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Basic Cost Management Basic Cost Management ConceptsConcepts
M. En C. Eduardo Bustos M. En C. Eduardo Bustos FarFarííasas
22
ObjectivesObjectives1. 1. ExplainExplain whatwhat isis meantmeant by by thethe wordword ""costcost." ." 2. 2. DistinguishDistinguish amongamong productproduct costscosts, , periodperiod costscosts, and expenses. , and expenses. 3. 3. Describe Describe thethe role role ofof costscosts onon publishedpublished financialfinancial statementsstatements. . 4. 4. ListList fivefive typestypes ofof manufacturingmanufacturing operationsoperations and describe and describe massmass
customizationcustomization. . 5. 5. GiveGive examplesexamples ofof threethree typestypes ofof manufacturingmanufacturing costscosts. . 6. 6. Prepare a Prepare a scheduleschedule ofof costcost ofof goodsgoods manufacturedmanufactured, a , a scheduleschedule ofof
costcost ofof goodsgoods soldsold, and , and anan incomeincome statementstatement forfor a a manufacturermanufacturer. . 7. 7. ExplainExplain whatwhat isis meantmeant by "by "differentdifferent costscosts forfor differentdifferent purposespurposes." ." 8. 8. UnderstandUnderstand thethe importanceimportance ofof identifyingidentifying anan organization'sorganization's costcost
driversdrivers. . 9. 9. Describe Describe thethe behaviorbehavior ofof variable variable costscosts and and fixedfixed costscosts, , bothboth in total in total
and and onon a a perper--unitunit basisbasis. . 10. 10. DistinguishDistinguish amongamong directdirect costcost, , indirectindirect costcost, , controllablecontrollable costcost , and , and
uncontrollableuncontrollable costcost. . 11. 11. Define and Define and givegive examplesexamples ofof anan opportunityopportunity costcost, , anan outout--ofof pocketpocket
costcost, a , a sunksunk costcost, a , a differentialdifferential costcost, a marginal , a marginal costcost, and , and ananaverage average costcost. .
12. 12. ExplainExplain thethe behavioralbehavioral tendenciestendencies manymany peoplepeople show show whenwhen theytheyencounterencounter opportunityopportunity costscosts and and sunksunk costscosts. .
33
Accounting Information SystemsAccounting Information Systems
44
The Need for Cost AccountingThe Need for Cost Accounting
Cost accounting provides the detailed cost data Cost accounting provides the detailed cost data that management needs to control current that management needs to control current operations and plan for the future.operations and plan for the future.Companies must control costs in order to keep Companies must control costs in order to keep prices competitive.prices competitive.In todayIn today’’s global environment, cost information is s global environment, cost information is more crucial than ever in remaining competitive.more crucial than ever in remaining competitive.
mantener
55
Accounting Information SystemsAccounting Information Systems
The cost management information systemis an accounting information subsystem that is primarily concerned with producing outputs for internal users using inputs and processes needed to satisfy management objectives.
66
Accounting Information SystemsAccounting Information Systems
The cost management information system has three broad objectives that provide information for--1) Costing out services, products, and other
objects of interest to management
2) Planning and control
3) Decision making
77
An Integrated Cost Management SystemAn Integrated Cost An Integrated Cost
Management SystemManagement SystemDesign and
DevelopmentSystem
CustomerCustomerServicingServicingSystemSystem
Marketing andMarketing andDistributionDistribution
SystemSystem
CostManagement
System
ProductionProductionSystemSystem
88
The Subsystems of the Accounting Information System
The Subsystems of the The Subsystems of the Accounting Information SystemAccounting Information System
Financial AccountingFinancial AccountingInformation SystemInformation System
Accounting Information SystemAccounting Information System
Cost ManagementCost ManagementInformation SystemInformation System
OperationalControl System
Cost AccountingCost AccountingInformation SystemInformation System
99
Costs and Benefits of Costs and Benefits of InformationInformation
Costs Benefits
More information does not mean more benefits if information overload results.
