Cost Concepts Slides

8/13/2019 Cost Concepts Slides

1/28

Irwin/McGraw-Hill

2-1

Cost Object:

Any end to which a cost isassigned

Ex: a Product, a Project, aCustomer, a Department

Cost Concepts


2/28

Irwin/McGraw-Hill

2-2

Manufacturing Costs (Product Costs)

Direct Materials

Direct Labor Manufacturing Overhead

Non-manufacturing Costs (Period Costs)

Marketing or Selling Costs

Administrative Costs

Prime Costs

ConversionCosts

Cost Concepts


3/28


4/28

Irwin/McGraw-Hill

2-4

Direct Materials

Those materials that become an integral partof the product and that can be conveniently

traced directly to it.

Example: A radio installed in an automobile


5/28

Irwin/McGraw-Hill

2-5

Direct Labor

Those labor costs that can be easily traced toindividual units of product.

Example: Wages paid to automobile assembly workers


6/28

Irwin/McGraw-Hill

2-6

Manufacturing costs that cannotbe traceddirectly to specific units produced.

Manufacturing Overhead

Examples: Indirect labor and indirect materials

Wages paid to employeeswho are not directly

involved in productionwork.Examples: maintenance

workers, janitors andsecurity guards.

Materials used to supportthe production process.

Examples:lubricants andcleaning supplies used in theautomobile assembly plant.


7/28Irwin/McGraw-Hill

2-7

Nonmanufacturing Costs

Marketing and selling costs . . .Costs necessary to get the order and deliver the

product.

Administrative costs . . .All executive, organizational, and clerical costs.



2-8

Manufacturing Cost Flows

ManufacturingOverhead

Work inProcess

FinishedGoods

Cost of

GoodsSold

Selling andAdministrative

Material Purchases

Direct Labor

Balance SheetCosts Inventories

Income

StatementExpenses

Selling andAdministrative

Period Costs

Raw Materials



2-9

Cost Classifications for Predicting

Cost Behavior

How a cost will react tochanges in the level of

business activity.

Total variable costschange when activitychanges.

Total fixed costsremain unchangedwhen activity changes.



2-10

Total Variable Cost

Your total long distancetelephone bill isbased on how many minutes you talk.

Minutes Talked

TotalL

ongDistance

Tele

phoneBill



2-11

Variable Cost Per Unit

Minutes Talked

Pe

rMinute

Teleph

oneCharge

The cost per long distance minutetalked isconstant. For example, 10 cents per minute.

2 12



2-12

Total Fixed Cost

Your monthly basic telephone billprobablydoes not change when you make more local

calls.

Number of Local Calls

Mon

thlyBasic

Tele

phoneBill

2 13



2-13

Fixed Cost Per Unit

Number of Local Calls

MonthlyBasicTelepho

ne

BillperLocalCall

The average cost per local calldecreases asmore local calls are made.

2 14



2-14

Cost Classifications for Predicting

Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains

as activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Fixed cost per unit goes

the same even when the down as activity level goes up.

activity level changes.

2 15



2-15

Cost Behavior

Fixed costs are usually characterized by:

a. Unit costs that remain constant.b. Total costs that increase as activity

decreases.

c. Total costs that increase as activityincreases.

d. Total costs that remain constant.

2 16



2-16

Cost Behavior

Variable costs are usually characterized by:

a. Unit costs that decrease as activity

increases.

b. Total costs that increase as activitydecreases.

c. Total costs that increase as activityincreases.

d. Total costs that remain constant.

2 17



2-17

Direct Costs and Indirect Costs

Direct costs

Costs that can beeasily and conveniently

traced to a unit ofproduct or other costobjective.

Examples: direct

material and direct labor

Indirect costs

Costs cannot be easilyand conveniently traced

to a unit of product orother cost object.

Example:manufacturing

overhead

2-18



2-18

Differential Costs and Revenues

Costs and revenues that differ amongalternatives.

Example: You have a job paying $1,500 per month in

your hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.

Differential revenue is:$2,000 $1,500 = $500

2-19


19/28

Irwin/McGraw-Hill

2-19

Differential Costs and Revenues

Costs and revenues that differ amongalternatives.

Differential revenue is:$2,000 $1,500 = $500

Differential cost is:$300

Example: You have a job paying $1,500 per month in

your hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.

2-20


20/28

Irwin/McGraw-Hill

2 20

Opportunity Costs

The potential benefit thatis given up when onealternative is selectedover another.Example: If you werenot attending college,you could be earning$15,000 per year.Your opportunity costof attending college for oneyear is $15,000.

2-21


21/28

Irwin/McGraw-Hill

2 21

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 issunk because whether you drive it, park it,trade it, or sell it, you cannot change the

$10,000 cost.

2-22


22/28

Irwin/McGraw-Hill

2 22

Different Costs for Different Purposes

Research and

Development

Production Production

Marketing

Production

Marketing

Pricing Decisions

Product Mix

Strategic Profitability

Tactical Decisions External Financial

Reporting

Value Chain Operations Traditional Product Costs

Customer Service Customer Service

2-23


23/28

Irwin/McGraw-Hill

Inventory Flows

Beginningbalance

$$

Available$$$$$

Endingbalance

$$

Additions$$$+ =

Withdrawals$$$

_

=

2-24


24/28

Irwin/McGraw-Hill

Manufacturing Work

Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the

in production period

Ending raw materials Ending work in

inventory process inventory= Raw materials used = Cost of goods

in production manufactured.

Product Costs - A Closer Look

2-25


25/28

Irwin/McGraw-Hill

Work

In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory+ Manufacturing costs + Cost of goods

for the period manufactured

= Total work in process = Cost of goods

for the period available for sale

Ending work in - Ending finished

process inventory goods inventory= Cost of goods Cost of goods

manufactured sold

Product Costs - A Closer Look

2-26


26/28

Irwin/McGraw-Hill

Resource Flows

Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the month

revealed that $28,000 of raw material was stillpresent. What is the cost of direct materialused?

a. $276,000

b. $272,000

c. $280,000

d. $ 2,000

2-27


27/28

Irwin/McGraw-Hill

Resource Flows

Direct materials used in production totaled$280,000. Direct Labor was $375,000 andfactory overhead was $180,000. What were

total manufacturing costs incurred for themonth?

a. $555,000

b. $835,000c. $655,000

d. Cannot be determined.

2-28


28/28

Resource Flows

Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 ofpartially finished goods remaining in work in

process inventory at the end of the month.What was the cost of goods manufacturedduring the month?

a. $1,160,000

b. $ 910,000c. $ 760,000d. Cannot be determined.

Documents

Cost Concepts Slides