Basic Cost Management Concepts - · PDF fileBasic Cost Management Concepts ... Economics Cost Terms Short run Long run Fixed Variable ... as distinguished from budgeted costs. A cost

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Basic Cost Management Basic Cost Management ConceptsConcepts

M. En C. Eduardo Bustos M. En C. Eduardo Bustos FarFarííasas

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ObjectivesObjectives1. 1. ExplainExplain whatwhat isis meantmeant by by thethe wordword ""costcost." ." 2. 2. DistinguishDistinguish amongamong productproduct costscosts, , periodperiod costscosts, and expenses. , and expenses. 3. 3. Describe Describe thethe role role ofof costscosts onon publishedpublished financialfinancial statementsstatements. . 4. 4. ListList fivefive typestypes ofof manufacturingmanufacturing operationsoperations and describe and describe massmass

customizationcustomization. . 5. 5. GiveGive examplesexamples ofof threethree typestypes ofof manufacturingmanufacturing costscosts. . 6. 6. Prepare a Prepare a scheduleschedule ofof costcost ofof goodsgoods manufacturedmanufactured, a , a scheduleschedule ofof

costcost ofof goodsgoods soldsold, and , and anan incomeincome statementstatement forfor a a manufacturermanufacturer. . 7. 7. ExplainExplain whatwhat isis meantmeant by "by "differentdifferent costscosts forfor differentdifferent purposespurposes." ." 8. 8. UnderstandUnderstand thethe importanceimportance ofof identifyingidentifying anan organization'sorganization's costcost

driversdrivers. . 9. 9. Describe Describe thethe behaviorbehavior ofof variable variable costscosts and and fixedfixed costscosts, , bothboth in total in total

and and onon a a perper--unitunit basisbasis. . 10. 10. DistinguishDistinguish amongamong directdirect costcost, , indirectindirect costcost, , controllablecontrollable costcost , and , and

uncontrollableuncontrollable costcost. . 11. 11. Define and Define and givegive examplesexamples ofof anan opportunityopportunity costcost, , anan outout--ofof pocketpocket

costcost, a , a sunksunk costcost, a , a differentialdifferential costcost, a marginal , a marginal costcost, and , and ananaverage average costcost. .

12. 12. ExplainExplain thethe behavioralbehavioral tendenciestendencies manymany peoplepeople show show whenwhen theytheyencounterencounter opportunityopportunity costscosts and and sunksunk costscosts. .

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Accounting Information SystemsAccounting Information Systems

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The Need for Cost AccountingThe Need for Cost Accounting

Cost accounting provides the detailed cost data Cost accounting provides the detailed cost data that management needs to control current that management needs to control current operations and plan for the future.operations and plan for the future.Companies must control costs in order to keep Companies must control costs in order to keep prices competitive.prices competitive.In todayIn today’’s global environment, cost information is s global environment, cost information is more crucial than ever in remaining competitive.more crucial than ever in remaining competitive.

mantener

55


The cost management information systemis an accounting information subsystem that is primarily concerned with producing outputs for internal users using inputs and processes needed to satisfy management objectives.

66


The cost management information system has three broad objectives that provide information for--1) Costing out services, products, and other

objects of interest to management

2) Planning and control

3) Decision making

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An Integrated Cost Management SystemAn Integrated Cost An Integrated Cost

Management SystemManagement SystemDesign and

DevelopmentSystem

CustomerCustomerServicingServicingSystemSystem

Marketing andMarketing andDistributionDistribution

SystemSystem

CostManagement

System

ProductionProductionSystemSystem

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The Subsystems of the Accounting Information System

The Subsystems of the The Subsystems of the Accounting Information SystemAccounting Information System

Financial AccountingFinancial AccountingInformation SystemInformation System

Accounting Information SystemAccounting Information System

Cost ManagementCost ManagementInformation SystemInformation System

OperationalControl System

Cost AccountingCost AccountingInformation SystemInformation System

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Costs and Benefits of Costs and Benefits of InformationInformation

Costs Benefits

More information does not mean more benefits if information overload results.

