examples- general management: administrative costs, general accounting, secretarial, public relations, and similar costs involved with administration as a whole  You want to have all the costs associated with the car to gage what profit you want to price the car Cost Classifications for Preparing Financial Statements  Product costs- direct materials, direct labor, and manufacturing overhead o Inventory (balance sheet) and cost of goods sold (income statement) o Consist of direct materials, direct labor, and manufacturing overhead  Period costs- include all selling costs and administrative costs o Expenses that go on the income statement o Examples- property taxes on corporate headquarters, sales commission, advertising, executive salaries, public relations, and the rental costs of administrative offices Prime Costs and Conversion Costs  Prime cost- pay outside the company o Direct material and direct labor  Conversion cost- you took a raw material and had to convert it into something useful o Direct labor and manufacturing overhead Cost Classifications for Predicting Cost Behavior  Cost behavior refers to how a cost will react to changes in the level of activity  Cost structure refers to the relative proportion of each type of cost in an organization o Variable costs  Varies in direct proportion to changes in the level of activity  Behave like a straight line  HOWEVER, variable cost per unit is constant (horizontal line)  What causes the incurrence of a variable cost (referred to as activity base)?  Units produce  Machine hours  Labor units  Miles driven  More specific examples- cost of goods sold for merchandising company, direct materials, direct labor, variable elements of manufacturing overhead (indirect materials, supplies, power, administrative and selling expenses like commissions and shipping costs) o Fixed costs  A cost that remains constant  HOWEVER, if it is expressed per unit, the average fixed cost per unit varies; becomes a downward sloping curve  Examples- straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising  Types of fixed costs August 18 -25 Notes  Committed- long-term, cannot be significantly reduced in the short term (multi-year)  Depreciation on buildings and equipment and real estate taxes  Discretionary- may be altered in the short-term by current managerial decisions (aka, managed fixed costs)  Advertising and research and development  Relevant range- the range of activity over which the graph of the cost is flat; outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable o Mixed costs- contains both variable and fixed elements  Formula Y = a +bX  y- the total mixed cost  a- the total fixed cost  b- the variable cost per unit of activity  x- the level of activity  Example- phone plans: fixed rate up until a certain point, then the rate changes  Analysis  Account analysis- each account is classified as either variable or fixed based on the analyst's knowledge of how the account behaves  Engineering approach- classifies costs based upon an industrial engineer's evaluation of production methods, and material, labor, and overhead requirements Scattergraph Plots and High-Low Method  The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours o Top: total maintenance cost = highest -lowest value o Bottom: total hours of maintenance = highest - lowest value o Variable cost = cost / activity (hours, units, etc.)  Total fixed cost = total cost - total variable cost  The cost equation for ________ = Y = a + bX Least-Squares Regression Method  A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables o This method uses all of the data points to estimate the fixed and variable cost components of a mixed cost o The goal of this method is to fit a straight line to the data that minimizes the sum of the squared errors (aka, minimizes the deviations among the points to the line)  Provides the most accurate estimate because it uses all the data points The Traditional and Contribution Formats  Use contribution because it can be used by multiple managers, not just those in accounting  Contribution Format- used as an internal planning and decision-making tool 1. Cost-volume-profit analysis 2. Budgeting August 18 -25 Notes 3. Segmented reporting of profit data 4. Special decisions such as pricing and make-or-buy analysis Cost Classifications for Decision Making  Every decision involves a choice between at least two alternatives  Only those costs and benefits that differ between alternatives are relevant in a decision o All other costs and benefits can and should be ignored as irrelevant Differential Cost and Revenue  Costs and revenues that differ among alternatives o Revenue = profits or the positives o Costs = expenses or the negatives Opportunity Cost  The potential benefit that is given up when one alternative is selected over another  These costs are not usually entered into the accounting records or an organization, but must be explicitly considered in all decisions Sunk Costs  Sunk costs have already been incurred and cannot be changed now or in the future  These costs should be ignored when making decisions  Example- you have a factory --> once the factory is purchased, it no longer factors into decisions because you own it; the good from selling or keeping it is an opportunity cost


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