Chapter 2: Basic Managerial Accounting Concepts

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Cost: the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization.

Expense: an expired cost; the benefit has been used up.

Accumulating costs: the way costs are measured and recorded.

Cost object: anything for which cost data are desired. Ex: products, customers, jobs, organizational subunits, etc.

Direct costs: costs that can easily and conveniently be traced to a specific cost object.

Indirect costs: costs that cannot easily and conveniently be traced to specific cost objects.

Cost behavior: how a cost reacts to changes in activity levels.

Variable cost: cost that varies in proportion to changes in activity level.

Fixed cost: cost that remains constant regardless of changes in activity level.

Opportunity cost: potential benefit given up when one alternative is selected over another.

Products: goods produced by converting raw materials into products (manufacturing org.)

Services: tasks or activities performed for a customer (service org.)

Product cost: direct and indirect costs of producing a product or acquiring a product.

- Direct materials (DM), direct labor (DL), manufacturing overhead (MOH)

- Inventory on balance sheet, COGS on income statement

Direct materials: raw materials that become integral parts of finished product. costs can be conveniently traced to it.

Direct labor: labor costs easily traced to individual units of product.

Manufacturing overhead: all manufacturing costs excluding DM and DL. costs cannot easily be traced to specific units produced.

Total Product Cost = DM + DL + MOH

Per-Unit Product Cost = Total Product Cost / # of Units Produced

Period costs: includes all selling and administrative costs. expensed in the income statement in period incurred.

Selling costs: costs necessary to secure customer orders and get finished product into hands of customer.

Administrative costs: all costs associated with general management of organization.

Prime costs: DM cost + DL cost

Conversion costs: DL cost + MOH cost