1010

EconomicsEconomics costcost

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Economics Cost TermsEconomics Cost Terms

Short runShort runLong runLong runFixedFixedVariableVariableTotalTotalAverageAverageMarginalMarginal

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Cost FunctionsCost Functions

Short run cost function Short run cost function -- use for dayuse for day--toto--day day operating decisionsoperating decisions–– at least one input is fixedat least one input is fixedLong run cost function Long run cost function -- use for strategic use for strategic planningplanning–– all inputs can be variedall inputs can be varied

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Fixed CostsFixed Costs

Do not vary with Do not vary with outputoutputRelevant only in the Relevant only in the short runshort runExamplesExamples–– leaselease–– contract employeescontract employees–– fixed insurance costsfixed insurance costs

Contrato de arrendamiento

1414

Variable CostsVariable Costs

Vary with outputVary with outputRelevant in the short and long runsRelevant in the short and long runsExamplesExamples–– wageswages–– material costsmaterial costs–– social insurance taxessocial insurance taxes

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Total CostTotal Cost

TVCTFCTC +=

1616

Marginal Costs and Average Marginal Costs and Average CostsCosts

The extra costincurred to produceone additional unit.

The total cost toproduce a quantity

divided by thequantity produced.

Marginal and average costs arelargely a function of cost behavior

-- variable and fixed costs.

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Average Fixed CostsAverage Fixed CostsC

ost (

$’s)

AFC

QTFCAFC =

Quantity

1818

Average Variable CostsAverage Variable Costs

Quantity

AVC

Cos

t ($’

s)

QTVCAVC =

1919

Average Total CostAverage Total Cost

Quantity

ATC

Cos

t ($’

s)

QTCATC =

2020

Average Total CostsAverage Total Costs

AVCAFCATC +=

2121

Marginal CostMarginal Cost QTVC

QTCMC

∆∆

=∆∆

=

MCC

ost (

$’s)

Quantity

2222

Cost CurvesCost Curves

Quantity

MCATC

AVC

Cos

t ($’

s)

2323

Other Cost TermsOther Cost Terms

Opportunity Cost Opportunity Cost -- foregone value foregone value associated with nextassociated with next--best use.best use.

Consider what a firm forgoes by accepting Consider what a firm forgoes by accepting a special order.a special order.

abandonado

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Cost TermsCost Terms

Explicit Explicit –– measured by cash costsmeasured by cash costs

Implicit Implicit -- nonnon--cash costscash costs–– measured by opportunity cost conceptmeasured by opportunity cost concept

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AccountingAccounting costcost

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Basic Cost ConceptsBasic Cost ConceptsBasic Cost Concepts

CostCost is the cash or cash equivalent value is the cash or cash equivalent value sacrificed for goods and services that are sacrificed for goods and services that are expected to bring a current or future benefit expected to bring a current or future benefit to the organization.to the organization.

genere

Costs are incurred to produce future benefits.Expired costs are called expenses.Unexpired costs are classified as assets and appear on the balance sheet.Assigning cost accurately to cost objects is crucial.

financieros

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AA cost objectcost object is any item, such as products, is any item, such as products, customers, departments, projects, activities, customers, departments, projects, activities, and so on, for which costs are measured and and so on, for which costs are measured and assigned.assigned.

Example:Example: A bicycle is a cost object when you are A bicycle is a cost object when you are determining the cost to produce a bicycle.determining the cost to produce a bicycle.

An An activityactivity is a basic unit of work performed is a basic unit of work performed within an organization. within an organization.

Example:Example: Moving materials, maintaining equipment, Moving materials, maintaining equipment, designing products, etc. designing products, etc.

