1. 03 Management Cost Strategic Chapter 3 Basic Cost Concepts
Ratih Puspa Dewi, SE, MM
EKONOMI
AKUNTANSI

2. Cost Drivers, Cost Pools, and Cost Objects
A cost driver is any factor that has the effect of changing the level of total cost.

3. Cost Drivers, Cost Pools, and Cost Objects
A cost is incurred when a resource is used for some purpose.
Costs may be collected into groups called cost pools.
A cost object is any product, service, or unit to which costs are assigned for some meaningful purpose.

4. Cost Assignment and Cost Allocation: Direct and Indirect Costs
A direct cost can be conveniently and economically traced directly to a cost pool or a cost object.
Indirect costs can not be conveniently or economically traced to cost pools or cost objects.
The assignment of indirect costs to cost pools and cost objects, using cost drivers (allocation bases), is called cost allocation.

5. Costs, Cost Pools, Cost Objects, and Cost Drivers
Cost Drivers and Cost Assignment
Cost Pools
Cost Objects
Electric Motor
Assembly
Materials
Handling
Dishwasher
Supervision
Packing
Packing
Materials
Washing
Machine
Final
Inspection

6. Direct Materials
MILK
SUGAR
FLOUR = + +
Direct materials include the cost of materials in the product, less purchase discounts, plus freight and a reasonable allowance for scrap and defective units.

7. Indirect Materials
Cleaning Material
Sweeping Compound
Indirect materials are materials used in manufacturing that are not part of the finished product.

8. Direct Labor
Direct labor includes the labor used to manufacture the product or to provide the service.

9. Indirect Labor
Indirect labor includes supervision, quality control, inspection, purchasing and receiving, and other manufacturing support costs.

10. Other Indirect Costs Factory Overhead
Other indirect costs such as building and equipment depreciation, property taxes, insurance, and utilities
are combined with indirect labor and indirect materials into a single cost pool called
Factory Overhead

11. Classifications of Costs
Manufacturing costs are often combined as follows:
Classifications of Costs
Direct Materials
Direct Labor
Factory Overhead
Prime Cost
Conversion Cost

12. Types of Cost Drivers Activity-based
Identified using activity analysis, a detailed description of specific activities and the relationship between the activity and costs.
Activity-based
Volume-based
Relationship between costs and volume measures such as units produced, direct labor hours, or quantity of materials used.
Structural
Executional

13. Types of Cost Drivers Activity-based
Involves strategic plans and decisions:
Scale
Experience
Technology
Complexity
Activity-based
Volume-based
Short-term operational decisions:
Workforce involvement
Production process design
Supplier relationships
Structural
Executional

14. The Linearity Assumption and the Relevant Range
A straight line closely approximates a curvilinear variable cost line within the relevant range.
Economist’s Curvilinear Cost Function
Relevant Range
Total Cost
Accountant’s Straight-Line Approximation (constant unit variable cost)
Activity

15. Fixed and Variable Costs
Total
Cost
Fixed cost is that portion of
the total cost that does not
change with a change in the
quantity of the cost driver,
within the relevant range.
$6,600
$6,500
$3,000
Total Fixed Cost
3, ,600
Units of the Cost Driver

16. Total Variable Cost Example
Your total long distance telephone bill is based on how many minutes you talk.
Total Long Distance Telephone Bill
Minutes Talked

17. Per Minute Telephone Charge
Variable Cost Per Unit Example
The cost per minute talked is constant. For example, 5 cents per minute.
Per Minute Telephone Charge
Minutes Talked

18. Total Fixed Cost Example
Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Total Fixed Cost Example
Monthly Basic Telephone Bill
Number of Local Calls

19. Fixed Cost Per Unit Example
The fixed cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls

20. Fixed and Variable Costs

21. Total cost remains constant within a narrow range of activity.
Step-Costs
Total cost remains constant within a narrow range of activity.
Cost
Activity

22. Step-Costs
Total cost increases to a new higher cost for the next higher range of activity.
Cost
Activity

23. Product Costs and Period Costs
Direct materials, the materials used in the manufacture of the product, which becomes a physical part of the final product.
Direct labor, the labor used in the manufacture of the product, and
Factory overhead, the indirect costs for materials, labor, and facilities used to support the manufacturing process, but not used directly in the manufacture of the product.
Product Costs and Period Costs
Product costs for a manufacturing firm include--

24. Product Costs and Period Costs
All other expenditures for managing the firm and selling the product are expenses as they are incurred and are referred to as
PERIOD COSTS.

