Biswas, and Ben Waber. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. Indirect materials are generally small items of material such as glue and nails.
They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. Direct labor consists of labor costs that can be easily traced to particular products. Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.
These labor costs are incurred to support production, but the workers involved do not directly work on the product. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.
In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.
Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume. Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume. Mixed cost: A mixed cost contains both variable and fixed cost elements. Unit fixed costs decrease as volume increases. Unit variable costs remain constant as volume increases.
Total fixed costs remain constant as volume increases. Total variable costs increase as volume increases. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed.
Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development.
A committed fixed cost has a long planning horizon—generally many years. As the anticipated level of activity changes, the level of fixed costs needed to support operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity.
These two points are likely to be less than typical because they represent extremes of activity. The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.
An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. For example, the alternatives might consist of purchasing one machine rather than another to make a product. The difference between the fixed costs of purchasing the two machines is a differential cost.
The wages of employees who build the sailboats: direct labor cost. The cost of advertising in the local newspapers: marketing and selling cost. The cost of an aluminum mast installed in a sailboat: direct materials cost. Rent on the boathouse: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations. Depreciation on power tools: manufacturing overhead cost.
The cost of the memory chips used in a radar set Factory heating costs Factory equipment maintenance costs Training costs for new administrative employees The cost of the solder that is used in assembling the radar sets Wages and salaries of factory security personnel The cost of air-conditioning executive offices Wages and salaries in the department that handles billing customers Depreciation on the equipment in the fitness room used by factory workers Telephone expenses incurred by factory management The costs of shipping completed radar sets to customers The wages of the workers who assemble the radar sets Health insurance premiums for factory personnel Cups of Coffee Served in a Week 1, 1, 2, Fixed cost The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.
High activity level August.. Low activity level October.. Electrical costs may reflect seasonal factors other than just the variation in occupancy days.
For example, common areas such as the reception area must be lighted for longer periods during the winter. This will result in seasonal effects on the fixed electrical costs. Additionally, fixed costs will be affected by how many days are in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.
Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Instead, students see how accounting provides key information used to make critical business decisions. Please select an option. View as Instructor. Whether you need access offline or online, in print or on your mobile device, we have cost saving options. Tell me about Cengage eTextbooks. Best value! Access your book immediately!
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