1010
EconomicsEconomics costcost
1111
Economics Cost TermsEconomics Cost Terms
Short runShort runLong runLong runFixedFixedVariableVariableTotalTotalAverageAverageMarginalMarginal
1212
Cost FunctionsCost Functions
Short run cost function Short run cost function -- use for dayuse for day--toto--day day operating decisionsoperating decisions–– at least one input is fixedat least one input is fixedLong run cost function Long run cost function -- use for strategic use for strategic planningplanning–– all inputs can be variedall inputs can be varied
1313
Fixed CostsFixed Costs
Do not vary with Do not vary with outputoutputRelevant only in the Relevant only in the short runshort runExamplesExamples–– leaselease–– contract employeescontract employees–– fixed insurance costsfixed insurance costs
Contrato de arrendamiento
1414
Variable CostsVariable Costs
Vary with outputVary with outputRelevant in the short and long runsRelevant in the short and long runsExamplesExamples–– wageswages–– material costsmaterial costs–– social insurance taxessocial insurance taxes
1515
Total CostTotal Cost
TVCTFCTC +=
1616
Marginal Costs and Average Marginal Costs and Average CostsCosts
The extra costincurred to produceone additional unit.
The total cost toproduce a quantity
divided by thequantity produced.
Marginal and average costs arelargely a function of cost behavior
-- variable and fixed costs.
1717
Average Fixed CostsAverage Fixed CostsC
ost (
$’s)
AFC
QTFCAFC =
Quantity
1818
Average Variable CostsAverage Variable Costs
Quantity
AVC
Cos
t ($’
s)
QTVCAVC =
1919
Average Total CostAverage Total Cost
Quantity
ATC
Cos
t ($’
s)
QTCATC =
2020
Average Total CostsAverage Total Costs
AVCAFCATC +=
2121
Marginal CostMarginal Cost QTVC
QTCMC
∆∆
=∆∆
=
MCC
ost (
$’s)
Quantity
2222
Cost CurvesCost Curves
Quantity
MCATC
AVC
Cos
t ($’
s)
2323
Other Cost TermsOther Cost Terms
Opportunity Cost Opportunity Cost -- foregone value foregone value associated with nextassociated with next--best use.best use.
Consider what a firm forgoes by accepting Consider what a firm forgoes by accepting a special order.a special order.
abandonado
2424
Cost TermsCost Terms
Explicit Explicit –– measured by cash costsmeasured by cash costs
Implicit Implicit -- nonnon--cash costscash costs–– measured by opportunity cost conceptmeasured by opportunity cost concept
2525
AccountingAccounting costcost
2626
Basic Cost ConceptsBasic Cost ConceptsBasic Cost Concepts
CostCost is the cash or cash equivalent value is the cash or cash equivalent value sacrificed for goods and services that are sacrificed for goods and services that are expected to bring a current or future benefit expected to bring a current or future benefit to the organization.to the organization.
genere
Costs are incurred to produce future benefits.Expired costs are called expenses.Unexpired costs are classified as assets and appear on the balance sheet.Assigning cost accurately to cost objects is crucial.
financieros
2727
Basic Cost ConceptsBasic Cost ConceptsBasic Cost Concepts
AA cost objectcost object is any item, such as products, is any item, such as products, customers, departments, projects, activities, customers, departments, projects, activities, and so on, for which costs are measured and and so on, for which costs are measured and assigned.assigned.
Example:Example: A bicycle is a cost object when you are A bicycle is a cost object when you are determining the cost to produce a bicycle.determining the cost to produce a bicycle.
An An activityactivity is a basic unit of work performed is a basic unit of work performed within an organization. within an organization.
Example:Example: Moving materials, maintaining equipment, Moving materials, maintaining equipment, designing products, etc. designing products, etc.
Dentro de
2828
Cost and Cost TerminologyCost and Cost Terminology
Cost is a resource sacrificed or forgone to achievea specific objective.
abandonado
An actual cost is the cost incurred (a historical cost)as distinguished from budgeted costs.