Dentro de

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Cost and Cost TerminologyCost and Cost Terminology

Cost is a resource sacrificed or forgone to achievea specific objective.

abandonado

An actual cost is the cost incurred (a historical cost)as distinguished from budgeted costs.

A cost object is anything for which a separatemeasurement of costs is desired.

deseado

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Cost and Cost TerminologyCost and Cost Terminology

CostAccumulation

Cost Object

Cost Object

Cost Object

CostAssignment

Tracing

Allocating

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Historical Historical -- actual cash outlayactual cash outlay

Current Current -- amount in prevailing marketamount in prevailing market–– one form of current cost is one form of current cost is replacementreplacement

costcost i.e. cost of duplicating productive i.e. cost of duplicating productive capacity using current technologycapacity using current technology

–– may be above or below historical costmay be above or below historical cost

desembolsado

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Incremental CostIncremental Cost–– cost of a management decisioncost of a management decision–– profit contributionprofit contribution

profit before fixed chargesprofit before fixed chargesantes

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Sunk cost Sunk cost -- cost that does not vary across cost that does not vary across management decisionmanagement decision–– option on land purchaseoption on land purchase

hundido

3333

Classifying CostsClassifying Costs

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Classifying CostsClassifying CostsBy Behavior By Behavior –– FixedFixed–– VariableVariableBy TraceabilityBy Traceability–– DirectDirect–– IndirectIndirectBy FunctionBy Function–– Product Product –– PeriodPeriod

origen

3535

Cost ClassificationsCost Classificationsby Behaviorby Behavior

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Cost ClassificationsCost Classificationsby Behaviorby Behavior

Cost BehaviorHow a cost will react to

changes in the level of business activity.

Cost BehaviorCost BehaviorHow a cost will react toHow a cost will react to

changes in the level of business activity.changes in the level of business activity.

Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.

Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.

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Total Variable CostTotal Variable CostA variable cost is one that changes in total

in proportion to changes in the volume of activity.

Your Your total long distancetotal long distance telephone billtelephone billis based on how many minutes you talk.is based on how many minutes you talk.

Minutes Talked

Tota

l Lon

g D

ista

nce

Tele

phon

e B

ill

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Variable Cost Per UnitVariable Cost Per UnitOn a per unit basis, a variable cost

remains constant over a wide range of activity.

Minutes Talked

Per

Min

ute

Tele

phon

e C

harg

e

The The cost per long distance minutecost per long distance minute talked is constant.talked is constant.For example, 10 cents per minute.For example, 10 cents per minute.

3939

Total Fixed CostTotal Fixed CostA fixed cost is one that remains constant in total

even when the volume of activity changes.

Your monthly Your monthly basic telephone billbasic telephone bill probably does not probably does not change when you make more local calls. change when you make more local calls.

Number of Local Calls

Mon

thly

Bas

ic

Tele

phon

e B

ill

4040

Fixed Cost Per UnitFixed Cost Per UnitOn a per unit basis, a fixed cost changes

as the volume of activity changes.

Number of Local Calls

Mon

thly

Bas

ic

Tele

phon

e B

ill pe

r Lo

cal C

all

The average cost The average cost per local callper local call decreasesdecreasesas more local calls are made.as more local calls are made.

4141

Cost ClassificationsCost Classifications

Summary of Variable and Fixed Cost BehaviorCost In Total Per Unit

Total variable cost changes Variable cost per unitVariable as activity level changes. remains the same over

wide ranges of activity.

Total fixed cost remains Fixed cost per unitFixed the same even when the goes down as activity

activity level changes. level goes up.

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PeliculaPelicula

4343

Cost Behavior Patterns Cost Behavior Patterns ExampleExample

Bicycles by the Sea buys a handlebarat $52 for each of its bicycles.

What is the total handlebar cost when1,000 bicycles are assembled?

manubrio

4444


1,000 units × $52 = $52,000What is the total handlebar cost

when 3,500 bicycles are assembled?3,500 units × $52 = $182,000

4545


Bicycles by the Sea incurred $94,500 ina given year for the leasing of its plant.This is an example of fixed costs with

respect to the number of bicycles assembled.

