Managerial Accounting
Review Session: key terms and concepts
Classifications of Costs
Manufacturing costs are often
combined as follows:
Direct
Materials
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
Quick Check 
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
Quick Check 
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
Product Costs Versus Period
Costs
Product costs include
direct materials, direct
labor, and manufacturing
overhead.
Cost of Good Sold
Inventory
Period costs are not
included in product costs.
They are expensed on
the income statement.
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement
Quick Check 
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
Quick Check 
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
Cost Classifications for
Predicting Cost Behavior
How a cost will react to
changes in the level of
business activity.
– Total variable costs
change when activity
changes.
– Total fixed costs
remain unchanged
when activity changes.
Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable
Total variable cost changes
as activity level changes.
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed
Total fixed cost remains
the same even when the
activity level changes.
Fixed cost per unit goes
down as activity level goes up.
Opportunity Costs
The potential benefit that is
given up when one alternative
is selected over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for one
year is $15,000.
Sunk Costs
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it,
trade it, or sell it, you cannot change the
$10,000 cost.
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
Chapter 4
 Many different products are produced each period.
 Products are manufactured to order.
 Cost are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
 Typical job order cost applications:
 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
Application of Manufacturing Overhead
The predetermined overhead rate (POHR)
used to apply overhead to jobs is determined
before the period begins.
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base is a
cost driver that causes overhead.
Application of Manufacturing
Overhead
Based on estimates, and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the cost driver
such as units produced, direct
labor hours, or machine hours.
Incurred during the period.
Job-Order System Cost Flows
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
Work in Process
(Job Cost Sheet)
Direct
Materials

Job-Order System Cost Flows
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Work in
Indirect
Process
Labor
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

Cost of
Goods
Mfd.

Finished Goods
Cost of
Goods
Mfd.

Cost of Goods Sold
Cost of
Goods
Sold

Cost of
Goods
Sold

Assigning Costs Using
Weighted-Average Costing
Beginning
Inventory
250 units
1,250 units
1,100 units
completed
1,000 units
started
Ending
Inventory
150 units
Now let’s examine the five-step process.
Weighted Average Example
Materials
Beginning
Work in Process
250 Units
100% Complete
1,000 Units Started
850 Units Started
and Completed
1,100 Units Completed
150 Equivalent Units
1,250 Equivalent units
of production
Ending
Work in Process
150 Units
100% Complete
150 × 100%
Weighted Average Example
Conversion
Beginning
Work in
Process
250 Units
80%
Complete
Work to
Complete
Process
20%
1,000 Units Started
850 Units Started
and Completed
Ending
Work in Process
150 Units
33 1/3% Complete
250 Units
1,100 Units Completed
50 Equivalent Units
1,150 Equivalent units
of production
150 × .333%
CVP: The Profit Equation


=
(P × X) - [(V × X) + F]
=
(P – V)X – F
Finding Target Volumes
Target
Volume
(units)
Fixed costs + Target profit
=
Contribution margin per unit
Break-Even in Units
Let’s use the Hap Bikes information again.
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Contribution margin ratio
Using CVP to Analyze Different
Cost Structures
High
Variable
Company
%
(50,000 units)
Sales
$
500,000 100%
Variable costs
400,000 80%
Contribution margin
100,000 20%
Fixed costs
40,000
8%
Operating profit
$
60,000 12%
Break-even units
Contribution margin
per unit
$
Hi Fixed
Company
%
(50,000 units)
$
500,000 100%
100,000 20%
400,000 80%
340,000 68%
$
60,000 12%
20,000
2.00
42,500
$
8.00
Margin of Safety
• Excess of projected (or actual) sales over
the break-even volume.
• The amount by which sales can fall before
the company is in the loss area of the
break-even graph.
Sales
Break-even
–
volume sales volume
= Margin of Safety
Identifying Relevant Costs
Costs that can be eliminated (in whole or in part)
by choosing one alternative over another are
avoidable costs. Avoidable costs are relevant
costs.
Unavoidable costs are never relevant and include:
Sunk costs.
Future costs that do not differ between the
alternatives.
Quick Check 
Colonial Heritage makes reproduction
colonial furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
The company’s supplier of hardwood will only be able to
supply 2,000 board feet this month. Is this enough
hardwood to satisfy demand?
a. Yes
b. No
Quick Check 
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
The company’s supplier of hardwood will only be able to
supply 2,000 board feet this month. What plan would
maximize profits?
a. 500 chairs and 100 tables
b. 600 chairs and 80 tables
c. 500 chairs and 80 tables
d. 600 chairs and 100 tables