A cost object is anything for which a separatemeasurement of costs is desired.
deseado
2929
Cost and Cost TerminologyCost and Cost Terminology
CostAccumulation
Cost Object
Cost Object
Cost Object
CostAssignment
Tracing
Allocating
3030
Cost TermsCost Terms
Historical Historical -- actual cash outlayactual cash outlay
Current Current -- amount in prevailing marketamount in prevailing market–– one form of current cost is one form of current cost is replacementreplacement
costcost i.e. cost of duplicating productive i.e. cost of duplicating productive capacity using current technologycapacity using current technology
–– may be above or below historical costmay be above or below historical cost
desembolsado
3131
Cost TermsCost Terms
Incremental CostIncremental Cost–– cost of a management decisioncost of a management decision–– profit contributionprofit contribution
profit before fixed chargesprofit before fixed chargesantes
3232
Cost TermsCost Terms
Sunk cost Sunk cost -- cost that does not vary across cost that does not vary across management decisionmanagement decision–– option on land purchaseoption on land purchase
hundido
3333
Classifying CostsClassifying Costs
3434
Classifying CostsClassifying CostsBy Behavior By Behavior –– FixedFixed–– VariableVariableBy TraceabilityBy Traceability–– DirectDirect–– IndirectIndirectBy FunctionBy Function–– Product Product –– PeriodPeriod
origen
3535
Cost ClassificationsCost Classificationsby Behaviorby Behavior
3636
Cost ClassificationsCost Classificationsby Behaviorby Behavior
Cost BehaviorHow a cost will react to
changes in the level of business activity.
Cost BehaviorCost BehaviorHow a cost will react toHow a cost will react to
changes in the level of business activity.changes in the level of business activity.
Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.
Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.
3737
Total Variable CostTotal Variable CostA variable cost is one that changes in total
in proportion to changes in the volume of activity.
Your Your total long distancetotal long distance telephone billtelephone billis based on how many minutes you talk.is based on how many minutes you talk.
Minutes Talked
Tota
l Lon
g D
ista
nce
Tele
phon
e B
ill
3838
Variable Cost Per UnitVariable Cost Per UnitOn a per unit basis, a variable cost
remains constant over a wide range of activity.
Minutes Talked
Per
Min
ute
Tele
phon
e C
harg
e
The The cost per long distance minutecost per long distance minute talked is constant.talked is constant.For example, 10 cents per minute.For example, 10 cents per minute.
3939
Total Fixed CostTotal Fixed CostA fixed cost is one that remains constant in total
even when the volume of activity changes.
Your monthly Your monthly basic telephone billbasic telephone bill probably does not probably does not change when you make more local calls. change when you make more local calls.
Number of Local Calls
Mon
thly
Bas
ic
Tele
phon
e B
ill
4040
Fixed Cost Per UnitFixed Cost Per UnitOn a per unit basis, a fixed cost changes
as the volume of activity changes.
Number of Local Calls
Mon
thly
Bas
ic
Tele
phon
e B
ill pe
r Lo
cal C
all
The average cost The average cost per local callper local call decreasesdecreasesas more local calls are made.as more local calls are made.
4141
Cost ClassificationsCost Classifications
Summary of Variable and Fixed Cost BehaviorCost In Total Per Unit
Total variable cost changes Variable cost per unitVariable as activity level changes. remains the same over
wide ranges of activity.
Total fixed cost remains Fixed cost per unitFixed the same even when the goes down as activity
activity level changes. level goes up.
4242
PeliculaPelicula
4343
Cost Behavior Patterns Cost Behavior Patterns ExampleExample
Bicycles by the Sea buys a handlebarat $52 for each of its bicycles.
What is the total handlebar cost when1,000 bicycles are assembled?
manubrio
4444
Cost Behavior Patterns Cost Behavior Patterns ExampleExample
1,000 units × $52 = $52,000What is the total handlebar cost
when 3,500 bicycles are assembled?3,500 units × $52 = $182,000
4545
Cost Behavior Patterns Cost Behavior Patterns ExampleExample
Bicycles by the Sea incurred $94,500 ina given year for the leasing of its plant.This is an example of fixed costs with
respect to the number of bicycles assembled.
