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Acct 226 Week 1 Notes

by: Madeline Lacman

Acct 226 Week 1 Notes ACCT 226 - 001

Madeline Lacman
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About this Document

these notes cover chapter 2.
Introduction to Managerial Accounting
Debbie Huguley Brumbaugh (P)
Class Notes
Accounting, 226, accounting226, acct226




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This 5 page Class Notes was uploaded by Madeline Lacman on Sunday August 28, 2016. The Class Notes belongs to ACCT 226 - 001 at University of South Carolina taught by Debbie Huguley Brumbaugh (P) in Fall 2016. Since its upload, it has received 51 views. For similar materials see Introduction to Managerial Accounting in Accounting at University of South Carolina.


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Date Created: 08/28/16
Chapter 2 Managerial Accounting and Cost Concepts Managers want cost data  for eternal financial reports  to prepare planning documents and budgets  to make decisions Classifications of Manufacturing Costs  Direct Materials- the materials that go into creating the product  Direct Labor- wages  Manufacturing overhead- if you read a transaction and it says there was a cost that incurred in the factory, it is a manufacturing overhead; security, supervisors salaries Prime Costs and Conversion Costs  Manufacturing costs are often classified as follows: o Direct Material/Direct Labor  Prime cost  Manufacturing Overhead/Direct Labor  Conversion cost Classifications of Non-manufacturing Costs  Selling (marketing)  General & Administrative Product vs. Period Costs  Product Costs  DM+DL+MOH  Include direct materials, direct labor, and manufacturing overhead (Inventoriable Costs)  Period Costs  S+G&A  Include all selling costs and general & administrative costs (Expense as Incurred) Variable Cost  Varies (or changes), in total, in direct proportion to changes in the level of activity  Your total texting bill may be based on how many texts you send Fixed Cost  Remains constant, in total, regardless of changes in the level of the activity within the relevant range  Relevant range- is that range within which the assumptions made about cost behavior are valid  Fixed costs in total remain fixed within the relevant range  Committed o Long term, cannot be significantly reduced in the short term o Depreciation on buildings and equipment and real estate taxes  Discretionary  May be altered in the short term by current managerial decisions  Advertising and research and development Chapter 2 continued Cost In Total Per Unit Variable Total variable cost Variable cost per unit increase and decrease in remains constant proportion to changes in the activity level Fixed Total fixed cost is not Fixed cost per unit affected by changes in decreases as the activity the activity level within level rises and increases the relevant range as the activity level falls Mixed Costs A mixed cost contains both variable and fixed elements  Example: utility cost  If your fixed monthly utility cost 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=mx+b Y=$40+($0.03 x 2,000) Y=$100 Y Variable  Cost per KW X Fixed Monthly Utility Charge  The Scattergraph Method o Plot the data points on a graph  The High-Low Method o The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours o When you’re trying to differentiate between mixed cost and variable cost o Total fixed cost= total cost-total variable cost=$9,800-($6/hour x 850 hours) =$4,700 o The cost equation for maintenance o Y= $4,700 + $6.00X Chapter 2 continued  Least-Squares Regression Method o Method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables o Uses all the data points to estimate the fixed and variable cost components of a mixed cost o Goal- to fit a straight line to the data that minimizes the sum of the squared errors o Software can be used o Cost analysis objective is the same  Y=a + bX 2 o Provides a statistic, called R  Measure of the goodness of fit of the regression line to the data points The two methods (High/Low and Least Squares) provide different estimates of the fixed and variable cost components of a mixed cost. This is to be expected because each method uses differing amounts of the data points to provide estimates. Least-squares regression provides the most accurate estimate because it uses all the data points. Chapter 2 continued Traditional and Contribution Formats of Income Statement  Traditional format o Used primarily for external reporting  Contribution format o Used primarily by management Cost Classifications for Decision Making  Every decision involves a choice between at least 2 alternatives  Only those costs and benefits that differ between alternatives are relevant in a decision o All other costs and benefits are irrelevant Differential Cost and Revenue  Costs and revenues that differ among alternatives  Opportunity cost o The potential benefit that is given up when one alternative is selected over another o These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions  Sunk Cost o Already been incurred and can’t be changed now or in the future o These should be ignored when making decisions o Example  You purchased gold for $1,100 an ounce but now it’s selling for $950 an ounce. Should you wait for the gold to reach $1,100 an ounce before selling it?  You may say “yes” even though the $1,100 purchase is a sunk cost


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