ACCTG 231 – 1st Edition Lecture 2 Outline of Last Lecture I. Introduction to Managerial AccountingII. Forms of ManagementOutline of Current Lecture I. Manufacturing Costsa. Direct Materials, Direct Labor, Manufacturing OverheadII. Non-Manufacturing CostsIII. Cost ClassificationsCurrent LectureManufacturing Costs:- The manufacturing costs of a company consist of three cost categories:o Direct Labor, Direct Materials, Manufacturing Overhead- Direct Materials:o Raw materials that become an integral part of the product and that can be conveniently traced directly to it.o EX: A radio installed in a vehicle.- Direct Labor:o Those labor costs that can be easily traced to individual units of product.o EX: The wages paid to automobile assembly workers.- Manufacturing Overhead:o Manufacturing costs that cannot be easily traced directly to specific units produced.o Made up of Indirect Labor and Indirect Materials Indirect Labor: Wages paid to employees who are not directly involved in production work. - EX: maintenance workers, janitors, and security guards. Indirect Materials: Materials used to support the production process.- EX: lubricants and cleaning supplies used in the automobile assembly plant.Non-Manufacturing Costs:- Selling Costs: Costs necessary to secure the order and deliver the 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.- Administrative Costs: All executive, organizational, and clerical costs.Product Costs:- Includes direct materials, direct labor and manufacturing overhead.- On the balance sheet (Inventory) and income statement (Cost of Goods Sold).Period Costs:- Includes all selling costs and administrative costs.- On the income statement (Expense)Prime Cost: [Direct Material & Direct Labor]Conversion Cost: [Direct Labor & Manufacturing Overhead]Cost Classifications for Predicting Cost Behavior:- Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are:o Variable Costs: EX: Your total texting bill is based on how many texts you send. Cost is determined by amount of units. Variable Cost Per Unit:- EX: The cost per text sent is constant at 5 cents per text message. The Activity Base (Cost Driver)- A measure of what causes the incurrence of a variable cost.o Units Produced, Machine-hours, Miles driven etc.o Fixed Costs: EX: Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract.- Doesn’t change normally. Types of Fixed Costs:- Committed: Long term, cannot be significantly reduced in the short term.- Discretionary: May be altered in the short term by current managerial decisions. Relevant Range: The relevant range of an activity for a fixed cost is the range of activity over which the graph of the cost is flat.o Mixed Costs: A mixed cost contains both variable and fixed elements.  The total mixed cost line can be expressed as an equation:- Y = a + bX- Y = the total mixed cost- a = the total fixed cost (the vertical intercept of the line)- b = the variable cost per unit of activity (the slope of the line)- X = the level of activity In account analysis, each account is classified as either variable or fixed based on the analyst’s knowledge of how the account behaves. The engineering approach classifies costs based upon an industrial engineer’s evaluation of production methods, and material, labor and overhead