4646


What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 1,000 bicycles?

$94,500 ÷ 1,000 = $94.50What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 3,500 bicycles?

$94,500 ÷ 3,500 = $27

4747

Cost DriversCost DriversDe gestión

The cost driver of variable costs is the levelof activity or volume whose change causes

the (variable) costs to change proportionately.The number of bicycles assembled is acost driver of the cost of handlebars.

4848

Relevant Range ExampleRelevant Range Example

Assume that fixed (leasing) costs are $94,500for a year and that they remain the same for a

certain volume range (1,000 to 5,000 bicycles).1,000 to 5,000 bicycles is the relevant range.

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Relevant Range ExampleRelevant Range Example

020000400006000080000

100000120000

0 1000 2000 3000 4000 5000 6000

Volume

Fixe

d C

osts

$94,500

5050

Classification of CostsClassification of Costsby Traceabilityby Traceability

origen

5151


TraceabilityTraceability is the ability to assign a cost is the ability to assign a cost to a cost object in an economically to a cost object in an economically feasible way by means of a causal feasible way by means of a causal relationshiprelationship..Direct costsDirect costs are those costs that can be are those costs that can be easily and accurately traced to a cost easily and accurately traced to a cost object. object.

Example: The salary of a supervisor of a department, Example: The salary of a supervisor of a department, where the department is defined as the cost where the department is defined as the cost object.object.

5252

Basic Cost ConceptsBasic Cost ConceptsIndirect costs are those costs that cannot be traced easily and accurately to a cost object.

Example: The cost of heating and cooling a plant that manufactures five products.

5353

Classification of CostsClassification of Costsby Traceabilityby Traceability

Direct costsDirect costsCosts that can beCosts that can beeasily and conveniently easily and conveniently traced to a unit of product traced to a unit of product or department or other or department or other cost objective.cost objective.

Example: Example: –– Direct materialDirect material–– Direct labor Direct labor –– Cost of paint in the paint Cost of paint in the paint

department of an automobile department of an automobile assembly plant.assembly plant.

Indirect costsIndirect costsCosts that must be Costs that must be allocated in order to be allocated in order to be assigned to a unit of assigned to a unit of productproduct or department. or department. Example: Example: –– Manufacturing overheadManufacturing overhead–– Cost of national advertising Cost of national advertising

for an airline is indirect to for an airline is indirect to a particular flight.a particular flight.

gastos

5454

Direct and Indirect CostsDirect and Indirect Costs

Direct CostsExample: Paper on whichSports Illustrated magazineis printed

Indirect CostsExample: Lease cost forTime-Warner buildinghousing the senior editorsof its magazine

COST OBJECT

Example: SportsIllustrated magazine

COST OBJECT

Example: SportsIllustrated magazine

5555

Direct and Indirect CostsDirect and Indirect CostsExampleExample

Direct Costs:Maintenance Department $40,000Personnel Department $20,600Assembly Department $75,000Finishing Department $55,000

Assume that Maintenance Department costs areallocated equally among the production departments.

How much is allocated to each department?

5656

Direct and Indirect Costs Direct and Indirect Costs ExampleExample

Allocated$20,000

Maintenance$40,000

AssemblyDirect Costs

$75,000

FinishingDirect Costs

$55,000

$20,000

5757

Relationships of Types of CostsRelationships of Types of Costs

Direct

Indirect

Variable Fixed

5858

Interpret unit costs Interpret unit costs cautiously.cautiously.

5959

Total Costs and Unit Costs Total Costs and Unit Costs ExampleExample

What is the unit cost (leasing and handlebars)when Bicycles assembles 1,000 bicycles?