4646
Cost Behavior Patterns Cost Behavior Patterns ExampleExample
What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 1,000 bicycles?
$94,500 ÷ 1,000 = $94.50What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 3,500 bicycles?
$94,500 ÷ 3,500 = $27
4747
Cost DriversCost DriversDe gestión
The cost driver of variable costs is the levelof activity or volume whose change causes
the (variable) costs to change proportionately.The number of bicycles assembled is acost driver of the cost of handlebars.
4848
Relevant Range ExampleRelevant Range Example
Assume that fixed (leasing) costs are $94,500for a year and that they remain the same for a
certain volume range (1,000 to 5,000 bicycles).1,000 to 5,000 bicycles is the relevant range.
4949
Relevant Range ExampleRelevant Range Example
020000400006000080000
100000120000
0 1000 2000 3000 4000 5000 6000
Volume
Fixe
d C
osts
$94,500
5050
Classification of CostsClassification of Costsby Traceabilityby Traceability
origen
5151
Basic Cost ConceptsBasic Cost ConceptsBasic Cost Concepts
TraceabilityTraceability is the ability to assign a cost is the ability to assign a cost to a cost object in an economically to a cost object in an economically feasible way by means of a causal feasible way by means of a causal relationshiprelationship..Direct costsDirect costs are those costs that can be are those costs that can be easily and accurately traced to a cost easily and accurately traced to a cost object. object.
Example: The salary of a supervisor of a department, Example: The salary of a supervisor of a department, where the department is defined as the cost where the department is defined as the cost object.object.
5252
Basic Cost ConceptsBasic Cost ConceptsIndirect costs are those costs that cannot be traced easily and accurately to a cost object.
Example: The cost of heating and cooling a plant that manufactures five products.
5353
Classification of CostsClassification of Costsby Traceabilityby Traceability
Direct costsDirect costsCosts that can beCosts that can beeasily and conveniently easily and conveniently traced to a unit of product traced to a unit of product or department or other or department or other cost objective.cost objective.
Example: Example: –– Direct materialDirect material–– Direct labor Direct labor –– Cost of paint in the paint Cost of paint in the paint
department of an automobile department of an automobile assembly plant.assembly plant.
Indirect costsIndirect costsCosts that must be Costs that must be allocated in order to be allocated in order to be assigned to a unit of assigned to a unit of productproduct or department. or department. Example: Example: –– Manufacturing overheadManufacturing overhead–– Cost of national advertising Cost of national advertising
for an airline is indirect to for an airline is indirect to a particular flight.a particular flight.
gastos
5454
Direct and Indirect CostsDirect and Indirect Costs
Direct CostsExample: Paper on whichSports Illustrated magazineis printed
Indirect CostsExample: Lease cost forTime-Warner buildinghousing the senior editorsof its magazine
COST OBJECT
Example: SportsIllustrated magazine
COST OBJECT
Example: SportsIllustrated magazine
5555
Direct and Indirect CostsDirect and Indirect CostsExampleExample
Direct Costs:Maintenance Department $40,000Personnel Department $20,600Assembly Department $75,000Finishing Department $55,000
Assume that Maintenance Department costs areallocated equally among the production departments.
How much is allocated to each department?
5656
Direct and Indirect Costs Direct and Indirect Costs ExampleExample
Allocated$20,000
Maintenance$40,000
AssemblyDirect Costs
$75,000
FinishingDirect Costs
$55,000
$20,000
5757
Relationships of Types of CostsRelationships of Types of Costs
Direct
Indirect
Variable Fixed
5858
Interpret unit costs Interpret unit costs cautiously.cautiously.
5959
Total Costs and Unit Costs Total Costs and Unit Costs ExampleExample
What is the unit cost (leasing and handlebars)when Bicycles assembles 1,000 bicycles?
