1. 2
Chapter Two
Basic Cost Management Concepts and Accounting for Mass Customization Operations

2. Managers need cost information to perform each of these functions.
Process of Management
Decision Making
Directing
Control
Planning
Managers need cost information to perform each of these functions.

3. What Do We Mean By a Cost?
A Cost is the measure of resources given up to achieve a particular purpose.

4. Manufacturing Overhead
Manufacturing Costs
Direct Labor
Direct Material
Manufacturing Overhead
The Product

5. Steel used to manufacture the automobile.
Direct Material
Cost of raw material that is used to make, and can be conveniently traced, to the finished product.
Example:
Steel used to manufacture the automobile.

6. Wages paid to an automobile assembly worker.
Direct Labor
Cost of salaries, wages, and fringe benefits for personnel who work directly on manufactured products.
Example:
Wages paid to an automobile assembly worker.

7. Manufacturing Overhead
All other manufacturing costs
Indirect Material
Indirect Labor
Other Costs
Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.

8. Manufacturing Overhead
All other manufacturing costs
Indirect Material
Indirect Labor
Other Costs
Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards.

9. Manufacturing Overhead
All other manufacturing costs
Indirect Material
Indirect Labor
Other Costs
Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

10. Classifications of Costs in Manufacturing Companies
Manufacturing costs are often combined as follows:
Direct Material
Direct Labor
Manufacturing Overhead
Prime Cost
Conversion Cost

11. Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods

12. Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Those materials waiting to be processed.

13. Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Partially complete products – material to which some labor and/or overhead has been added.

14. Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Completed products awaiting sale.

15. Manufacturing Cost Flows
Finished Goods
Cost of Goods Sold
Income Statement Expenses
Balance Sheet Costs Inventories
Material Purchases
Work in Process
Raw Material
Direct Labor
Manufacturing Overhead
Selling and Administrative
Selling and Administrative
Period Expenses

16. Manufacturing Cost Flows
Income Statement Expenses
Balance Sheet Costs Inventories
Material Purchases
Material, labor and manufacturing overhead costs remain in inventory until the product is sold, so they are sometimes called inventoriable costs.
Raw Material
Direct Labor
Work in Process
Manufacturing Overhead
Cost of Goods Sold
Finished Goods
Selling and Administrative
Period Expenses
Selling and Administrative

17. Manufacturing Cost Flows
Income Statement Expenses
Balance Sheet Costs Inventories
Material Purchases
Raw Material
Direct Labor
Work in Process
Manufacturing Overhead
Cost of Goods Sold
Finished Goods
Period expenses are not associated with manufacturing the product and are expensed in the period incurred.
Selling and Administrative
Period Expenses
Selling and Administrative

18. Manufacturing Cost Flows
Income Statement Expenses
Balance Sheet Costs Inventories
Material Purchases
Raw Material
Direct Labor
Work in Process
Manufacturing Overhead
Cost of Goods Sold
Finished Goods
Selling and Administrative
Period Expenses
Selling and Administrative

19. Types of Production Processes

20. Schedule of Cost of Goods Manufactured
Let’s look at a Schedule of Cost of Goods Manufactured for Comet Computer Corporation.

21. Schedule of Cost of Goods Manufactured

22. Schedule of Cost of Goods Manufactured

23. Schedule of Cost of Goods Manufactured
Include all direct labor costs incurred during the current period.

24. Schedule of Cost of Goods Manufactured

25. Schedule of Cost of Goods Manufactured
Beginning work-in-process inventory is carried over from the prior period.

26. Schedule of Cost of Goods Manufactured
Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.

27. Income Statement for a Manufacturer
Now let’s look at an income statement for Comet Computer Corporation.

28. Income Statement for a Manufacturer

29. Income Statement for a Manufacturer

30. Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.

31. Activities that cause costs to be incurred are called cost drivers.
Cost Classifications
Activities that cause costs to be incurred are called cost drivers.
Cost behavior means how a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.

32. Identifying Cost Drivers

33. 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

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

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

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

37. Cost Classifications

38. Cost Behavior Question
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.

39. Cost Behavior Question
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.

40. Cost Behavior Question
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.

41. Cost Behavior Question
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.

42. Direct and Indirect Costs
Costs that can be easily and conveniently traced to a product or department.
Example: cost of paint in the paint department of an automobile assembly plant.
Indirect costs
Costs that must be allocated in order to be assigned to a product or department.
Example: cost of national advertising for an airline is indirect to a particular flight.

43. Direct and Indirect Costs
A cost can be direct to the department, but indirect to units of product produced in the department.
Example: department manager’s salary.
Tracing costs directly to departments or products facilitates responsibility accounting.

44. Controllable and Uncontrollable Costs
A cost that can be significantly influenced by a manager is a controllable cost.

45. Opportunity Cost
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 $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

46. Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.

47. Differential Costs Costs that differ between alternatives.
Example: You can earn $1,500 per month in your hometown or $2,000 per month in a nearby city. Your commuting costs are $50 per month in your hometown and $300 per month to the city.
What is your differential cost?

48. Differential Costs Costs that differ between alternatives.
Example: You can earn $1,500 per month in your hometown or $2,000 per month in a nearby city. Your commuting costs are $50 per month in your hometown and $300 per month to the city.
What is your differential cost?
$300 - $50 = $250

49. Marginal Costs and Average Costs
The extra cost incurred to produce one additional unit.
The total cost to produce a quantity divided by the quantity produced.
Marginal and average costs are largely a function of cost behavior -- variable and fixed costs.

50. Costs and Benefits of Information
More information does not mean more benefits if information overload results.

51. End of Chapter 2