Total fixed cost $94,500+ Total variable cost $52,000 = $146,500

$146,500 ÷ 1,000 = $146.50

6060

Total Costs and Unit CostsTotal Costs and Unit CostsExampleExample

0

50000

100000

150000

200000

0 500 1000 1500

Volume

Tota

l Cos

ts

$94,500

$94,500 + $52x

$146,500

6161

Use Unit Costs CautiouslyUse Unit Costs Cautiously

Assume that Bicycles management uses aunit cost of $146.50 (leasing and wheels).

Management is budgeting costs fordifferent levels of production.

What is their budgeted cost for anestimated production of 600 bicycles?

600 × $146.50 = $87,900

6262


What is their budgeted cost for an estimatedproduction of 3,500 bicycles?3,500 × $146.50 = $512,750

What should the budgeted cost be for anestimated production of 600 bicycles?

6363


Total fixed cost $ 94,500Total variable cost ($52 × 600) 31,200Total $125,700

$125,700 ÷ 600 = $209.50Using a cost of $146.50 per unit would

underestimate actual total costs if outputis below 1,000 units.

6464


What should the budgeted cost be for anestimated production of 3,500 bicycles?

Total fixed cost $ 94,500Total variable cost (52 × 3,500) 182,000Total $276,500

$276,500 ÷ 3,500 = $79.00

6565

Distinguish amongDistinguish amongmanufacturing companies,manufacturing companies,

merchandising companies, andmerchandising companies, andserviceservice--sector companies.sector companies.

6666

ManufacturingManufacturing

Manufacturing companiespurchase materials and components and

convert them into finished goods.

Manufacturing companiespurchase materials and components and

convert them into finished goods.

A manufacturing company must also develop,design, market, and distribute its products.

A manufacturing company must also develop,design, market, and distribute its products.

6767

MerchandisingMerchandising

Merchandising companiespurchase and then sell tangible products

without changing their basic form.

Merchandising companiespurchase and then sell tangible products

without changing their basic form.

6868

Service

Service companiesprovide services or intangibleproducts to their customers.

Service companiesprovide services or intangibleproducts to their customers.

Labor is the most significant cost category.Labor is the most significant cost category.

6969

PELICULAPELICULA

7070

Types of InventoryTypes of Inventory

Manufacturing-sector companiestypically have one or more of the

following three types of inventories:1. Direct materials inventory2. Work in process inventory (work

in progress)3. Finished goods inventory

7171

Types of InventoryTypes of Inventory

Merchandising-sector companies holdonly one type of inventory – the

product in its original purchased form.Service-sector companies do not

hold inventories of tangible products.mantienen

7272

PELICULAPELICULA

7373

Cost Classification by Cost Classification by FunctionFunction

7474

Cost Classification by FunctionCost Classification by FunctionProduct costsProduct costs

Include expendituresInclude expendituresthat arethat are

necessary and integralnecessary and integralto finished products.to finished products.Capitalized on theCapitalized on the

balance sheet until sold.balance sheet until sold.

Period costsPeriod costsIInclude expendituresnclude expendituresidentified more with aidentified more with atime period than withtime period than with

finished products.finished products.Expensed on theExpensed on theincome statement.income statement.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

SaleExpense

IncomeStatementEdo. De resultadosEdo. De

Posicion financiera

7575

Classification of Costs by Classification of Costs by FunctionFunction

Period CostsPeriod CostsSellingSellingGeneral and General and administrative administrative expenses

Product CostsProduct CostsDirect materialsDirect materialsDirect laborDirect laborOverhead Overhead expensesgastos

7676

Manufacturing CostsManufacturing Costs

TheProduct

DirectLabor

DirectMaterial

Manufacturing Overhead

7777

PelPelíículacula

7878

Classification ofClassification ofManufacturing CostsManufacturing Costs

Direct materials costs

Direct manufacturing labor costs

Indirect manufacturing costs

7979

Classifications of Costs in Classifications of Costs in Manufacturing CompaniesManufacturing Companies

