View
250
Download
1
Category
Preview:
Citation preview
GENERAL INFORMATIONGENERAL INFORMATION
• G. WALRAEVENS : guy.walraevens@kuleuven.be – room: A05/09
• STUDY MATERIALS:
- Book: Financial & Management Accounting : an introduction – Weetman P. – FT Prentice Hall (PEARSON) – 5th edition
- TOLEDO: powerpoint presentations
extra exercises
• EXAM:
- January
- Closed book
- Written
- 2 cases Management Accounting
CHAPTER 17
Classification of costs
2
3
CHAPTER 17
Classification of costs
Page 472Page 475Page 476
NO EXAM CONTENT CHAPTER 17
Cost classification for planning,…Cost coding
Cost selection and reporting
The following case is not included in the manual
The following case is not included in the manual
4
CHAPTER 17
Classification of costs
CASE - STUDYCASE - STUDY
BATH ROBES BATH TOWELS
PRODUCTION
SALES
TURNOVER
SALES PRICE
100 000 units
90 000 units
€ 4 500 000
€ 50 / unit
200 000 units
150 000 units
€ 3 000 000
€ 20 / unit
5
BATH ROBES
BATH TOWELS
Use fabric
Labels
Thread
Plastic cover
Direct Labour
6m à € 1.81/m
€ 0.05/unit
20m à € 0.03/m
€ 0.04/unit
72 min à € 15/hour
2.2m à € 0.8/m
€ 0.05/unit
5m à € 0.03/m
€ 0.04/unit
24 min à € 15/hour
Labour costs 2 supervisors
Depreciation machines
Deprecation production building
Energy consumption production building
Other production costs
€ 50 000
€ 53 750
€ 2 000
€ 64 250
€ 250 000
Administrative and sales expenses
Commission salesmen
€ 800 000
1% on turnover
CASE - STUDYCASE - STUDY
6
A costis the measure ofresources givenup to achieve a
particular purpose.
Wh
at d
o w
e m
ean
by
a co
st ?
7
Wh
at d
o w
e m
ean
by
a co
st ?
RESOURCES
SACRIFICED or FORGONE
COST OBJECT
8
Wh
at d
o w
e m
ean
by
a co
st ?
RESOURCES
SACRIFICED or FORGONE
COST OBJECT
MaterialsLabour
MachinesEnergy
9
Wh
at d
o w
e m
ean
by
a co
st ?
RESOURCES
SACRIFICED or FORGONE
COST OBJECT
MaterialsLabour
MachinesEnergy
Historical costs
Budgeted costs
10
Wh
at d
o w
e m
ean
by
a co
st ?
RESOURCES
SACRIFICED or FORGONE
COST OBJECT
MaterialsLabour
MachinesEnergy
Historical costs
Budgeted costs
ProductService
DepartmentCustomer
11
Cla
ssif
icat
ion
of
cost
s Variable & Fixed costs
Direct & Indirect costs
Product & Period costs
12
COST BEHAVIOR
VARIABLECOSTS
FIXEDCOSTS
SEMI-VARIABLECOSTS
SEMI-FIXEDCOSTS
Cla
ssif
icat
ion
of
cost
s :
vari
able
& f
ixed
co
sts
13
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
Cost behavior means how a cost
will react to changes in the level of business activity.
14
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
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.
15
VARIABLE COSTSVARIABLE COSTS
BATH ROBES100 000 UNITS
USE FABRIC
USE LABELS
USE THREAD
USE PLASTIC COVERS
DIRECT LABOUR
COMMISSION
100 000 x 6m x € 1.81/m
100 000 x € 0.05/unit
100 000 x 20 x € 0.03/unit
100 000 x € 0.04/unit
100 000 x 72' = 120 000 DLH x € 15/DLH
€ 4 500 000 x 1%
€ 1 086 000
€ 5 000
€ 60 000
€ 4 000
€ 1 800 000
€ 45 000
16
VARIABLE COSTSVARIABLE COSTS
BATH TOWELS200 000 UNITS
USE FABRIC
USE LABELS
USE THREAD
USE PLASTIC COVERS
DIRECT LABOUR
COMMISSION
200 000 x 2.2m x € 0.8/m
200 000 x € 0.05/unit
200 000 x 5 x € 0.03/unit
200 000 x € 0.04/unit
200 000 x 24' = 80 000 DLH x € 15/DLH
€ 3 000 000 x 1%
€ 352 000
€ 10 000
€ 30 000
€ 8 000
€ 1 200 000
€ 30 000
17
FIXED COSTSFIXED COSTS
BATHROBES / BATH TOWELS
Labour costs 2 supervisors
Depreciation machines
Deprecation production building
Energy consumption production building
Other production expenses
€ 50 000
€ 53 750
€ 2 000
€ 64 250
€ 250 000
Administrative and sales expenses
€ 800 000
18
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.