25. Cost flows in a Merchandising Firm
Merchandise
Purchases
Product
Inventory
Cost of
Goods Sold

26. Inventory Cost Flow Formula
Beginning Inventory
Balance
Beginning Inventory
Balance
Cost Added
Cost
Transferred
Out
Ending Inventory Balance + = +

27. Manufacturing Inventories
materials inventory--the store of materials used in the manufacturing process.
work-in-process inventory--all costs put into manufacture of products that are not complete at the financial statement date.
finished goods inventory--the cost of goods that are ready for sale.

28. Cost flows in a Manufacturing Firm
Materials Purchases
Materials Used
Labor
Overhead
Work in Process
Finished Goods
Cost of Goods Sold

29. Cost flows in a Manufacturing Firm
Raw Materials
Wages Payable 75
EI 5
BI 10
Purchased raw
materials on
account, $70.
Credit Accounts
Payable. 70
Work in Process
Factory Overhead
BI 10
Requisitioned
direct materials for production, $75.
Cost of Goods Sold
Finished Goods
BI 20

30. Cost flows in a Manufacturing Firm
Raw Materials
Wages Payable
BI 10 75 80
Accrued direct
labor, $80. 70
EI 5
Work in Process
Factory Overhead
BI 10
100
Applied
manufacturing
overhead, $100.
Cost of Goods Sold
Finished Goods
BI 20

31. Cost flows in a Manufacturing Firm
Raw Materials
Wages Payable
BI 10 75 80
Transferred
completed goods
to finished goods,
$215. 70
EI 5
Work in Process
Factory Overhead
215
EI 50
BI 10
100
Sold goods
that cost $210
to make.
Cost of Goods Sold
210
EI 25
Finished Goods
BI 20

32. Cost of Goods Manufactured Statement
Direct Materials
Beginning inventory $10
Purchases 70
Cost of Materials Available $80 Ending Inventory 5
Direct Materials Used 75
Direct Labor Used 80
Factory Overhead 100
Total Manufacturing Cost $255
ADD: Beginning Work-in-Process Inventory 10
Total Manufacturing Costs to Account For $265
LESS: Ending Work-in-Process Inventory 50
Cost of Goods Manufactured $215

33. Income Statement Sales $300 Cost of Goods Sold:
Beginning Finished Goods Inventory $ 20
Cost of Goods Manufactured 215
Cost of Goods Available for Sale 235
Ending Finished Goods Inventory
Gross Margin 90
Selling and Administrative Expenses 50
Net Income $ 40

34. Differential revenue is:
Differential Costs
Costs that differ among alternatives.
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.
Differential revenue is:
$500
Differential cost is:
$300

35. The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $18,000 per year. Your opportunity cost of attending college for one year is $18,000.
Opportunity Costs

36. Sunk costs cannot be changed by any decision
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 is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.
Sunk Costs

37. Attributes of Cost Information for Decision Making
Accuracy
Timeliness
Cost versus Value

38. Cost Concepts for Management and Operational Control
Controllability
Management risk preferences

39. Fixed and Variable Costs
Total variable cost is the change
in total cost associated with
each change in the quantity
of the cost driver.
Total Cost
Total
Cost
Total
Cost
$6,600
$6,500
$3,000
Total Variable Cost
Total Fixed Cost
3, ,600
Units of the Cost Driver

40. Ratih Puspa Dewi, SE, MM