Manufacturing costs are oftenManufacturing costs are oftencombined as follows:combined as follows:

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

8080

Manufacturing Cost FlowsManufacturing Cost Flows


Material Purchases

Direct Labor

Balance SheetCosts Inventories

FinishedGoods

Cost of GoodsSold

Income StatementExpenses

Work inProcess

Raw Material

Selling andAdministrative

Selling andAdministrative

Period Expenses

8181

Cost Assignment MethodsCost Assignment MethodsCost Assignment MethodsCost of ResourcesCost of Resources

DirectDirectTracingTracing

DriverDriverTracingTracing AllocationAllocation

Resource Drivers

Cost ObjectsCost Objects

ActivityDrivers

ConvenienceAssumedLinkage

PhysicalObservation

8282

Product Cost DefinitionsProduct Cost DefinitionsValue-Chain Product Costs

Operating Product Costs

Traditional Product Costs

Research andDevelopmentResearch andResearch andDevelopmentDevelopment

ProductionProductionProduction

MarketingMarketingMarketing

Customer ServiceCustomer ServiceCustomer Service


MarketingMarketingMarketing

Customer ServiceCustomer ServiceCustomer Service


Strategic Design Decisions

Tactical Profitability Analysis

External FinancialReporting

Pricing DecisionsProduct Mix DecisionsStrategic Profitability

Analysis

8383

Manufacturing CostsManufacturing CostsManufacturing CostsDirect materialsDirect materials are those materials that are are those materials that are directly traceable to the goods or services directly traceable to the goods or services being producedbeing produced..

Example: The cost of wood in furniture.Example: The cost of wood in furniture.

Direct laborDirect labor is the labor that is directly traceable is the labor that is directly traceable to the goods or services being produced. to the goods or services being produced.

Example: Wages of assemblyExample: Wages of assembly--line workers.line workers.

OverheadOverhead are all other manufacturing costs.are all other manufacturing costs.Example:Example: Plant depreciation, utilities, property taxes, Plant depreciation, utilities, property taxes,

indirect materials, indirect labor, etc.indirect materials, indirect labor, etc.

8484

Nonproduction CostsNonproductionNonproduction CostsCosts

Marketing (selling) costs are the costs necessary to market, distribute, and service a product or service.

Example: Advertising, storage costs, and freight out.

Administrative costs are the costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production.

Example: Legal fees, salary of the chief executive officer.

8585

Nonproduction CostsNonproductionNonproduction CostsCostsFor external financial

reporting, marketing and administrative costs are not

inventoried. They are referred to as period costs.

For external financial reporting, marketing and

administrative costs are not inventoried. They are

referred to as period costs.

8686

Nonproduction Nonproduction or Operating or Operating

CostsCosts

Production or Production or Manufacturing Manufacturing

CostsCosts

Direct Materials

Direct Labor

Overhead

Prime

Cost

Conversion

Cost

Marketing ExpenseMarketing ExpenseOrderOrder--Getting CostsGetting CostsOrderOrder--Filling CostsFilling Costs

Administrative Expense

8787

Describe the three categories Describe the three categories ofof

inventories commonly foundinventories commonly foundin manufacturing companies.in manufacturing companies.

8888

Inventoriable CostsInventoriable Costs

Inventoriable costs (assets)…Los recursos

become cost of goods sold…

after a sale takes place.

8989

Period CostsPeriod Costs

Period costs are all costs in the incomestatement other than cost of goods sold.

Period costs are recorded as expenses of theaccounting period in which they are incurred.

9090

Flow of Costs ExampleFlow of Costs Example

Bicycles by the Sea had $50,000 of directmaterials inventory at the beginning of the period.

Purchases during the period amounted to$180,000 and ending inventory was $30,000.

How much direct materials were used?$50,000 + $180,000 – $30,000 = $200,000

9191


Direct labor costs incurred were $105,500.Indirect manufacturing costs were $194,500.