EXAMPLE
Output bath towels in units 50 000 100 000 200 000
Total cost labels 2 500 5 000 10 000
0
2 5005 000
10 000
0 50 100 200
Activity in ‘000 units
To
tal c
os
t la
be
ls i
n €
Total variable cost
19
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.
0
0,05
0 50 100 200
Activity in ‘000 units
To
tal
cost
lab
el p
er u
nit
in
€
Variable cost per unit
EXAMPLE
Output bath towels in units 50 000 100 000 200 000
Total cost labels
Total cost labels per unit
2 500
0.05
5 000
0.05
10 000
0.05
20
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.
Total fixed cost
EXAMPLEOutput in robes & towels in units 50 000 150 000 300 000
Total labour costs supervisors 50 000 50 000 50 000
0
50 000
0 50 150 300
Activity in ‘ 000 units
To
tal
cost
su
per
viso
rs i
n €
21
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.
Fixed cost per unit
Total cost remains fixed at € 50 000.Unit cost is decreasing as output increases, because the fixed cost is
spread over more robes & towels.
0
0,17
0,33
1
0 50 150 300
Activity in ‘000 units
To
tal
cost
su
per
viso
rs i
n €
EXAMPLEOutput in robes & towels in units 50 000 150 000 300 000
Total labour costs supervisors
Total labour costs supervisors per unit
50 000
1
50 000
0.33
50 000
0.17
22
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
Semi-variable = fixed + variable.
Semi-variable cost
EXAMPLE
Output in units 100 200 300
Total costs 2 100 2 200 2 300
Activity in units
1 800
1 900
2 000
2 100
2 200
2 300
0 100 200 300
To
tal c
os
t in
€
23
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
Step cost = fixed cost increases by steps.
Step cost
A fixed cost that increases in steps.For example, rent storage space until full capacity reached, then
expand by renting second storage spaceYear 1 € 1 000;
Year 2 € 1 100 etc.
0200400600800
1 0001 2001 400
1 2 3 4 5
Step cost for five-year period, with annual increase
24
Cla
ssif
ica
tio
n o
f co
sts
: v
ari
able
& f
ixed
co
sts
Summary of Variable and Fixed Cost Behavior
Cost 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.
25
Cla
ssif
icat
ion
of
cost
s Variable & Fixed costs
Direct & Indirect costs
Product & Period costs
26
DIRECT COSTS BATH ROBES100 000 UNITS
USE FABRIC
USE LABELS
USE THREAD
USE PLASTIC COVERS
DIRECT LABOUR
COMMISSION
100 000 x 6m x € 1.81/m
100 000 x € 0.05/unit
100 000 x 20 x € 0.03/unit
100 000 x € 0.04/unit
100 000 x 72' = 120 000 DLH x € 15/DLH
€ 4 500 000 x 1%
€ 1 086 000
€ 5 000
€ 60 000
€ 4 000
€ 1 800 000
€ 45 000
DIRECT COSTSDIRECT COSTS
27
DIRECT COSTS BATH TOWELS200 000 UNITS
USE FABRIC
USE LABELS
USE THREAD
USE PLASTIC COVERS
DIRECT LABOUR
COMMISSION
200 000 x 2.2m x € 0.8/m
200 000 x € 0.05/unit
200 000 x 5 x € 0.03/unit
200 000 x € 0.04/unit
200 000 x 24' = 80 000 DLH x € 15/DLH
€ 3 000 000 x 1%
€ 320 000
€ 10 000
€ 30 000
€ 8 000
€ 1 200 000
€ 30 000
DIRECT COSTSDIRECT COSTS
28
INDIRECT COSTSBATH ROBES / BATH TOWELS
Labour costs 2 supervisors
Depreciation machines
Deprecation production building
Energy consumption production building
Other production expenses
€ 50 000
€ 53 750
€ 2 000
€ 64 250
€ 250 000
Administrative and sales expenses
€ 800 000
INDIRECT COSTSINDIRECT COSTS
29
Cla
ssif
ica
tio
n o
f co
sts
: d
ire
ct &
ind
ire
ct
cos
ts Direct costs:
directly traceable to an identifiable unit, such as a product or service or
department of the business
Indirect costs:OVERHEAD
Spread over a number of identifiable units of the business, such as products or services or departments, for which
costs are to be determined30
TheProduct
Cla
ssif
icat
ion
of
cost
s :
dir
ect
& in
dir
ect
cost
sManufacturing CostsManufacturing Costs
DIRECTMATERIALS
DIRECTLABOUR
INDIRECTCOSTS
31
Direct MaterialDirect Material
Example:Steel used tomanufacture
the automobile.
