Managerial Acc 2 - Chapter 2 Lecture Notes Chapter 2...

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Chapter 2 Lecture Notes 2-1 Chapter 2 Lecture Notes Chapter theme : This chapter explains how managers need to rely on different cost classifications for different purposes. The four main purposes emphasized in this chapter include preparing external financial reports, predicting cost behavior, assigning costs to cost objects, and decision making . I. General cost classifications We’ll begin by looking at manufacturing companies because their basic activities include most of the activities found in other types of business organizations. Learning Objective 1: Identify and give examples of each of the three basic manufacturing cost categories. A. Classifications of manufacturing costs i. Direct materials Raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it. ii. Direct labor Labor costs that can be easily traced to individual units of product (also called touch labor). iii. Manufacturing overhead Includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced (also called indirect manufacturing cost, factory overhead, and factory burden).
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Chapter 2 Lecture Notes 2-2 1. Includes indirect materials that are part of the finished product, but that cannot be easily traced to it. 2. Includes indirect labor costs that cannot be conveniently traced to the creation of products. 3. Other examples of manufacturing overhead include: maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc. B. Classifications of nonmanufacturing costs (also called selling and administrative costs). i. Selling costs Includes all costs necessary to secure customer orders and get the finished product into the hands of the customer. ii. Administrative costs Includes all costs associated with the general management of an organization. Learning Objective 2: Distinguish between product costs and period costs and give examples of each. C. Product costs versus period costs i. Product costs Includes all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Product costs are expensed in the income statement when the products are sold.
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Chapter 2 Lecture Notes 2-3 ii. Period costs Includes all selling and administrative costs. 1. These costs are expensed in the income statement in the period incurred. D. Prime costs and conversion costs i. Prime cost Direct materials cost plus direct labor cost. ii. Conversion cost Direct labor cost plus manufacturing overhead costs. II. Cost classifications for predicting cost behavior Learning Objective 3: Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.
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