Conversion cost is the sum of direct labor cost and manufacturing overhead cost. Conversion is used to describe direct labor and manufacturing overhead because these costs are incurred cost to convert materials into the finished product. Cost classifications for predicting cost behavior Cost behavior refers to how a cost react to changes in the level of activity. Costs are often categorized as or The relative proportion of each type of cost in an variable, fixed, mixed. organization is known as its cost structure. Variable cost varies, in total, in direct proportion to changes in the level of activity. Examples of VC are variable elements of manufacturing cost of goods sold, direct materials, direct labor, overhead such as and and variable elements of selling and indirect materials, supplies, power, administrative expenses such as and commissions shipping costs. For a cost to be variable, it must be variable with respect to something i.e. activity base: a measure of whatever causes the incurrence of a variable cost. AKA cost driver. Common AB’s are: and Other examples include direct labor-hours, machine-hours, units produced, units sold. etc. number of miles driven by a salesperson, number of pounds of laundry cleaned by a hotel, Unless stated otherwise, assume that the activity based under consideration is the total volume of goods and services provided by the organization. Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. E.g.: straight-line depreciation, insurance, property taxes, rent, supervisory salaries, and administrative salaries, advertising. As a general costs on an average per unit basis rule, you’re forewarned against expressing fixed in internal reports because it creates the false impression that fixed costs are like variable costs For planning purposes, and that total fixed costs actually change as the level of activity changes. fixed costs can be viewed as either or committed discretionary. represent organizational investments with a multiyear planning Committed fixed costs horizon that be significantly reduced even for short periods of time without making can’t fundamental changes. Discretionary fixed costs (manufacturing usually arise from annual fixed costs) decisions by management to spend on certain fixed cost items. The relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable.
Conversion cost is the sum of direct labor cost and manufacturing overhead cost. Conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product. Cost classifications for predicting cost behavior Cost behavior refers to how a cost react to changes in the level of activity. Costs are often categorized as variable, fixed, or mixed. The relative proportion of each type of cost in an organization is known as its cost structure. Variable cost varies, in total, in direct proportion to changes in the level of activity. Examples of VC are cost of goods sold, direct materials, direct labor, variable elements of manufacturing overhead such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses such as commissions and shipping costs. For a cost to be variable, it must be variable with respect to something i.e. activity base: a measure of whatever causes the incurrence of a variable cost. AKA cost driver. Common AB’s are: direct labor-hours, machine-hours, units produced, and units sold. Other examples include number of miles driven by a salesperson, number of pounds of laundry cleaned by a hotel, etc. Unless stated otherwise, assume that the activity based under consideration is the total volume of goods and services provided by the organization. Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. E.g.: straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising. As a general rule, you’re forewarned against expressing fixed costs on an average per unit basis in internal reports because it creates the false impression that fixed costs are like variable costs and that total fixed costs actually change as the level of activity changes. For planning purposes, fixed costs can be viewed as either committed or discretionary. Committed fixed costs represent organizational investments with a multiyear planning horizon that can’t be significantly reduced even for short periods of time without making fundamental changes. Discretionary fixed costs (manufacturing fixed costs) usually arise from annual decisions by management to spend on certain fixed cost items. The relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable.
Accounting.docx