An Introduction to Cost Accounting

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An IntroductionAn Introduction

TTooCost AccountingCost Accounting


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C o s to st s a resource sacrificed or forgone tos a resource sacrificed or forgone toachievechieve .specific objective.specific objectivenn c tu a l co stc tu al c o s t (s the cost incurred a(s the cost incurred a)istorical cost)istorical costs distinguished from budgeted costss distinguished from budgeted costs

o st ob j ec to s t ob j e c t s anything for which as anything for which aseparateeparate .easurement of costs is desired.easurement of costs is desired

ost and Costost and CostTerminologyerminology


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istinguish betweenistinguish betweenirect costsirect costs .nd indirect costs.nd indirect costs


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irectCosts:xample Paper onwhich p or t s Il lu s t r a t e dmagazines printed ndirectCosts:xample Lease costfor -ime Warnerbuildingousing the senior

editorsf its magazine

OSTOBJECT:xampleS p o r t s l l u s t r a t e dmagazine

OSTOBJECT:xampleS p o r t s l l u s t r a t e dmagazine

irect and Indirectirect and IndirectCostsosts


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irect and Indirect Costsirect and Indirect CostsExamplexample:irect Costs:irect Costsaintenance Departmentaintenance Department ,40 00040 000ersonnel Departmentersonnel Department ,20 60020 600ssembly Departmentssembly Department ,75 00075 000inishing Departmentinishing Department ,55 00055 000

ssume that Maintenance Department costs aressume that Maintenance Department costs arellocated equally among the productionllocated equally among the production.epartments.epartmentsow much is allocated to each department?ow much is allocated to each department?


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Direct and Indirect CostsDirect and Indirect CostsExampleExample

Maintenanceaintenance,40 00040 000

AssemblyssemblyirectirectCostsosts,75 00075 000FinishinginishingirectirectCostsosts,55 00055 000

Allocatedllocated,20 00020 000 ,20 00020 000


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xplain variablexplain variablecostsosts .nd fixed costs.nd fixed costs


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ost Behavior Patternsost Behavior PatternsExamplexampleicycles by the Sea buys aicycles by the Sea buys ahandlebarandlebar .t $52 for each of its bicycles.t $52 for each of its bicycles

hat is the total handlebar costhat is the total handlebar costwhenhen,000 bicycles are assembled?000 bicycles are assembled?


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ost Behavior Patternsost Behavior PatternsExamplexample, = ,000 units $52 $52 000 = ,000 units $52 $52 000hat is the total handlebar costhat is the total handlebar cost,hen 3 500 bicycles are,hen 3 500 bicycles are

assembled?ssembled?, = ,500 units $52 $182 000 = ,500 units $52 $182 000


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ost Behavior Patternsost Behavior PatternsExamplexample,icycles by the Sea incurred $94 500 in,icycles by the Sea incurred $94 500 ingiven year for the leasing of itsgiven year for the leasing of its.lant.lant

his is an example of fixed costs withhis is an example of fixed costs withespect to the number of bicyclesespect to the number of bicycles.ssembled.ssembled


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ost Behavior Patternsost Behavior PatternsExamplexample( )hat is the leasing fixed cost per( )hat is the leasing fixed cost perbicycleicycle ,hen Bicycles assembles 1 000 bicycles?,hen Bicycles assembles 1 000 bicycles?

, , = .94 500 1 000 $94 50 , = .94 500 1 000 $94 50( )hat is the leasing fixed cost per( )hat is the leasing fixed cost perbicycleicycle ,hen Bicycles assembles 3 500 bicycles?,hen Bicycles assembles 3 500 bicycles?

, , =94 500 3 500 $27 , =94 500 3 500 $27


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ost Driversost Drivershe cost driver of variable costs is thehe cost driver of variable costs is thelevelevelf activity or volume whose change causesf activity or volume whose change causes( )he variable costs to change( )he variable costs to change.roportionately.roportionatelyhe number of bicycles assembled is ahe number of bicycles assembled is a.ost driver of the cost of handlebars.ost driver of the cost of handlebars


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elationships of Types ofelationships of Types ofCostsosts

Variableariable

Directirect

Indirectndirect

Fixedixed


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nterpret unit costsnterpret unit costscautiouslyautiously.


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se Unit Costsse Unit CostsCautiouslyautiouslyssume that Bicycles management uses assume that Bicycles management uses a. (nit cost of $146 50 leasing and. (nit cost of $146 50 leasing and).heels).heelsanagement is budgeting costs foranagement is budgeting costs for.ifferent levels of production.ifferent levels of production

hat is their budgeted cost for anhat is their budgeted cost for anstimated production of 600 bicycles?stimated production of 600 bicycles? . = ,00 $146 50 $87 900 . = ,00 $146 50 $87 900


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se Unit Costsse Unit CostsCautiouslyautiouslyhat is their budgeted cost for anhat is their budgeted cost for anestimatedstimated,roduction of 3 500 bicycles?,roduction of 3 500 bicycles?, . = ,500 $146 50 $512 750 . = ,500 $146 50 $512 750

hat should the budgeted cost be for anhat should the budgeted cost be for anstimated production of 600 bicycles?stimated production of 600 bicycles?