What are the total manufacturing costs incurred?Direct materials used $200,000Direct labor 105,500Indirect manufacturing costs 194,500Total manufacturing costs $500,000

9292


Assume that the work in process inventoryat the beginning of the period was $30,000,

and $35,000 at the end of the period.What is the cost of goods manufactured?

Beginning work in process $ 30,000Total manufacturing costs 500,000Ending work in process 35,000Cost of goods manufactured $495,000

9393


Assume that the finished goods inventoryat the beginning of the period was $10,000,

and $15,000 at the end of the period.What is the cost of goods sold?

Beginning finished goods $ 10,000Cost of goods manufactured 495,000Ending finished goods 15,000Cost of goods sold $490,000

9494


Work in ProcessBeg. Balance 30,000 495,000Direct mtls. used 200,000Direct labor 105,500Indirect mfg. costs 194,500Ending Balance 35,000

9595


Work in Process495,000

Finished Goods10,000 490,000

495,00015,000

Cost of Goods Sold490,000

9696

Manufacturing CompanyManufacturing Company

MaterialsInventory

FinishedGoods

Inventory

Revenues

Cost ofGoods Sold

INCOME STATEMENTInventoriable

Costs

BALANCE SHEET

whensalesoccur

PeriodCosts

Equals Operating Income

deduct

Equals Gross Margindeduct

Work inProcess

Inventory

9797

Merchandising CompanyMerchandising Company

BALANCE SHEET INCOME STATEMENTInventoriable

CostswhensalesoccurMerchandise

Purchases Inventory

Revenuesdeduct

Cost ofGoods Sold

Equals Gross Margindeduct

PeriodCosts

Equals Operating Income

9898

Prime CostsPrime Costs

DirectMaterials

PrimeCosts

DirectLabor+ =

9999

Prime CostsPrime Costs

What are the prime costs for Bicycles by the Sea?Direct materials used $200,000+ Direct labor 105,500= $305,000

100100

Conversion CostsConversion Costs


DirectLabor

ConversionCosts+ =

IndirectMaterials

IndirectLabor Other

101101

Conversion CostsConversion Costs

What are the conversion costs forBicycles by the Sea?

Direct labor $105,500+ Indirect manufacturing costs 194,500= $300,000

102102

Measuring CostsMeasuring CostsRequires JudgmentRequires Judgment

Manufacturing labor-cost classificationsvary among companies.

The following distinctions are generally found:Direct manufacturing labor

Manufacturing overhead

103103


Manufacturing overhead

Indirect labor Managers’ salaries Payroll fringe costsForklift truck operators (internal handling of materials)

Janitors Rework laborOvertime premium Idle time

Nomina marginal

montacargasconserjes

ocioso

104104


Overtime premium is usuallyconsidered part of overhead.

Assume that a worker gets $18/hourfor straight time and gets

time and one-half for overtime.

105105


How much is the overtime premium?$18 × 50% = $9 per overtime hour

If this worker works 44 hours on a givenweek, how much are his gross earnings?

Direct labor 44 hours × $18 = $792Overtime premium 4 hours × $ 9 = 36Total gross earnings $828

106106

Cost Classifications on Cost Classifications on Financial StatementsFinancial Statements

107107

108108

109109

Cost Classifications on Financial Cost Classifications on Financial Statements Statements –– Balance SheetBalance Sheet

MerchandiserMerchandiserCurrent AssetsCurrent Assets

–– CashCash–– ReceivablesReceivables–– Prepaid ExpensesPrepaid Expenses–– Merchandise InventoryMerchandise Inventory

ManufacturerManufacturerCurrent AssetsCurrent Assets

CashCashReceivablesReceivablesPrepaid ExpensesPrepaid ExpensesInventoriesInventories

