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BUSI 2170U

Chapter 2 Managerial cost concepts costaccountants define cost as an economic resource given up or foregon to accomplish a particular objective cost object is anything for which we want to calculate a cost such as a productsoft drink product linehdtv or service or process for which cost information is measured and accumulated Manufacturing costs manufacturing consists of activities and processes that convert raw materials into finished goodsthree types of manufacturing cost direct materials direct labour and manufacturing over head Direct materials raw materialsare the basic materials and parts used in the manufacturing processDirect materials raw materials that can be physically and directly associated with the finished products during the manufacturing processs are called direct materials Indirect materials some raw materials cannot be easily associated with the finished product Indirect materials hae one of two characteristics1 the do no physically become part of the finished product such as lubricants and polishing compounds or 2 they cannot be easily traced becuz their physical association with the finished product is too small in terms of cost such as sandpaper and gluecompanies account for indirect material as manufacturing overhead Manufacturing Overhead manufacturing overhead consists of cost that are indirectly associated with the manufacturing of the finished product These costs may also be manufacturing costs that cannot be classified as direct materials or direct labour Manufacturing overhead includes indirect materials indirect labour depreciation of factory buildings and machines and insurance taxes and maintenance on factory facilitiesPrime cost and conversion costs prime costsare the sum of all direct materials costs and direct labour costsconversion costs are the sum of all direct labour costs and manufacturing overhead coststogether they are the costs of converting raw materials into a final product Prime costsdirect materialsdirect labourConversion costsdirect labourmanufacturing overhead Product versus period cost each of the manufacturing cost componentsdirect materials direct labour and manufacturing over head are product costproduct costs are costs that are necessary and integral part of producing the finished product companies record product cost when incurred as inventory These costs do not become expenses until the company sells the finished goods inventory At that point the company records the expenses as cost of goods soldperiod costs are costs that are matched with the revenue of a specific time period rather than included as part of the cost of a saleable product Its hard to identify the cost directly to the product These are non manufacturing costs Period costs included selling and administrative expenses They are deducted from revenues in the period in which they are incurred in order to determin the net incomeCost behaviour analysis Cost behaviour analysis is the study of how specific costs respond to changes in the level of business activity knowledge of cost behaviour helps management paln activities and decide between alternative course of actionthe starting point in cost behaviour analysis is measuring the key business activities activity levels may be expressed in terms of sales dolarsretail company kmin a trucking company room occupancyin a hotel or dance classes taughtby a dance studio Some companys use more than one like direct labour hours or unit of output for manufacturing costs and sales revenue or units sold for selling expensesthe activity index identifies the activity that causes changes in the behaviuour of costs With this you can see how the behaviour of cost in response to changes in activity levels into three categories variable fixed or mixed Variable costs Are costs that vary in total directly and proportionally with changes in the activity level If level of activity increases by 10 total variable increases by 10a variable costs may also be defined as a cost that remains the same per unit at every level of activityEx of variable cost direct materials and direct labour for manufacturer cost of goods sold sales commisission and freight out for merchandiser and gasoline for an airline or trucking companyFixed costs fixed costs are costs that remain the same in total within the relevant range regardless of changes in activity levelex property taxes insurance rent supervisory salaries and depreciation on building and equipment As volume increases fixed cost declines read pg 60 on61Relevant range in the real worldthe relationship between the behaviour of a cariable cost and changes in the activity level is often curvilinear the range that a company expects to operate in during a year is called the relevant range of the activity index the linear assumption produces useful data for cost behaviour analysis as long as the level of activity stays in the relevant range
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