Example:Steel used tomanufacture
the automobile.
Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.
Cla
ssif
icat
ion
of
cost
s :
dir
ect
& in
dir
ect
cost
s
32
Cost of salaries, wages, and fringebenefits for personnel who work
directly on manufactured products.
Direct LabourDirect Labour
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
Cla
ssif
icat
ion
of
cost
s :
dir
ect
& in
dir
ect
cost
s
33
All other manufacturing costs
Manufacturing OverheadManufacturing Overhead
Materials used to support the production process. Examples: lubricants and
cleaning supplies used in an automobile assembly plant.
IndirectLabor
IndirectMaterial
OtherCosts
Cla
ssif
icat
ion
of
cost
s :
dir
ect
& in
dir
ect
cost
s
34
All other manufacturing costs
Cost of personnel who do not work directly on
the product. Examples: maintenance workers, janitors and security
guards.
IndirectLabor
IndirectMaterial
OtherCosts
Manufacturing OverheadManufacturing OverheadC
lass
ific
atio
n o
f co
sts
: d
irec
t &
ind
irec
t co
sts
35
All other manufacturing costs
Examples: depreciation on plant and equipment,
property taxes, insurance, utilities,
overtime premium, and unavoidable idle time.
IndirectLabor
IndirectMaterial
OtherCosts
Manufacturing OverheadManufacturing OverheadC
lass
ific
atio
n o
f co
sts
: d
irec
t &
ind
irec
t co
sts
36
Classifications of Costs in Classifications of Costs in Manufacturing CompaniesManufacturing Companies
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
Cla
ssif
icat
ion
of
cost
s :
dir
ect
& in
dir
ect
cost
s
37
Cla
ssif
icat
ion
of
cost
s Variable & Fixed costs
Direct & Indirect costs
Product & Period costs
38
Product costs are costs assigned to goods that were either purchased or manufactured for resale.
Merchandiser: cost of purchase + transportationManufacturer: materials, labour, depreciation,…
Period costs are those costs, which are treated as expenses in the period in which they are incurred.
Administration costs – Selling costs – Research & Development
Cla
ssif
icat
ion
of
cost
s
39
PRODUCT COSTSPRODUCT COSTSPERIOD COSTSPERIOD COSTS
BATH ROBES BATH TOWELSDirect product costs:- Direct materials
. fabric
. labels
. thread
. plastic covers
- Direct labour costs
Direct period costs:- commission
1 086 000
5 000
60 000
4 000
1 800 000
45 000
352 000
10 000
30 000
8 000
1 200 000
30 000
TOTAL DIRECT COSTS 3 000 000 1 630 000
40
INDIRECT PRODUCT COSTSLabour costs 2 supervisors
Depreciation machines
Deprecation production building
Energy consumption production building
Other production expenses
50 000
53 750
2 000
64 250
250 000
TOTAL 420 000
PRODUCT COSTSPRODUCT COSTSPERIOD COSTSPERIOD COSTS
INDIRECT PERIOD COSTSAdministration & selling expenses 800 000
TOTAL 800 00041
42
CHAPTER 17
Classification of costs
Page 479Page 480
RECOMMENDED EXERCISES
B 17.6B 17.5
EXTRA EXERCISEEXTRA EXERCISE
Consider the following items:
A. Tomatoes used in the manufacture of Hunts ketchupB. Administrative salaries of executives employed by Jet Blue AirlinesC. Wages of assembly-line workers at a Ford plantD. Marketing expenditures of the Atlanta Braves baseball clubE. Commissions paid to Coca-Cola's salespeopleF. Straight-line depreciation on manufacturing equipment owned by Dell ComputerG. Shipping charges incurred by Office Depot on out-going ordersH. Speakers used in Sony home-theater systemsI. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant
Required:
Complete the table that follows and classify each of the costs listed as (1) a product or period cost and (2) a variable or fixed cost by placing an "X" in the appropriate column.
43
EXTRA EXERCISEEXTRA EXERCISE
44
Product Period Variable Fixed
A
B
C
D
E
F
G
H
I
Recommended