Presentation on theme: "Cost Terms, Concepts, and Classifications"— Presentation transcript:
1Cost Terms, Concepts, and Classifications UAA – ACCT Principles of Managerial Accounting Dr. Fred BarbeeChapter
2Specify “Tag” the CostWe need to place an adjective (tag) on the cost to identify what it is.Direct Cost
3Cost Flows in a Manufacturing Firm DirectMaterialsDirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldMfg.Overhead
4Cost Flows in a Manufacturing Firm Manufacturing Costs Costs incurred in the manufacture of goods being produced.DirectMaterialsDirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldKnown as product (inventoriable) costs.They are expensed when the product is sold.Mfg.Overhead
5Cost Flows in a Manufacturing Firm Those materials that become an integral part of the finished product and can be physically traced to the product.DirectMaterialsThose factory labor costs that can be physically traced to the production of the finished product.DirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldMfg.OverheadAll costs associated with the manufacture of a product except direct materials and direct labor.
6Nonmanufacturing Costs DirectMaterialsNonmanufacturing CostsCosts incurred for other than production activities.Known as Period costs.They are expensed in the period in which they are incurred.DirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldMfg.OverheadSoldSales-Cost of Goods SoldIncome Statement=Gross Margin-NonmanufacturingExpenses=Net Income
7- - General & Administrative Expenses Selling & Distribution Expenses All executive, organizational, and clerical costs associated with the general management of the firm.Selling & Distribution ExpensesAll costs necessary to secure customer orders and get the products/services to the customer.DirectMaterialsDirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldMfg.OverheadSoldSales-Cost of Goods SoldIncome Statement=Gross Margin-NonmanufacturingExpenses=Net Income
8- - = = Product Costs Sales Gross Margin Period Costs Net Income DirectMaterialsDirectLaborWork-in-ProcessFinishedGoodsCost-ofGoods SoldProduct CostsMfg.OverheadSoldSales-Cost of Goods SoldIncome Statement=Gross Margin-NonmanufacturingExpensesPeriod Costs=Net Income
10Steel in cars, wood in furniture, etc. Manufacturing CostsDirectMaterialsMaterials that are directly traceable to the goods or services being produced (physical observation).Steel in cars, wood in furniture, etc.
11Manufacturing Costs and Job-Order Costing Systems March 31, 2017Direct MaterialsDM in TheoryEvery componentDM in RealityMust apply cost-benefit ruleDr. Fred Barbee
12Manufacturing Costs and Job-Order Costing Systems March 31, 2017DM – What is Cost?The invoice price of the raw materials,Shipping costs,Import duties, andA reduction for any allowable discounts for prompt payment.Dr. Fred Barbee
13Manufacturing CostsDirectLaborLabor that is directly traceable to the goods being produced.Assembly line workers, chefs, pilots
14Manufacturing CostsAll production costs other than direct materials and direct labor.Utilities, security, janitorial, etc.
15Manufacturing Costs and Job-Order Costing Systems March 31, 2017MOH – Other NamesOverheadBurdenIndirect Manufacturing CostsFactory ExpensesDr. Fred Barbee
16Manufacturing Costs and Job-Order Costing Systems March 31, 2017MOH – A Few ExamplesFactory Supervision,Factory Telephone, heat, light, power,Factory bookkeeping salaries,InsuranceDepreciation/factory equipmentIndirect materials, labor.Dr. Fred Barbee
17Nonmanufacturing Costs All costs not associated with the production of goods.Selling CostsAdministrative Costs
18Cost Flows in a Manufacturing Firm Manufacturing CostsBalance SheetUnusedDMDM Inv.UsedUsedUnfinishedDLWIPWIP Inv.Product CostsAppliedMOHFinishedFG Inv.Sales-COGSSold=Income StatementGross Margin-S&APeriod Costs=Net Income
19Cost Flows in a Manufacturing Firm Manufacturing CostsBalance SheetInventoryUnusedDMDM Inv.UsedUsedUnfinishedDLWIPWIP Inv.Product CostsAppliedMOHFinishedFG Inv.SalesProduct 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.-COGSSold=Income StatementGross MarginExpense-S&A=Net Income
20Cost Flows in a Manufacturing Firm Manufacturing CostsBalance SheetInventoryUnusedDMDM Inv.UsedUsedUnfinishedDLWIPWIP Inv.Product CostsAppliedMOHFinishedFG Inv.ExpenseSales-COGSSold=Income StatementGross Margin-S&A=Net Income
21Cost Flows in a Manufacturing Firm Period Costs: Expired non product costs. Always charged to expense in the period in which they occur.Manufacturing CostsBalance SheetUnusedDMDM Inv.UsedUsedUnfinishedDLWIPWIP Inv.AppliedMOHFinishedFG Inv.Sales-COGSSold=Income StatementGross Margin-S&APeriod Costs=Net Income
22Product Costs Vs. Period Costs DM, DL, MOH, S&A CostsWork-in-ProcessFinished GoodsSaleCost of Goods SoldDM ,DL MOHProduct CostsDM, DLMOHDM, DLMOHDM, DLMOHS&AS&AS&APeriod CostsSelling and Administrative CostsExpensed in the currentperiod.
