1. Cost Terms, Concepts, and Classifications
UAA – ACCT 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
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead

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

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

6. Nonmanufacturing Costs
Direct
Materials
Nonmanufacturing Costs
Costs incurred for other than production activities.
Known as Period costs.
They are expensed in the period in which they are incurred.
Direct
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
Sold
Sales -
Cost of Goods Sold
Income Statement =
Gross Margin -
Nonmanufacturing
Expenses =
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 Expenses
All costs necessary to secure customer orders and get the products/services to the customer.
Direct
Materials
Direct
Labor
Work-in-
Process
Finished
Goods
Cost-of
Goods Sold
Mfg.
Overhead
Sold
Sales -
Cost of Goods Sold
Income Statement =
Gross Margin -
Nonmanufacturing
Expenses =
Net Income

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

9. Manufacturing Costs
Direct
Materials
Direct
Labor

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

11. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Direct Materials
DM in Theory
Every component
DM in Reality
Must apply cost-benefit rule
Dr. Fred Barbee

12. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
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.
Dr. Fred Barbee

13. Manufacturing Costs
Direct
Labor
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. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
MOH – Other Names
Overhead
Burden
Indirect Manufacturing Costs
Factory Expenses
Dr. Fred Barbee

16. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
MOH – A Few Examples
Factory Supervision,
Factory Telephone, heat, light, power,
Factory bookkeeping salaries,
Insurance
Depreciation/factory equipment
Indirect materials, labor.
Dr. Fred Barbee

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

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

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

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

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

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

23. Balance Sheet Presentation

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

29. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Total Variable Costs $
Volume (Activity Base)
Dr. Fred Barbee

30. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Per Unit Variable Cost $
Volume (Activity Base)
Dr. Fred Barbee

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

32. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Total Fixed Costs $
Volume (Activity Base)
Dr. Fred Barbee

33. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Per Unit Fixed Costs $
Per Unit Fixed Costs
Within 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

34. Curvilinear Costs and the Relevant Range
Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Curvilinear Costs and the Relevant Range
Economist’s
Curvilinear
Cost Function
Relevant Range $
Accountant’s
Straight-Line
Approximation
The 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

35. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Anything for which a separate measurement of costs is desired (products, customers, departments, etc.)
Direct
Costs
Cost
Object
Indirect
Costs
Dr. Fred Barbee

36. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor)
Direct
Costs
Cost
Object
Costs that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead)
Indirect
Costs
Dr. Fred Barbee

37. Different Costs for Different Purposes

38. Product Costing Definitions
Manufacturing Costs and Job-Order Costing Systems
Product Costing Definitions
March 31, 2017
Value-Chain Operating Traditional
Product Costs Product Costs Product Costs
Research and
Development
Production
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions
Product-Mix Decisions
Strategic Profitability
Analysis
Strategic Design
Decisions
Tactical Profitability
Analysis
External Financial
Reporting
Dr. Fred Barbee

39. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
Value-Chain
Product Costs
Research and
Development
Production
Marketing
Customer Service
If making any of these types of decisions, I need to look at all costs.
Pricing Decisions
Product-Mix Decisions
Strategic Profitability
Analysis
Dr. Fred Barbee

40. Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
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.
Dr. Fred Barbee

41. Product Costing Definitions
Manufacturing Costs and Job-Order Costing Systems
March 31, 2017
For external financial reporting, we need only these costs – because that is what GAAP says we need.
Value-Chain Operating Traditional
Product Costs Product Costs Product Costs
Research and
Development
Production
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions
Product-Mix Decisions
Strategic Profitability
Analysis
Strategic Design
Decisions
Tactical Profitability
Analysis
External Financial
Reporting
Dr. Fred Barbee