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se Unit Costsse Unit CostsCautiouslyautiouslyhat should the budgeted cost be for anhat should the budgeted cost be for an,stimated production of 3 500 bicycles?,stimated production of 3 500 bicycles?otal fixed costotal fixed cost

,4 5004 500 ( , )otal variable cost 52 3 500( , )otal variable cost 52 3 500 ,82 00082 000Totalotal ,276 500276 500, , = .276 500 3 500 $79 00 , = .276 500 3 500 $79 00


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istinguish amongistinguish among ,anufacturing companies,anufacturing companies ,erchandising companies,erchandising companiesandnd- .ervice sector companies.ervice sector companies


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a nu fa ct ur in g c om pa ni esa nu fa ct ur in g c om pa ni esurchase materials andurchase materials andomponents andomponents andonvert them into finishedonvert them into finished.oods.oods

a nu fa ct ur in g c om pa ni esa nu fa ct ur in g c om pa ni esurchase materials andurchase materials andomponents andomponents andonvert them into finishedonvert them into finished.oods.oods ,manufacturing company must also develop,manufacturing company must also develop, , .esign market and distribute its products, .esign market and distribute its products,manufacturing company must also develop,manufacturing company must also develop, , .esign market and distribute its products, .esign market and distribute its products

Manufacturinganufacturing


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Merchandisingerchandisinge rc ha nd is in g c om pa ni ese rc ha nd is in g c om pa ni esurchase and then sell tangibleurchase and then sell tangibleproductsroductsithout changing their basicithout changing their basic.orm.orm

e rc ha nd is in g c om pa ni ese rc ha nd is in g c om pa ni esurchase and then sell tangibleurchase and then sell tangibleproductsroductsithout changing their basicithout changing their basic.orm.orm


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Merchandisingerchandisinge r v i c e c o m pa ni ese r v i c e co mpa ni esrovide services or intangiblerovide services or intangible.roducts to their customers.roducts to their customerse r v i c e co mp an i e se r vi ce c o m p a n i e srovide services or intangiblerovide services or intangible.roducts to their customers.roducts to their customers

.abor is the most significant cost category.abor is the most significant cost category .abor is the most significant cost category.abor is the most significant cost category


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ifferentiate betweenifferentiate betweennventor able costsnventor able costsnd period costsnd period costs .


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-anufacturing sector companiesanufacturing sector companiesypically have one or more of theypically have one or more of theollowing three types ofollowing three types of:nventories:nventories

ypes of Inventoryypes of Inventory

. Direct materials inventoryDirect materials inventory

. (Work in process inventory work(Work in process inventory work)n progress)n progress

. Finished goods inventoryFinished goods inventory


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ypes of Inventoryypes of Inventory-erchandising sector companies holderchandising sector companies holdnly one type of inventory thenly one type of inventory theroduct in its original purchasedroduct in its original purchased.orm.orm

-ervice sector companies do notervice sector companies do not .old inventories of tangible products.old inventories of tangible products


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lassification oflassification ofanufacturing Costsanufacturing Costsirect materials costsirect materials costsirect manufacturingirect manufacturingabor costsabor costsndirect manufacturingndirect manufacturingcostsosts


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escribe the threeescribe the threeategories ofategories ofnventories commonlynventories commonlyfoundound

n manufacturingn manufacturingcompaniesompanies .


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eriod Costseriod Costseriod costs are all costs in the incomeeriod costs are all costs in the income.tatement other than cost of goods sold.tatement other than cost of goods solderiod costs are recorded as expenses oferiod costs are recorded as expenses oftheheccounting period in which they areccounting period in which they are.ncurred.ncurred


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low of Costs Examplelow of Costs Example,icycles by the Sea had $50 000 of direct,icycles by the Sea had $50 000 of directaterials inventory at the beginning of theaterials inventory at the beginning of the.eriod.eriod

urchases during the period amounted tourchases during the period amounted to, ,180 000 and ending inventory was $30 000,180 000 and ending inventory was $30 000 .ow much direct materials were used?ow much direct materials were used?

, + , , = ,50 000 $180 000 $30 000 $200 000+ , , = ,50 000 $180 000 $30 000 $200 000


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low of Costs Examplelow of Costs Example, .irect labor costs incurred were $105 500, .irect labor costs incurred were $105 500, .ndirect manufacturing costs were $194 500, .ndirect manufacturing costs were $194 500

hat are the total manufacturing costshat are the total manufacturing costsincurred?ncurred?irect materials usedirect materials used ,200 000200 000irect laborirect labor ,05 50005 500ndirect manufacturing costsndirect manufacturing costs ,94 50094 500otal manufacturing costsotal manufacturing costs ,500 000500 000


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low of Costs Examplelow of Costs Examplessume that the work in processssume that the work in processinventorynventoryt the beginning of the period wast the beginning of the period was, ,30 000,30 000, .nd $35 000 at the end of the period, .nd $35 000 at the end of the period

hat is the cost of goods manufactured?hat is the cost of goods manufactured?eginning work in processeginning work in process ,30 000,30 000otal manufacturing costsotal manufacturing costs ,00 000,00 000nding work in processnding work in process ,5 000,5 000ost of goods manufacturedost of goods manufactured ,495 000495 000