28Variable CostsTotal costs that vary in direct proportion to changes in the level of activity within the relevant range.
29Manufacturing Costs and Job-Order Costing Systems March 31, 2017Total Variable Costs$Volume (Activity Base)Dr. Fred Barbee
30Manufacturing Costs and Job-Order Costing Systems March 31, 2017Per Unit Variable Cost$Volume (Activity Base)Dr. Fred Barbee
31Fixed CostsCosts that remain constant in total, regardless of the changes in activity within the relevant range.
32Manufacturing Costs and Job-Order Costing Systems March 31, 2017Total Fixed Costs$Volume (Activity Base)Dr. Fred Barbee
33Manufacturing Costs and Job-Order Costing Systems March 31, 2017Per Unit Fixed Costs$Per Unit Fixed CostsWithin the limits of the activity range, per-unit fixed costs decrease with increased output.It is important to recognize that a fixed cost remains fixed only for a particular range of production.For example, if the size of a factory building permits 400,000 units to be produced on any given day, its fixed cost has a range of 0 to 400,000 units each day. Whether 100,000 or 400,000 units are produced, the cost for factory rent remains the same.Volume (Activity Base)Dr. Fred Barbee
34Curvilinear Costs and the Relevant Range Manufacturing Costs and Job-Order Costing SystemsMarch 31, 2017Curvilinear Costs and the Relevant RangeEconomist’sCurvilinearCost FunctionRelevant Range$Accountant’sStraight-LineApproximationThe behavior of a curvilinear cost is illustrated on the following slide. Notice that a strictly linear relationship between cost and volume does not exist either at very high or at very low levels of activity.Thus, we see that a linear pattern may be a poor approximation of the economists’ curvilinear pattern over the entire range of possible activity.Volume (Activity Base)Dr. Fred Barbee
35Manufacturing Costs and Job-Order Costing Systems March 31, 2017Anything for which a separate measurement of costs is desired (products, customers, departments, etc.)DirectCostsCostObjectIndirectCostsDr. Fred Barbee
36Manufacturing Costs and Job-Order Costing Systems March 31, 2017Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor)DirectCostsCostObjectCosts that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead)IndirectCostsDr. Fred Barbee
39Manufacturing Costs and Job-Order Costing Systems March 31, 2017Value-ChainProduct CostsResearch andDevelopmentProductionMarketingCustomer ServiceIf making any of these types of decisions, I need to look at all costs.Pricing DecisionsProduct-Mix DecisionsStrategic ProfitabilityAnalysisDr. Fred Barbee
40Manufacturing Costs and Job-Order Costing Systems March 31, 2017ProductionMarketingStrategic DesignDecisionsTactical ProfitabilityAnalysisOperatingProduct CostsCustomer ServiceOn the other hand, for these decisions, we might be able to ignore some of the costs.Dr. Fred Barbee
41Product Costing Definitions Manufacturing Costs and Job-Order Costing SystemsMarch 31, 2017For external financial reporting, we need only these costs – because that is what GAAP says we need.Value-Chain Operating TraditionalProduct Costs Product Costs Product CostsResearch andDevelopmentProductionProductionProductionMarketingMarketingCustomer ServiceCustomer ServicePricing DecisionsProduct-Mix DecisionsStrategic ProfitabilityAnalysisStrategic DesignDecisionsTactical ProfitabilityAnalysisExternal FinancialReportingDr. Fred Barbee