Lecture 3. Mgt Acc .Fall

7/30/2019 Lecture 3. Mgt Acc .Fall

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Costs Terms, Concepts andClassifications

Chapter Two


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Learning Objective

Identify and give examplesof each of the three basicmanufacturing cost

categories.


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Classification of COST

ManufacturingCost

Non

ManufacturingCost

1. Direct Labor2. Direct Material

3. Mfg. OH

SellingAdministrative


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Cost Classification according to Purpose

Financial Statement Product CostPeriod Cost

Predicting Cost BehaviorVariable Cost

Fixed Cost

Assigning Cost tocost object

Direct Cost

Indirect Cost

Making Decision Sunk Cost

Opportunity Cost

Differential Cost


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The Product

DirectMaterials DirectLabor ManufacturingOverhead

Manufacturing Costs


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Direct Materials

Raw materials that become an integral part of theproduct and that can be conveniently traced

directly to it.

Example: Engine installed in an automobile


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Direct Labor

Those labor costs that can be easily traced toindividual units of product.

Example: Wages paid to automobile assembly workers


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Manufacturing costs that cannot be traced directlyto specific units produced.

Manufacturing Overhead

Examples: Indirect labor and indirect materials

Wages paid to employeeswho are not directly

involved in productionwork.

Examples: maintenanceworkers, janitors and

security guards.

Materials used to supportthe production process.

Examples: lubricants andcleaning supplies used in theautomobile assembly plant.


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Classifications of Costs

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:


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2-10 Comparing Merchandising andManufacturing Activities

Merchandisers . . . Buy finished goods.

Sell finished goods.

Manufacturers . . . