Define common terms and concepts used in management

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Define common terms and concepts used in management accounting. The following are definitions of key terms associated with managerial accounting. Product costs - All costs used to produce a good or service. These costs include direct materials, indirect materials and manufacturing overhead. Manufacturing overhead include indirect materials and indirect labor plus all other manufacturing overhead. You can identify other manufacturing overhead items because they will be indicated using terms like production, manufacturing, or factory. Period costs - Costs not used to produce a good or service, or capitalized as an asset. They are charged as expenses to the income statement in the period in which they are incurred. Some examples include: President’s salary Selling Costs Office costs Sales salaries Advertising Legal and accounting fees Dues and subscriptions Office utility costs Supplies 26
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Direct materials - Materials that become part of the product and are traceable to it. For example the ice cream in an ice cream cone. Indirect materials - M aterials that are necessary to a manufacturing or service business but are not directly included in or are not a significant part of the actual product. For example, the cleaning supplies used to clean the assembly line at night once it is shut down. Direct labor - Wages paid to those who physically work on direct materials to transform them into a finished product and are traceable to specific products. For example, the labor costs to assemble the ice cream cones. Indirect labor - Labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product. For example, the labor costs to clean up the assembly line at the end of the day. Manufacturing overhead - All costs incurred in the manufacturing process other than direct materials and direct labor to include indirect materials and labor and any other costs associated with the manufacturing facility. For example, the depreciation on the manufacturing facility. These costs are usually indicated with the term factory, manufacturing, or production. Differential costs - Future costs that change as a result of a decision; also called incremental or relevant costs. For example, if you are going to buy a new car, the difference between your current insurance premiums and the new insurance premiums. Sunk costs - Costs that are past costs and do not change as a result of a future decision. For example if a business is buying a new piece of equipment, the depreciation expenses on the old equipment would be sunk and not recoverable. Opportunity costs - The benefits lost or forfeited as a result of selecting one alternative course of action over another. For example, if you pay cash for your new cash, you give up the opportunity to use the cash to pay for a vacation. Variable costs - Variable costs, by definition, vary in total proportionately to the number of units sold. However, the variable cost per unit sold is fixed within a relevant range.
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  • Spring '16
  • Kenneth Cassell
  • Balance Sheet, Generally Accepted Accounting Principles

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