Cost Terms, Concepts, and Classifications

Cost Terms, Concepts, and Classifications

UAA – ACCT 202 Principles of Managerial Accounting

Dr. Fred Barbee

Chapter

Specify “Tag” the Cost

We need to place an adjective (tag) on the cost to identify what it is.

Direct

Cost

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Manufacturing Costs

Costs incurred in the manufacture of

goods being produced.

•Known as product (inventoriable) costs.

•They are expensed when the product is sold.

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Those materials that become an integral part of the finished

product and can be physically traced to the product.

Those factory labor costs that can be physically traced to

the production of the finished product.

All costs associated with the manufacture of a product except direct materials and direct labor.

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost of Goods SoldCost of Goods Sold

NonmanufacturingExpenses

NonmanufacturingExpenses

Sales

-= Gross Margin

-Net Income=

Income Statement

Sold

•Known as Period costs.

•They are expensed in the period in which they are incurred.

Nonmanufacturing Costs

Costs incurred for other than production activities.

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost of Goods SoldCost of Goods Sold

NonmanufacturingExpenses

NonmanufacturingExpenses

Sales

-= Gross Margin

-Net Income=

Income Statement

Sold

General & Administrative Expenses

All executive, organizational, and clerical costs associated with the general

management of the firm.

Selling & Distribution ExpensesAll costs necessary to secure customer

orders and get the products/services to the customer.

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost of Goods SoldCost of Goods Sold

NonmanufacturingExpenses

NonmanufacturingExpenses

Sales

-= Gross Margin

-Net Income=

Income Statement

Sold

Pro

du

ct Co

sts

Period Costs

Manufacturing Costs

Manufacturing Costs

Materials that are directly traceable to the goods or services being produced (physical observation).

Steel in cars, wood in furniture, etc.

Direct Materials

DM in Theory

Every component

DM in Reality

Must apply cost-benefit rule

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.

Manufacturing Costs

Labor that is directly traceable to the goods

being produced.

Assembly line workers, chefs, pilots

Manufacturing Costs

All production costs other than direct materials and

direct labor.

Utilities, security, janitorial, etc.

MOH – Other Names

Overhead

Burden

Indirect Manufacturing Costs

Factory Expenses

MOH – A Few Examples

Factory Supervision,

Factory Telephone, heat, light, power,

Factory bookkeeping salaries,

Insurance

Depreciation/factory equipment

Indirect materials, labor.

Nonmanufacturing Costs

All costs not associated with the production of goods.

Selling Costs

Administrative Costs

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DMDM

DLDL

MOHMOH

DM Inv.DM Inv.

WIP Inv.WIP Inv.

FG Inv.FG Inv.

WIPWIP

Manufacturing Costs

COGSCOGS

S&AS&A

Sales

-= Gross Margin

-Net Income=

Balance Sheet

Period Period CostsCosts

Income Statement

Pro

du

ct C

ost

sP

rod

uct

Co

sts

Unfinished

Finished

Sold

UnusedUsed

Used

Applied

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DMDM

DLDL

MOHMOH

DM Inv.DM Inv.

WIP Inv.WIP Inv.

FG Inv.FG Inv.

WIPWIP

Manufacturing Costs

COGSCOGS

S&AS&A

Sales

-= Gross Margin

-Net Income=

Balance Sheet

Income Statement

Pro

du

ct C

ost

sP

rod

uct

Co

sts

Unfinished

Finished

Sold

UnusedUsed

Used

Applied

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.

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DMDM

DLDL

MOHMOH

DM Inv.DM Inv.

WIP Inv.WIP Inv.

FG Inv.FG Inv.

WIPWIP

Manufacturing Costs

COGSCOGS

S&AS&A

Sales

-= Gross Margin

-Net Income=

Balance Sheet

Income Statement

Pro

du

ct C

ost

sP

rod

uct

Co

sts

Unfinished

Finished

Sold

UnusedUsed

Used

Applied

Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DMDM

DLDL

MOHMOH

DM Inv.DM Inv.

WIP Inv.WIP Inv.

FG Inv.FG Inv.

WIPWIP

Manufacturing Costs

COGSCOGS

S&AS&A

Sales

-= Gross Margin

-Net Income=

Balance Sheet

Income Statement

Unfinished

Finished

Sold

UnusedUsed

Used

Applied

Period Costs: Expired non product costs. Always charged to expense in the period in

which they occur.

Period Period CostsCosts

Product Costs Vs. Period CostsProduct Costs Vs. Period Costs

DM, DL, MOH, S&A CostsDM, DL, MOH, S&A Costs

DM, DLMOH

DM, DLMOH

DM, DLMOH

DM, DLMOH

DM, DLMOH

DM, DLMOH

SS&&AA

SS&&AA

SS&&AA

Product Product CostsCosts

Selling and Administrative Costs

Work-in-Process

Finished Goods

Sale

Cost of Goods Sold

DM ,DL DM ,DL MOHMOH

Period Period CostsCosts

Expensed in the currentperiod.

Balance Sheet Presentation

Variable Costs

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

$

Volume (Activity Base)

Total Variable Costs

$

Volume (Activity Base)

Per Unit Variable Cost

Fixed Costs

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

$

Volume (Activity Base)

Total Fixed Costs

$

Volume (Activity Base)

Per Unit Fixed Costs

Relevant Range

$

Volume (Activity Base)

Accountant’s Straight-Line Approximation

Economist’s CurvilinearCost Function

Curvilinear Costs and the Relevant Range

DirectCosts

IndirectCosts

CostObject

Anything for which a separate measurement of costs is

desired (products, customers, departments, etc.)

DirectCosts

IndirectCosts

CostObject

Costs that are related to and directly traceable to the

identified cost objective. (Direct Material, Direct Labor)

Costs that are related to, but not traceable to, the identified

cost objective. (Manufacturing overhead)

Different Costs for Different Purposes

Product Costing Definitions

Research andDevelopment

Research andDevelopment

ProductionProduction

MarketingMarketing

ProductionProduction

MarketingMarketing

ProductionProduction

Pricing DecisionsProduct-Mix DecisionsStrategic Profitability Analysis

Strategic Design DecisionsTactical Profitability Analysis

External FinancialReporting

Value-Chain Operating Traditional Product Costs Product Costs Product Costs

Customer ServiceCustomer Service Customer ServiceCustomer Service

Research andDevelopment

Research andDevelopment

ProductionProduction

MarketingMarketing

Pricing DecisionsProduct-Mix DecisionsStrategic Profitability Analysis

Value-Chain Product Costs

Customer ServiceCustomer Service

If making any of these types of decisions, I need to look at all costs.

ProductionProduction

MarketingMarketing

Strategic Design DecisionsTactical Profitability Analysis

Operating Product Costs

Customer ServiceCustomer Service

On the other hand, for these decisions, we might be able to ignore some of the costs.

Product Costing Definitions

Research andDevelopment

Research andDevelopment

ProductionProduction

MarketingMarketing

ProductionProduction

MarketingMarketing

ProductionProduction

Pricing DecisionsProduct-Mix DecisionsStrategic Profitability Analysis

Strategic Design DecisionsTactical Profitability Analysis

External FinancialReporting

Value-Chain Operating Traditional Product Costs Product Costs Product Costs

Customer ServiceCustomer Service Customer ServiceCustomer Service

For external financial reporting, we need only these

costs – because that is what GAAP

says we need.