1. Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 Chapter 2 Basic Cost Management Concepts

2. Process of Management Decision Making Directing Control Planning Strategy Formulation Managers need cost information to perform each of these functions. Learning Objective 01

3. Product Costs, Period Costs and Expenses Product costs are costs associated with goods for sale until the time period during which the products are sold, Period costs are costs that are expensed during the time period in which they are incurred. Expenses are the consumption of assets for the purpose of generating revenue.

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

5. Types of Production Processes Type of ProductionDescription ofExample of Process Manufacturer Job ShopLow volumeDisney Little standard Unique products BatchMultiple productsCaterpillar Low volume Assembly LineA few major productsFord Higher volume Mass CustomizationHigh volumeDell Many standardized components Customized combination of components Continuous FlowHigh volumeExxon Highly standardized commodity products

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

7. Direct Materials Raw materials that become an integral part of the product and that can be traced directly to it. Example: A radio installed in an automobile

8. Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

9. Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

10. Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.

11. Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

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

13. Manufacturing Cost Flows Manufacturing Overhead Direct Material Direct Labor Finished Goods Inventory Cost of Goods Sold Work in Process Inventory

14. Schedule of Cost of Goods Manufactured

15. Beginning work-in-process inventory is carried over from the prior period. Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.

16. Income Statement for a Manufacturer

18. Activities that cause costs to be incurred are called COST DRIVERS Cost Driver Examples ActivityCost Driver Machining operationsMachine hours SetupSetup hours Production schedulingManufacturing orders InspectionPieces inspected PurchasingPurchase orders cost driver: A factor that can causes a change in the cost of an activity

19. Cost Classifications

20. Various Costs Direct costs: Costs that can be easily traced to a product or department. Indirect costs: Costs that must be allocated in order to be assigned to a product or department. Opportunity Costs: The potential benefit that is given up when one alternative is selected over another. Sunk Costs: All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions. Differential Costs: Costs that differ between alternatives. Marginal Cost: The extra cost incurred to produce one additional unit. Average Cost: The total cost to produce a quantity divided by the quantity produced.

21. Very thanks 21