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Cost Concepts and Behavior

Chapter 2

Copyright 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e".McGraw-Hill#Irwin

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What is a Cost?

Cost is a sacrifice of resources.

L.O. 1 Explain the basic concept of cost.

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Cost versus Expenses

Cost

Outlay Cost

Past, present,or future cash

outflow

ExpenseCost charged against

revenue in anaccounting period

LO

1

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Presentation of Costs

in Financial Statements

L.O. 2 Explain how costs are presented in financial stateents.

!ncoe "tateents

"ervice copany

#evenues$ Cost of services sold% &ross argin

$ 'ar(eting and

adinistrative costs% Operating profit

)he excess of operating revenue over costsnecessary to generate those revenues

Cost ofbillablehours

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!ncoe "tateents

'erchandising copany

#evenues$ Cost of goods sold% &ross argin

$ 'ar(eting and

adinistrative costs% Operating profit

)he excess of operating revenue over costsnecessary to generate those revenues

Expense assignedto products soldduring a period

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2

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"ales revenue$ Cost of goods sold% &ross argin

$ 'ar(eting and adinistrative costs

% Operating profit

Cost incurred to anufacturethe product sold

Product costs recorded asinventory when cost is incurred

Period costs recorded as

an expense in the periodthe cost is incurred

Expensedwhen sold

!ncoe "tateents

'anufacturing copany

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Direct and Indirect

Manufacturin Costs

*irect costs+Costs that, for a reasonable cost, can

be directly traced to the product.

*irect aterials+'aterials directly

traceable to the product

*irect labor+or( directly traceable to

transforing aterialsinto the finished product

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Direct and Indirect

Manufacturin Costs

!ndirect costs+Costs that cannot reasonably

be directly traced to the product.

'anufacturing overhead+-ll production costs except

direct aterials and direct labor.

!ndirect aterials Other indirect costs!ndirect labor

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Prime Costs and

Conversion Costs

Prie costs+)he priary costs

of the product

Conversion costs+

Costs necessary toconvert aterials

into a product

*irectaterials

*irectlabor

*irectlabor

'anufacturingoverhead

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2

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Cost !llocation

L.O. 3 Explain the process of cost allocation.

!t is the process of assigning indirect coststo products, services, business units, etc.

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Details of Manufacturin

Cost Flo"s

L.O. 4 nderstand how aterial, labor, and overhead costs areadded to a product at each stage of the production process.

Product costs are recorded in inventory when costs are incurred.

- anufacturing copany has three inventory accounts+

/. #aw 'aterials !nventory+'aterials purchased to a(e a product

0. or(1in1Process !nventory+Products currently in the production process,but not yet copleted

2. 3inished &oods !nventory+Copleted products that have not yet been sold

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Inventor# !ccounts

$ %he Balance Sheet

Beg. RM inventory

+ Purc!"e"

# R!$ %!teri!&"!v!i&!'&e (or

)ro*uction

,n*ing RM inventory

# R!$ %!teri!&"

tr!n"(erre* to P

*irect 'aterials!nventory

Beg. P inventory

+ /irect %!teri!&"

tr!n"(erre* (ro%r!$ %!teri!&"

+ /irect &!'or

# ot!& %!nu(!cturing co"t"

o"t" o( goo*" co%)&ete*

!n* tr!n"(erre* to

(ini"e* goo*" or co"t o(

goo*" %!nu(!cture*

+ M!nu(!cturing overe!*

# ,n*ing P inventory

or(1in1Process!nventory

Beg. inventory

+ o"t o( goo*"

co%)&ete* !n*tr!n"(erre* (ro% P

# oo*" !v!i&!'&e

(or "!&e

o"t o( goo*" "o&*

# ,n*ing inventory

3inished &oods!nventory

)o the !ncoe"tateent

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4

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Cost Behavior

L.O. 5 *efine basic cost behaviors, including fixed,variable, seivariable, and step costs.

Cost behavior+4ow costs respond to a change in

activity level within the relevant range

#elevant range+-ctivity levels within which a given total fixedcost or unit variable cost will be unchanged

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Components of Product Costs

L.O. 6 !dentify the coponents of a product5s costs.

3ull cost+)he su of all costs of anufacturing

and selling a unit of the product

3ull absorption cost+)he su of all variable and fixed costsof anufacturing a unit of the product

6ariable cost+)he su of all variable costs of anufacturingand selling a unit of the product

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Components of Product Costs

*irect aterials % 78

*irect labor % 79

6ariable anufacturingoverhead % 78

3ixed anufacturingoverhead % 7:

6ariable ar(eting andadinistrative costs % 7;

3ixed ar(eting andadinistrative costs % 79

3ull costper unit% 7;

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