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Chapter 2-3

ACTG 2020 Chapter Notes - Chapter 2-3: Scatter Plot, Regression Analysis, Dependent And Independent Variables

Course Code
ACTG 2020
Douglas Kong

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Chapter 2: Basic Managerial Accounting Concepts
2.1 The meaning and uses of cost
oCost is the amount of cash or cash equivalent sacrificed for goods and/or services that expect to
ring in current or future benefit to the organization.
oAccumulating cost is the way cost are measured and recorded.
oAssigning cost is the way the cost is linked to some cost object.
oCost object is any item such as a product, service, customer, department, project geographic
region, plant and so on, for which costs are measured and assigned.
oOpportunity cost is a benefit given up or sacrifice when one alternative is chosen over another
oCost classification
-Direct cost: costs that can be easily and accurately traced to a cost object.
-Indirect cost: cost that cannot be easily, accurately or economically traced.
-Prime cost
-Conversion costs
-Product costs
-Variable costs: varies in direct proportion to changes in output. It increases as total
output increases (eg. Denim used to make jeans).
-Fixed costs: does not increase as total output increases (eg. Property tax on land stays
the same regardless how many jeans are made)
-Mixed costs
-Selling costs
-Administrative costs
2.2 Product and service costs
oProducts vs. service
oManufacturing organizations vs. service organizations
oProduct cost are those costs, both direct and indirect, of producing and preparing it for sale.
-Direct material: material that’s are a part of the final product and can be directly
traced to the goods being produced.
-Direct labour: is the labour that can be directly traced to the goods being produced.
-Manufacturing overhead: all product costs, other than direct materials and direct
labour, are put into category called manufacturing overhead (factory overhead or
indirect manufacturing cost).
oTotal product cost equals the sum of direct material, direct labour and manufacturing overhead.
oPrime cost is the sum of direct material cost and direct labour cost.
oConversion cost is the sum of direct labour cost and manufacturing overhead cost.
oPeriod costs are all the costs that are not product costs (all areas of the value chain except for
-Example, cost of supplies or R&D
-Cannot be assigned to products
-Cannot be reported as inventories on the balance sheet
-They are typically expensed in the period in which they are incurred
-If it is expected to give you future benefit, then it has to be recorded as asset and be
capitalized and allocated to expense through depreciation or amortization through out
its useful life.
-Inventory assets are recorded as cost of goods sold on the financial statements
oSelling cost is the necessary cost to market, distribute and service a product service.
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