MGA 202 1st EditionLecture 2Outline of Chapter 1: Managerial Accounting & Cost Concepts I. Classify costs by functionII. Classify costs by cost behavior III. Classify costs in relation to cost objects IV. Classify costs for decision making I. Classify costs by function. A. Manufacturing Costs v. Nonmanufacturing CostsManufacturing costs (product costs) are all costs incurred inside the factory associated with transforming raw materials into a finished product. These included 3 elements:1. Direct materials:these must become a part of the finished product& their costs must be separately & conveniently traced to the finished product.2. Direct labor: labor that can be traced to the goods or services being produced. 3. Manufacturing Overhead: includes all manufacturing costs other than direct labor & materials. Prime Costs= Direct Materials + Direct Labor Conversion Costs= Direct Labor + Manufacturing Overhead Nonmanufacturing costs (period costs) include a firm’s other costs. These are things that happen outside of manufacturing/the factory. 1. Selling Costs:these are necessary to market, distribute, & service a product or service. Ex. salaries & commissions of sales people, advertising costs2. Administrative Costs:these are associated with the general management of the company.Ex. General accounting, top executive salariesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Reporting Costs on Financial Statements Manufacturing/Product/Inventorial Costs include DM, DL, & MOH.- Are assets that are carried in inventory.- Become an expense (Cost of GoodsSold) when the items are sold.Period costs include all selling & administrative costs.- Do not appear as part of the costsof inventories.- Are expensed in the period inwhich they are