Total fixed cost $94,500+ Total variable cost $52,000 = $146,500
$146,500 ÷ 1,000 = $146.50
6060
Total Costs and Unit CostsTotal Costs and Unit CostsExampleExample
0
50000
100000
150000
200000
0 500 1000 1500
Volume
Tota
l Cos
ts
$94,500
$94,500 + $52x
$146,500
6161
Use Unit Costs CautiouslyUse Unit Costs Cautiously
Assume that Bicycles management uses aunit cost of $146.50 (leasing and wheels).
Management is budgeting costs fordifferent levels of production.
What is their budgeted cost for anestimated production of 600 bicycles?
600 × $146.50 = $87,900
6262
Use Unit Costs CautiouslyUse Unit Costs Cautiously
What is their budgeted cost for an estimatedproduction of 3,500 bicycles?3,500 × $146.50 = $512,750
What should the budgeted cost be for anestimated production of 600 bicycles?
6363
Use Unit Costs CautiouslyUse Unit Costs Cautiously
Total fixed cost $ 94,500Total variable cost ($52 × 600) 31,200Total $125,700
$125,700 ÷ 600 = $209.50Using a cost of $146.50 per unit would
underestimate actual total costs if outputis below 1,000 units.
6464
Use Unit Costs CautiouslyUse Unit Costs Cautiously
What should the budgeted cost be for anestimated production of 3,500 bicycles?
Total fixed cost $ 94,500Total variable cost (52 × 3,500) 182,000Total $276,500
$276,500 ÷ 3,500 = $79.00
6565
Distinguish amongDistinguish amongmanufacturing companies,manufacturing companies,
merchandising companies, andmerchandising companies, andserviceservice--sector companies.sector companies.
6666
ManufacturingManufacturing
Manufacturing companiespurchase materials and components and
convert them into finished goods.
Manufacturing companiespurchase materials and components and
convert them into finished goods.
A manufacturing company must also develop,design, market, and distribute its products.
A manufacturing company must also develop,design, market, and distribute its products.
6767
MerchandisingMerchandising
Merchandising companiespurchase and then sell tangible products
without changing their basic form.
Merchandising companiespurchase and then sell tangible products
without changing their basic form.
6868
Service
Service companiesprovide services or intangibleproducts to their customers.
Service companiesprovide services or intangibleproducts to their customers.
Labor is the most significant cost category.Labor is the most significant cost category.
6969
PELICULAPELICULA
7070
Types of InventoryTypes of Inventory
Manufacturing-sector companiestypically have one or more of the
following three types of inventories:1. Direct materials inventory2. Work in process inventory (work
in progress)3. Finished goods inventory
7171
Types of InventoryTypes of Inventory
Merchandising-sector companies holdonly one type of inventory – the
product in its original purchased form.Service-sector companies do not
hold inventories of tangible products.mantienen
7272
PELICULAPELICULA
7373
Cost Classification by Cost Classification by FunctionFunction
7474
Cost Classification by FunctionCost Classification by FunctionProduct costsProduct costs
Include expendituresInclude expendituresthat arethat are
necessary and integralnecessary and integralto finished products.to finished products.Capitalized on theCapitalized on the
balance sheet until sold.balance sheet until sold.
