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Cost Terms, Concepts, and Classifications UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter.

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Presentation on theme: "Cost Terms, Concepts, and Classifications UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter."— Presentation transcript:

1 Cost Terms, Concepts, and Classifications UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter

2 Specify Tag the Cost We need to place an adjective (tag) on the cost to identify what it is. Direct Cost

3 Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold

4 Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Manufacturing Costs Costs incurred in the manufacture of goods being produced. Known as product (inventoriable) costs. They are expensed when the product is sold.

5 Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Those materials that become an integral part of the finished product and can be physically traced to the product. Those factory labor costs that can be physically traced to the production of the finished product. All costs associated with the manufacture of a product except direct materials and direct labor.

6 Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold Known as Period costs. They are expensedin the period in which they are incurred. Nonmanufacturing Costs Costs incurred for other than production activities.

7 Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold General & Administrative Expenses All executive, organizational, and clerical costs associated with the general management of the firm. Selling & Distribution Expenses All costs necessary to secure customer orders and get the products/services to the customer.

8 Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold Product Costs Period Costs

9 Manufacturing Costs

10 Materials that are directly traceable to the goods or services being produced (physical observation). Steel in cars, wood in furniture, etc.

11 Direct Materials DM in Theory Every component DM in Reality Must apply cost-benefit rule

12 DM – What is Cost? The invoice price of the raw materials, Shipping costs, Import duties, and A reduction for any allowable discounts for prompt payment.

13 Manufacturing Costs Labor that is directly traceable to the goods being produced. Assembly line workers, chefs, pilots

14 Manufacturing Costs All production costs other than direct materials and direct labor. Utilities, security, janitorial, etc.

15 MOH – Other Names Overhead Burden Indirect Manufacturing Costs Factory Expenses

16 MOH – A Few Examples Factory Supervision, Factory Telephone, heat, light, power, Factory bookkeeping salaries, Insurance Depreciation/factory equipment Indirect materials, labor.

17 Nonmanufacturing Costs All costs not associated with the production of goods. Selling Costs Administrative Costs

18 Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Period Costs Income Statement Product Costs Unfinished Finished Sold Unused Used Applied

19 Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Product Costs Unfinished Finished Sold Unused Used Applied Product Costs: Costs assigned to products (i.e., Work in Process Inventory. They attach themselves to units of product and remain with the product until it is sold.

20 Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Product Costs Unfinished Finished Sold Unused Used Applied

21 Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Unfinished Finished Sold Unused Used Applied Period Costs: Expired non product costs. Always charged to expense in the period in which they occur. Period Costs

22 Product Costs Vs. Period Costs DM, DL, MOH, S&A Costs DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH S&AS&AS&AS&A S&AS&AS&AS&A S&AS&AS&AS&A Product Costs Selling and Administrative Costs Work-in- Process Finished Goods Sale Cost of Goods Sold DM,DL MOH Period Costs Expensed in the current period.

23 Balance Sheet Presentation

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25

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28 Variable Costs Total costs that vary in direct proportion to changes in the level of activity within the relevant range.

29 $ Volume (Activity Base) Total Variable Costs

30 $ Volume (Activity Base) Per Unit Variable Cost

31 Fixed Costs Costs that remain constant in total, regardless of the changes in activity within the relevant range.

32 $ Volume (Activity Base) Total Fixed Costs

33 $ Volume (Activity Base) Per Unit Fixed Costs

34 Relevant Range $ Volume (Activity Base) Accountants Straight-Line Approximation Economists Curvilinear Cost Function Curvilinear Costs and the Relevant Range

35 Direct Costs Direct Costs Indirect Costs Indirect Costs Cost Object Cost Object Anything for which a separate measurement of costs is desired (products, customers, departments, etc.)

36 Direct Costs Direct Costs Indirect Costs Indirect Costs Cost Object Cost Object Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor) Costs that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead)

37 Different Costs for Different Purposes

38 Product Costing Definitions Research and Development Research and Development Production Marketing Production Marketing Production Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Value-Chain Operating Traditional Product Costs Product Costs Product Costs Customer Service

39 Research and Development Research and Development Production Marketing Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Value-Chain Product Costs Customer Service If making any of these types of decisions, I need to look at all costs.

40 Production Marketing Strategic Design Decisions Tactical Profitability Analysis Operating Product Costs Customer Service On the other hand, for these decisions, we might be able to ignore some of the costs.

41 Product Costing Definitions Research and Development Research and Development Production Marketing Production Marketing Production Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Value-Chain Operating Traditional Product Costs Product Costs Product Costs Customer Service For external financial reporting, we need only these costs – because that is what GAAP says we need.


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