Raw MaterialsRaw MaterialsWork in ProcessWork in ProcessFinished GoodsFinished Goods

recibir

Gastos prepagados

110110

Manufacturing OrganizationManufacturing OrganizationIncome StatementIncome Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004

Sales $2,800,000Less: Cost of goods sold 1,300,000Gross margin $ 700,000Less operating expenses:

Selling expenses $300,000Administrative expenses 150,000 450,000

Operating income $ 250,000

From the Cost of Goods Sold

Schedule

From the Cost of Goods Sold

Schedule

111111

Direct materials:Beginning inventory $200,000Add: Purchases 450,000Materials available $650,000Less: Ending inventory 50,000Direct materials used in production $ 600,000

Direct labor 350,000Manufacturing overhead:

Indirect labor $122,500Depreciation 177,500Rent 50,000Utilities 37,500Property taxes 12,500Maintenance 50,000 450,000

Total manufacturing costs added $1,400,000

Statement of Cost of Goods ManufacturedStatement of Cost of Goods ManufacturedFor the Year Ended December 31, 2004For the Year Ended December 31, 2004

continuedcontinued

112112

Total manufacturing costs added $1,400,000Add: Beginning work in process 200,000Less: Ending work in process 400,000Cost of goods manufactured $1,200,000

Work in process consists of all partially completed units found in

production at a given point in time.

113113

Cost of Goods Sold ScheduleCost of Goods Sold ScheduleFor the Year Ended December 31, 2004For the Year Ended December 31, 2004

Cost of goods manufactured $1,200,000Add: Beginning inventory finished goods 250,000Cost of goods available for sale $1,450,000Less: Ending inventory finished goods 150,000Cost of goods sold $1,300,000

From the Statement of

Cost of Goods Manufactured

From the Statement of

Cost of Goods Manufactured

114114

Explain why product costs Explain why product costs areare

computed in different wayscomputed in different waysfor different purposes.for different purposes.

115115

Many Meanings of Product CostMany Meanings of Product Cost

A product cost is the sum of the costsassigned to a product for a specific purpose.

1. Pricing and product emphasis decisions2. Contracting with government agencies3. Preparing financial statements for external

reporting under generally acceptedaccounting principles

116116

ReferencesReferences1.1. GarrisonGarrison, , RayRay H. & H. & NoreenNoreen, Eric W. , Eric W. ““ManagerialManagerial

AccountingAccounting””. 10th ed. USA, . 10th ed. USA, McMc GrawGraw Hill/Hill/IrwinIrwin, 2003. , 2003. 838 pp.838 pp.

2.2. Hansen & Hansen & MowenMowen. . ““Cost Management. Accounting Cost Management. Accounting and Controland Control””. . Fourth Edition. USA, Thomson.

3.3. HiltonHilton, , RonaldRonald W. W. ““ManagerialManagerial AccountingAccounting: : CreatingCreatingValueValue in a in a DynamicDynamic BusinessBusiness EnvironmentEnvironment ””. 5th. Ed. . 5th. Ed. USA, USA, McMc GrawGraw Hill/Hill/IrwinIrwin, 2002. 858 pp., 2002. 858 pp.

4. Horngren /Datar /Foster. “Cost Accounting” 11th. ed. USA, Prentice Hall Business Publishing,2003.

5.5. VanDerbeckVanDerbeck, Edward J. , Edward J. ““Principles of Cost Principles of Cost AccountingAccounting””. 13th Ed. USA, Thomson.. 13th Ed. USA, Thomson.

6.6. Zimmerman, Jerold L. & Bittner, Ronald L. Zimmerman, Jerold L. & Bittner, Ronald L. ““Accounting for Decision Making and Control“ Fourth Edition. USA, Irwin/McGrawIrwin/McGraw--Hill, 2003.Hill, 2003.

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Basic Cost Management Concepts - · PDF fileBasic Cost Management Concepts ... Economics Cost Terms Short run Long run Fixed Variable ... as distinguished from budgeted costs. A cost