Period costsPeriod costsIInclude expendituresnclude expendituresidentified more with aidentified more with atime period than withtime period than with
finished products.finished products.Expensed on theExpensed on theincome statement.income statement.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
SaleExpense
IncomeStatementEdo. De resultadosEdo. De
Posicion financiera
7575
Classification of Costs by Classification of Costs by FunctionFunction
Period CostsPeriod CostsSellingSellingGeneral and General and administrative administrative expenses
Product CostsProduct CostsDirect materialsDirect materialsDirect laborDirect laborOverhead Overhead expensesgastos
7676
Manufacturing CostsManufacturing Costs
TheProduct
DirectLabor
DirectMaterial
Manufacturing Overhead
7777
PelPelíículacula
7878
Classification ofClassification ofManufacturing CostsManufacturing Costs
Direct materials costs
Direct manufacturing labor costs
Indirect manufacturing costs
7979
Classifications of Costs in Classifications of Costs in Manufacturing CompaniesManufacturing Companies
Manufacturing costs are oftenManufacturing costs are oftencombined as follows:combined as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
8080
Manufacturing Cost FlowsManufacturing Cost Flows
ManufacturingOverhead
Material Purchases
Direct Labor
Balance SheetCosts Inventories
FinishedGoods
Cost of GoodsSold
Income StatementExpenses
Work inProcess
Raw Material
Selling andAdministrative
Selling andAdministrative
Period Expenses
8181
Cost Assignment MethodsCost Assignment MethodsCost Assignment MethodsCost of ResourcesCost of Resources
DirectDirectTracingTracing
DriverDriverTracingTracing AllocationAllocation
Resource Drivers
Cost ObjectsCost Objects
ActivityDrivers
ConvenienceAssumedLinkage
PhysicalObservation
8282
Product Cost DefinitionsProduct Cost DefinitionsValue-Chain Product Costs
Operating Product Costs
Traditional Product Costs
Research andDevelopmentResearch andResearch andDevelopmentDevelopment
ProductionProductionProduction
MarketingMarketingMarketing
Customer ServiceCustomer ServiceCustomer Service
ProductionProductionProduction
MarketingMarketingMarketing
Customer ServiceCustomer ServiceCustomer Service
ProductionProductionProduction
Strategic Design Decisions
Tactical Profitability Analysis
External FinancialReporting
Pricing DecisionsProduct Mix DecisionsStrategic Profitability
Analysis
8383
Manufacturing CostsManufacturing CostsManufacturing CostsDirect materialsDirect materials are those materials that are are those materials that are directly traceable to the goods or services directly traceable to the goods or services being producedbeing produced..
Example: The cost of wood in furniture.Example: The cost of wood in furniture.
Direct laborDirect labor is the labor that is directly traceable is the labor that is directly traceable to the goods or services being produced. to the goods or services being produced.
Example: Wages of assemblyExample: Wages of assembly--line workers.line workers.
OverheadOverhead are all other manufacturing costs.are all other manufacturing costs.Example:Example: Plant depreciation, utilities, property taxes, Plant depreciation, utilities, property taxes,
indirect materials, indirect labor, etc.indirect materials, indirect labor, etc.
8484
Nonproduction CostsNonproductionNonproduction CostsCosts
Marketing (selling) costs are the costs necessary to market, distribute, and service a product or service.
Example: Advertising, storage costs, and freight out.
Administrative costs are the costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production.
Example: Legal fees, salary of the chief executive officer.
8585
Nonproduction CostsNonproductionNonproduction CostsCostsFor external financial
reporting, marketing and administrative costs are not
inventoried. They are referred to as period costs.
For external financial reporting, marketing and
administrative costs are not inventoried. They are
referred to as period costs.
8686
Nonproduction Nonproduction or Operating or Operating
CostsCosts
Production or Production or Manufacturing Manufacturing
CostsCosts
Direct Materials
Direct Labor
Overhead
Prime
Cost
Conversion
Cost
Marketing ExpenseMarketing ExpenseOrderOrder--Getting CostsGetting CostsOrderOrder--Filling CostsFilling Costs
Administrative Expense
8787
Describe the three categories Describe the three categories ofof
inventories commonly foundinventories commonly foundin manufacturing companies.in manufacturing companies.
8888
Inventoriable CostsInventoriable Costs
Inventoriable costs (assets)…Los recursos
become cost of goods sold…
after a sale takes place.
8989
Period CostsPeriod Costs
Period costs are all costs in the incomestatement other than cost of goods sold.
Period costs are recorded as expenses of theaccounting period in which they are incurred.
9090
Flow of Costs ExampleFlow of Costs Example
Bicycles by the Sea had $50,000 of directmaterials inventory at the beginning of the period.
Purchases during the period amounted to$180,000 and ending inventory was $30,000.
How much direct materials were used?$50,000 + $180,000 – $30,000 = $200,000
9191
Flow of Costs ExampleFlow of Costs Example
Direct labor costs incurred were $105,500.Indirect manufacturing costs were $194,500.
