BUSA 12 - Fundamentals of Accounting II
Chapter 14 Handout
Managerial Accounting Concepts and Applications
Types of Business Entities
Service Enterprises
Those businesses that sell their labor or skills to the public. Covered in BUSA 10 - Introduction to Accounting
Merchandisers
Those businesses that buy and sell merchandise in the same form to outside users. Covered in BUSA 1O/BUSA 11
Manufacturers
Those businesses that take raw materials and convert them into finished goods. Covered in BUSA 12.
Some Important Terms
Cost - payment of cash (or equivalent) expended for the purpose of generating revenues. As you will see later, not all costs are expenses. Some are assets. This is an important concept f or manufacturing companies. Although not all costs are expenses, oil expenses are costs of some sort.
Cost Object - The object to which costs are assigned. They can be assigned to a product, a geographic location, a line of product or anything else depending on management's needs.
Ways of classifying Costs
Direct vs. Indirect
Direct Costs - those costs that ore directly traceable to an object. The wages of a factory line worker that only works on the producing a Volkswagen Beetle would be considered a direct cost of the Beetle. However the VP of production's salary who is in charge of production on all cars would be an indirect cost to the Beetle. Indirect costs cannot be traced to a specific object.
Manufacturing Costs Vs. Non manufacturing Costs
Manufacturing costs are the costs that go into making a product. There are three basic types of manufacturing costs that you will become very familiar with over the course of the semester:
1) Direct Materials
2) Direct Labor
3) Factory Overhead
Direct Materials - Materials that are directly traceable to the product and represent a significant portion of the total cost.
Direct Labor - The- cost of wages of employees who are directly involved in manufacturing the product. Sometimes referred to as 'touch labor"...if they touch it, their time is probably classified as direct labor.
Factory Overhead - All other product costs or costs related to the factory other than direct materials or direct labor. By definition, factory overhead costs are indirect. This is a catch-all category for product costs. These overhead costs are also called 'burden". This category includes insignificant materials and labor costs.
Prime Costs vs. Conversion Costs
The difference in classifying these costs will become very important in the process-costing chapter, In summary; prime costs are the combination of direct materials and direct labor. Conversion costs are the combination of direct labor and factory overhead costs.
Product Costs vs. Period Costs
Product costs are the combination of the three basic types of manufacturing costs' direct materials, direct labor, and factory overhead as we described above. Period costs are expenses that are generally classified into two categories: Selling and administrative expenses. THE IMPOPTANCE IN IDENTIFYING THE COSTS PPOPEPLY CANNOT BE OVER-EMPHASIZED). PPODUCT COSTS GO ON THE BALANCE SHEET AS THEY APE INCURRED). (They eventually make their way to the income statement.) PERIOD COSTS G0 RIGHT TO THE INCOME STATEMENT!!! Financial statements and managerial reports can be misleading if these costs are not accounted for properly.