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low of Costs Examplelow of Costs Examplessume that the finished goodsssume that the finished goods

inventorynventoryt the beginning of the period wast the beginning of the period was, ,10 000,10 000, .nd $15 000 at the end of the period, .nd $15 000 at the end of the periodhat is the cost of goods sold?hat is the cost of goods sold?eginning finished goodseginning finished goods ,10 000,10 000ost of goods manufacturedost of goods manufactured ,95 00095 000nding finished goodsnding finished goods ,5 000,5 000

ost of goods soldost of goods sold ,490 000490 000


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low of Costs Examplelow of Costs Example ork in Processork in Process.eg Balanceeg Balance ,0 000,0 000 ,95 00095 000.irect mtls used.irect mtls used ,00 00000 000irect laborirect labor ,05 50005 500.ndirect mfg costs.ndirect mfg costs ,94 50094 500nding Balancending Balance ,5 000,5 000


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low of Costs Examplelow of Costs Example

ork in Processork in Process,95 00095 000

inished Goodsinished Goods ,0 0000 000 ,90 000,90 000,95 00095 000,5 0005 000

ost of Goodsost of GoodsSoldold,90 00090 000


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anufacturing Companyanufacturing CompanyALANCE SHEETALANCE SHEET NCOME STATEMENTNCOME STATEMENT

InventoriablenventoriableCostsosts RevenuesevenuesMaterialsaterialsInventorynventory

FinishedinishedGoodsoodsInventorynventory ost ofost ofoods Soldoods Soldork inork inProcessrocessInventorynventory PerioderiodCostsosts

whenhensalesalesoccurccurquals Gross Marginquals Gross Margindeducteduct

quals Operating Incomquals Operating Incom


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erchandising Companyerchandising Company

MerchandiserchandisePurchasesurchases Inventorynventory ost ofost ofoods Soldoods Sold

Revenuesevenues

PerioderiodCostsosts

ALANCE SHEETALANCE SHEET NCOME STATEMENTNCOME STATEMENT

whenhensalesalesoccurccurquals Gross Marginquals Gross Margindeducteduct

quals Operating Incomquals Operating Incom

InventoriablenventoriableCostsosts


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rime Costsrime CostsDirectirectMateriaaterialss

DirectirectLaborabor

PrimerimeCostsosts+ =


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rime Costsrime Costshat are the prime costs for Bicycles by thehat are the prime costs for Bicycles by theSea?ea?irect materials usedirect materials used ,200 000200 000+ irect labor irect labor ,05 500,05 500

= ,305 000305 000


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onversion Costsonversion CostsDirectirectLaborabor + ManufacturianufacturinggOverheadverhead = ConversioonversionCostsosts

I n d i r en d i r ecttL a b o ra b o r

I n d i r en d i r ec ttM a t e r ia t e r ia l sl s

O t h e rt h e r


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onversion Costsonversion Costshat are the conversion costs forhat are the conversion costs foricycles by the Sea?icycles by the Sea?

irect laborirect labor,105 500105 500+ ndirect manufacturing costs ndirect manufacturing costs ,94 500,94 500= ,300 000300 000


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easuring Costseasuring Costsequires Judgmentequires Judgment-anufacturing labor cost classifications-anufacturing labor cost classifications.ary among companies.ary among companies

he following distinctions are generallyhe following distinctions are generally:ound:oundirect manufacturing laborirect manufacturing laboranufacturing overheadanufacturing overhead


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easuring Costseasuring Costsequires Judgmentequires Judgmentanufacturing overheadanufacturing overhead

ndirectndirectlaborabor anagersanagerssalariesalaries ayrollayrollringe costsringe costs(orklift truck operators internal(orklift truck operators internal)andling of materials)andling of materialsJanitorsanitors ework laborework laborvertime premiumvertime premium dle timedle time


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easuring Costseasuring Costsequires Judgmentequires Judgmentow much is the overtime premium?ow much is the overtime premium? % =18 50 $9 per overtime hour % =18 50 $9 per overtime hour

f this worker works 44 hours on a givenf this worker works 44 hours on a given,eek how much are his gross earnings?eek how much are his gross earnings?irect laborirect labor =4 hours $18 $792 =4 hours $18 $792vertime premiumvertime premium =hours $ 9 =hours $ 9 366 otal gross earningsotal gross earnings $828 $828


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xplain why productxplain why productosts areosts areomputed in differentomputed in differentwaysays .or different purposes.or different purposes


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any Meanings of Productany Meanings of ProductCostostproduct cost is the sum of theproduct cost is the sum of thecostsostsssigned to a product for a specificssigned to a product for a specific.urpose.urposePricing and product emphasisPricing and product emphasisdecisionsecisions. Contracting with governmentContracting with governmentagenciesgencies. Preparing financial statementsPreparing financial statementsor externalor external

eporting under generallyeporting under generallyccepted accountingccepted accounting principlesrinciples

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An Introduction to Cost Accounting