What are the total manufacturing costs incurred?Direct materials used $200,000Direct labor 105,500Indirect manufacturing costs 194,500Total manufacturing costs $500,000
9292
Flow of Costs ExampleFlow of Costs Example
Assume that the work in process inventoryat the beginning of the period was $30,000,
and $35,000 at the end of the period.What is the cost of goods manufactured?
Beginning work in process $ 30,000Total manufacturing costs 500,000Ending work in process 35,000Cost of goods manufactured $495,000
9393
Flow of Costs ExampleFlow of Costs Example
Assume that the finished goods inventoryat the beginning of the period was $10,000,
and $15,000 at the end of the period.What is the cost of goods sold?
Beginning finished goods $ 10,000Cost of goods manufactured 495,000Ending finished goods 15,000Cost of goods sold $490,000
9494
Flow of Costs ExampleFlow of Costs Example
Work in ProcessBeg. Balance 30,000 495,000Direct mtls. used 200,000Direct labor 105,500Indirect mfg. costs 194,500Ending Balance 35,000
9595
Flow of Costs ExampleFlow of Costs Example
Work in Process495,000
Finished Goods10,000 490,000
495,00015,000
Cost of Goods Sold490,000
9696
Manufacturing CompanyManufacturing Company
MaterialsInventory
FinishedGoods
Inventory
Revenues
Cost ofGoods Sold
INCOME STATEMENTInventoriable
Costs
BALANCE SHEET
whensalesoccur
PeriodCosts
Equals Operating Income
deduct
Equals Gross Margindeduct
Work inProcess
Inventory
9797
Merchandising CompanyMerchandising Company
BALANCE SHEET INCOME STATEMENTInventoriable
CostswhensalesoccurMerchandise
Purchases Inventory
Revenuesdeduct
Cost ofGoods Sold
Equals Gross Margindeduct
PeriodCosts
Equals Operating Income
9898
Prime CostsPrime Costs
DirectMaterials
PrimeCosts
DirectLabor+ =
9999
Prime CostsPrime Costs
What are the prime costs for Bicycles by the Sea?Direct materials used $200,000+ Direct labor 105,500= $305,000
100100
Conversion CostsConversion Costs
ManufacturingOverhead
DirectLabor
ConversionCosts+ =
IndirectMaterials
IndirectLabor Other
101101
Conversion CostsConversion Costs
What are the conversion costs forBicycles by the Sea?
Direct labor $105,500+ Indirect manufacturing costs 194,500= $300,000
102102
Measuring CostsMeasuring CostsRequires JudgmentRequires Judgment
Manufacturing labor-cost classificationsvary among companies.
The following distinctions are generally found:Direct manufacturing labor
Manufacturing overhead
103103
Measuring CostsMeasuring CostsRequires JudgmentRequires Judgment
Manufacturing overhead
Indirect labor Managers’ salaries Payroll fringe costsForklift truck operators (internal handling of materials)
Janitors Rework laborOvertime premium Idle time
Nomina marginal
montacargasconserjes
ocioso
104104
Measuring CostsMeasuring CostsRequires JudgmentRequires Judgment
Overtime premium is usuallyconsidered part of overhead.
Assume that a worker gets $18/hourfor straight time and gets
time and one-half for overtime.
105105
Measuring CostsMeasuring CostsRequires JudgmentRequires Judgment
How much is the overtime premium?$18 × 50% = $9 per overtime hour
If this worker works 44 hours on a givenweek, how much are his gross earnings?
