ACCT 2123 1st EditionExam # 1 Study Guide Chapter: 2CHAPTER 2 NOTES AND VOCAB-A cost object is anything for which cost data are desired- including products, customers, jobs, and organizational subunits. The purpose of cost classifications are assigning costs to cost objects, accountingfor costs in manufacturing companies, preparing financial statements, predicting cost behavior in response to changes in activity, and making decisions. -A direct cost is a cost that can be easily and conveniently traced to a specific cost object. -An indirect cost is a cost that cannot be easily and conveniently traced to a specific object. (To be traced to a cost object such as a particular product, the cost must be caused by the cost subject). -A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. -Most manufacturing companies further separate their manufacturing costs into two direct cost categories, direct materials and direct labor, and one indirect cost category, manufacturing overhead.-Raw materials are the materials that go into the final product. Raw materials may include both direct and indirect materials.-Direct materials are those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. These 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.-Materials such as solder and glue are called indirect materials and are included as part of the manufacturing overhead. These materials aren’t worth the effort to trace the costs relatively insignificant materials to end products. -Direct labor consists of labor costs that can be easily (physically and conveniently) traced to individual units of product. (sometimes called touch labors because they touch the product).-Indirect labor consists of labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience. (For example janitors, or night security guards).*Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. It includes items such as indirect materials, indirect labor, maintenance and repairs on production equipment, depreciation, insurance, property taxes, etc. ONLY THE COSTS ASSOCIATED WITH OPERATINGTHE FACTORY ARE INCLUDED IN MANUFACTURING OVERHEAD. -Nonmanufacturing costs are divided into two categories: selling costs and administrative costs. Selling costs include all costs that are incurred to secure customer orders ad get the finished product to the customer. (Examples include advertising, shipping, sales travel, sales commission, etc.). Administrative costs include al costs associated with the general management of an organization rather than with manufacturing or selling. (Examples include general accounting, secretarial, public relations, etc.). -Product costs include all costs involved in acquiring or making a product. They are recorded in the period in which the related products are sold (matching/ accrual principle) (Product cost= DM+ DL+ MOH)-Period costs are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. Period costs are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting. (Period costs= Selling expenses + administrativeexpenses)-Prime cost is the sum of direct materials cost and direct labor cost. (Prime cost= DM+ DL) Conversion cost is the sum of direct labor cost and manufacturing overhead cost. (Conversion cost= DL+ MOH)-A variable cost varies, in total, in direct proportion to changes in level of activity. For a cost to be variable, it must be variable with respect to something, which is activity base. Activity base is a measure of whatever causes the incurrence of a variable cost. It is important to note that a variable cost is constant if expressed on a per unit basis. -A fixed cost is a cost that remains constant in total regardless of changes in the level of activity. Fixed costs are not affected by changes in activity. -Committed fixed costs represent organizational investments with a multiyear planning horizon that cannot be significantly reduced even for short periods of time without making fundamental changes. Discretionary fixed costs usually arise from annual decisions by management to spend on certain fixed cost items. -A mixed cost contains both variable and fixed cost elements. The fixed portion of mixed cost represents the minimum cost of having a service ready and available for use. The variable portion represents the cost incurred for actual consumption of the service, thus it varies in proportion to the amount of service actually consumed.-To analyze mixed costs with the high-low method, begin with identifying the period with the lowest level of activity and the period with the highest level of activity. The period with the lowest level of activity is selected as the first point in the above formula and the period with the highest activity is selected as the second point. Variable cost= (Cost in HL activity- cost a LL activity)/ (high activity level- low activity level)Fixed cost element= total cost- variable cost element( $ per day* number of people)-Traditional income statements are prepared primarily for external reporting purposes. This type of income statement organizes costs into two categories- cost of goods sold (product costs) and selling and administrative expenses (period costs). Sales- COGS= gross margin, gross margin- S&A expenses= net income.-COGS= beginning merchandise inventory+ purchases- ending merchandise inventory -The traditional income statement does not distinguish between fixed and variable costs.-The crucial distinction between fixed and variable costs is at the heart of the contribution approach to constructing income statements. The unique thing about the contribution approach is that it provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids panning, controlling, and decision making. -The contribution margin is the amount remaining from sales revenues after variable expenses have been reduced. -A difference between costs in any two different alternatives is a differential cost. A difference in revenue(usually just sales) between any two