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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. - PowerPoint PPT Presentation
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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.