ACCT 2020 1st Edition Lecture 3 Outline of Last Lecture I Managerial Accounting an Overview II Work of Management III Managerial Accounting Activities IV Strategic management skills V Customer value propositions VI Enterprise Risk management VII Process Management Skills VIII Theory of constraints IX Six skills of effective leaders X The Importance of Ethics in business XI Corporate social responsibility Outline of Current Lecture I Manufacturing Cost Categories II Products Cost vs Period Cost III Classifications of costs IV Variable V Fixed VI Mixed VII High Low method 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 Current Lecture I Manufacturing Cost Categories The product o Direct material Raw materials that become an integral part of the product and that can be conveniently traced directly to it Ex Flour for the loaf of bread o Direct labor Those labor cost that can be easily traced to the individual units of the product Wages paid to bakers o Manufacturing overhead Costs that cannot be easily traced to the specific units produced basically everything else If it relates to the manufacture of the product Indirect material used to support production like lubricants and cleaning supplies for machines or equipment Indirect labor wages paid to laborers not directly involved in production ex supervisors janitors etc The building the lighting the desks the utilities These costs are also included Non manufacturing costs o Selling costs Costs necessary to secure the order and delivery of the product o Administrative costs All executive organizational and clerical costs II Products Cost vs Period Cost Product cost o Product costs include direct materials direct labor and manufacturing overhead Period costs o Include all selling costs and administrative costs Quick check o Which of the following costs would be considered a period cost rather than a product cost in a manufacturing company Property taxes on headquarters and selling commission III Classifications of costs Prime cost o Direct materials Direct Labor IV Conversion cost o Labor overhead o Cost behavior refers to how a cost will react to changes in the level of activity Variable V Varies in total in direct proportion to changes in the level of activity In some cases you total texting bill if not on plan is bases on how many texts you send 1text 10ct 5 50 o Cost per unit remains constant In some cases a cost per text is constant 1 10c no matter how many cents o Activity Base cost driver A measure of what causes the incurrence of a variable cost Units produced machine hours labor hours miles driven Fixed VI Remains constant and total regardless of changes in the level of activity A monthly cellphone contract that is unlimited o Cost per unit varies inversely with changes in activity If you talk 1 minute then my cost per minute is 60 If I talk 10 minutes then my cost per minute is 10 Committed o Long term cannot be significant reduced in the short term Depreciation and building payments Discretionary o Maybe be altered in the short term by current managerial decisions Advertising and R D Fixed cost and the relevant range o If the company needs 1020 square feet they must take the available option of 2000 This creates different thresholds which has a flat relative range If they needed 2500 theyd still have to go to 3000 o Not affected by change in the activity level while variable cost decreases with activity level Mixed The total cost line can be expressed as an equation Y a bx Total utility bill Y fixed cost a price per unit b multlipled by the number of units used x In Account Analysis each account is classified as either cariable or fixed bases on analyst Engineering analysis is bases on their knowledge of manufacturing view Graphing o Plot the dependent cost on y axis independent variable cost driver on the x axis on a scatter graph o TOTAL COST x vs ACTIVITY y VII High Low method o Portion that s mixed vs portion variable o o Find the month with the highest and lowest with activity Change in cost 9800 7400 2400 6 hr Change in activity 850hrs 450hrs 400hr Sales salaries and commissions are 10 000 when 80 000 units are sold and 14 000 when 120 000 units are sold Using the high low method what is the variable portion of sales salaries and commissions 0 10 unit Fixed 2000