ACC 132 1st Edition Lecture 3Outline of Last LectureI. What is Managerial AccountingII. Difference between managerial vs financial III. Why’s it important to your career?a. Business Majorsb. Accounting MajorsIV. Ethical StandardsV. Terminology Outline of Current Lecture I. Manufacturing CostsII. Nonmanufacturing CostsIII. Product CostsIV. Prime and Conversion CostsV. Variable CostsVI. High-Low MethodA. EquationVII. Tradition Format Income StatementA. Costs of goods soldCurrent LectureManufacturing CostsDirect Materials – are materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished productThese 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.Direct Labor- consist of labor costs that can easily be traced to individual units of a productIndirect Labor- labor costs that cannot be physically traced to particular products or that can be traced only at a great cost and inconvenience Nonmanufacturing CostsSelling Costs- include all costs that are incurred to secure customers’ orders and get the finished productto the customerExamples: advertising, shipping, sales travels, sales commissions, sales salaries and finish goods costAdministrative Costs- include all cost associated with general management of an organization rather than with manufacturing or selling Examples: general accounting, secretarial, public relations, executive compensationProduct CostsProduct Costs- include all costs involved in acquiring or making a productInventoriable costs- all the costs assigned to product costs- Product costs are not necessarily recorded as expenses on the income statement in the period they occur, but they are recorded as expenses in the period which the related products are sold.Period CostsPeriod Costs- are all costs that are not product costs.Examples: ALL selling and administrative expenses are treated as period costs (Sales commissions, advertising, executive salaries, public relations, and rental costs administrative offices)- Period costs are NOT included in the purchased or manufacturing costs- Period costs are expensed on the income statement in which they INCURRED inPrime Costs and Conversion CostsPrime Costs- are the sum of direct materials costs and direct labor costs.Conversion costs- is the sum of direct labor cost and manufacturing overhead cost.- Used to describe DL and MOH because these costs are incurred to convert materials into the finish productCost Behavior - refers to how a cost reacts to changes in the level of activityCost Structure – the relative proportion of each type of cost in an organizationVariable CostsVariable cost- they vary in total, in direct proportion changes in the level of activity.Example: direct materials, direct labor, variable elements of manufacturing overheadActivity base- is a measure of whatever causes the incurrence of a variable cost (also referred to as a cost driver)Example: direct labor hours, machine hours, units produced, units soldRelevant Range- is the range of activity within which assumption that cost behavior is strictly linear is reasonably valid. Mixed Costs – contains both variable and fixed costs elements.- Mixed costs are represented on a graph as a straight line- Because variable costs per unit equals the slope of the straight line, the steeper the slope, the higher the variable cost per unit.The equation for the straight line in the mixed cost graph is: Y = a +bXY = the total mixed costa = the total fixed cost (the vertical intercept of the line)b = the variable cost per unit of activity (slope of the line)X = the level of activity High – Low Method - The fixed and variable cost elements of a mixed costs can be estimated using the high – low method.- High- low method is based on the rise over run formula for the slope of a straight line- To analyze mixed costs begin identifying the period with the lowest level of activity and the period with the highest level of activity- Lowest activity is selected as the first point, highest selected as the second point- Variable cost = Change in cost Change in ActivityTraditional Format Income StatementTraditional Format – prepared primarily for the external reporting purposes- Organizes costs into two categories 1) costs of goods sold 2) selling and administrative expenses- Sales minus goods sold = gross marginCost of goods sold= Beginning Merchandise Inventory + Purchases – ending merchandise