ac102_ch1 - Revised Summer 2010 CHAPTER 1 MANAGERIAL...

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Revised Summer 2010 Page 1 of 19 CHAPTER 1 MANAGERIAL ACCOUNTING AND COST CONCEPTS Key Terms and Concepts to Know Major Management Activities Planning- formulating long and short-term plans Directing and Motivating- implementing plans Controlling- measuring performance; comparing actual to planned performance Manufacturing or Product Costs Direct Costs can be easily and conveniently traced to the finished product: o Direct Materials includes material costs which are an integral part of the finished product o Direct Labor includes labor costs used to make the finished product Indirect Costs- cannot be easily and conveniently traced to specified cost objects: o Manufacturing Overhead includes all costs of manufacturing except direct materials and direct labor; i.e., only those costs associated with operating the factory are included in manufacturing overhead. Prime Costs are direct materials + direct labor Conversion Costs are direct labor +manufacturing overhead Nonmanufacturing or Period Costs Period costs, generally named Selling and Administrative Costs, consist of all other costs not included in product costs. Period costs are expensed in the period incurred. Cost Classifications for Predicting Cost Behavior In addition to classifying costs by function (manufacturing vs. non- manufacturing), costs may be classified by how they behave in total when the activity level changes:
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Revised Summer 2010 Page 2 of 19 In Total Per Unit Variable Cost Varies The same Fixed Cost The same Varies inversely Mixed Cost (introduced in Chapter 5) Varies Varies (often inversely) The relevant range is the range of activity levels throughout which the assumptions for cost behavior are valid. Outside the relevant range, total fixed costs may change and/or variable costs per unit may change. Cost Classifications on the Balance Sheet Manufacturing companies have three inventory accounts which appear as current assets on the balance sheet: Raw Materials, Work in Process, Finished Goods. These accounts replace Merchandise Inventory which is used in a retailing company. Finished goods account is most similar to the merchandise inventory account because it contains the value of goods to be sold to customers. However, the purchases added to merchandise inventory are replaced by the cost of goods manufactured when dealing with a manufacturing rather than a retailing company because the goods to be sold are manufactured, not purchased. Rather than purchasing inventory to sell, manufacturing companies purchase raw materials which will be used to produce finished goods. Cost Classifications on the Income Statement Certain activities in these accounts appear on the Income Statement as Cost of Goods Sold or Cost of Goods Manufactured, a component of Cost of Goods Sold.
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 102 taught by Professor All during the Spring '11 term at Harper.

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ac102_ch1 - Revised Summer 2010 CHAPTER 1 MANAGERIAL...

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