Direct labor 44 hours × $18 = $792Overtime premium 4 hours × $ 9 = 36Total gross earnings $828
106106
Cost Classifications on Cost Classifications on Financial StatementsFinancial Statements
107107
108108
109109
Cost Classifications on Financial Cost Classifications on Financial Statements Statements –– Balance SheetBalance Sheet
MerchandiserMerchandiserCurrent AssetsCurrent Assets
–– CashCash–– ReceivablesReceivables–– Prepaid ExpensesPrepaid Expenses–– Merchandise InventoryMerchandise Inventory
ManufacturerManufacturerCurrent AssetsCurrent Assets
CashCashReceivablesReceivablesPrepaid ExpensesPrepaid ExpensesInventoriesInventories
Raw MaterialsRaw MaterialsWork in ProcessWork in ProcessFinished GoodsFinished Goods
recibir
Gastos prepagados
110110
Manufacturing OrganizationManufacturing OrganizationIncome StatementIncome Statement
For the Year Ended December 31, 2004For the Year Ended December 31, 2004
Sales $2,800,000Less: Cost of goods sold 1,300,000Gross margin $ 700,000Less operating expenses:
Selling expenses $300,000Administrative expenses 150,000 450,000
Operating income $ 250,000
From the Cost of Goods Sold
Schedule
From the Cost of Goods Sold
Schedule
111111
Direct materials:Beginning inventory $200,000Add: Purchases 450,000Materials available $650,000Less: Ending inventory 50,000Direct materials used in production $ 600,000
Direct labor 350,000Manufacturing overhead:
Indirect labor $122,500Depreciation 177,500Rent 50,000Utilities 37,500Property taxes 12,500Maintenance 50,000 450,000
Total manufacturing costs added $1,400,000
Statement of Cost of Goods ManufacturedStatement of Cost of Goods ManufacturedFor the Year Ended December 31, 2004For the Year Ended December 31, 2004
continuedcontinued
112112
Total manufacturing costs added $1,400,000Add: Beginning work in process 200,000Less: Ending work in process 400,000Cost of goods manufactured $1,200,000
Work in process consists of all partially completed units found in
production at a given point in time.
113113
Cost of Goods Sold ScheduleCost of Goods Sold ScheduleFor the Year Ended December 31, 2004For the Year Ended December 31, 2004
Cost of goods manufactured $1,200,000Add: Beginning inventory finished goods 250,000Cost of goods available for sale $1,450,000Less: Ending inventory finished goods 150,000Cost of goods sold $1,300,000
From the Statement of
Cost of Goods Manufactured
From the Statement of
Cost of Goods Manufactured
114114
Explain why product costs Explain why product costs areare
computed in different wayscomputed in different waysfor different purposes.for different purposes.
115115
Many Meanings of Product CostMany Meanings of Product Cost
A product cost is the sum of the costsassigned to a product for a specific purpose.
1. Pricing and product emphasis decisions2. Contracting with government agencies3. Preparing financial statements for external
reporting under generally acceptedaccounting principles
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ReferencesReferences1.1. GarrisonGarrison, , RayRay H. & H. & NoreenNoreen, Eric W. , Eric W. ““ManagerialManagerial
AccountingAccounting””. 10th ed. USA, . 10th ed. USA, McMc GrawGraw Hill/Hill/IrwinIrwin, 2003. , 2003. 838 pp.838 pp.
2.2. Hansen & Hansen & MowenMowen. . ““Cost Management. Accounting Cost Management. Accounting and Controland Control””. . Fourth Edition. USA, Thomson.
3.3. HiltonHilton, , RonaldRonald W. W. ““ManagerialManagerial AccountingAccounting: : CreatingCreatingValueValue in a in a DynamicDynamic BusinessBusiness EnvironmentEnvironment ””. 5th. Ed. . 5th. Ed. USA, USA, McMc GrawGraw Hill/Hill/IrwinIrwin, 2002. 858 pp., 2002. 858 pp.
4. Horngren /Datar /Foster. “Cost Accounting” 11th. ed. USA, Prentice Hall Business Publishing,2003.
5.5. VanDerbeckVanDerbeck, Edward J. , Edward J. ““Principles of Cost Principles of Cost AccountingAccounting””. 13th Ed. USA, Thomson.. 13th Ed. USA, Thomson.
6.6. Zimmerman, Jerold L. & Bittner, Ronald L. Zimmerman, Jerold L. & Bittner, Ronald L. ““Accounting for Decision Making and Control“ Fourth Edition. USA, Irwin/McGrawIrwin/McGraw--Hill, 2003.Hill, 2003.
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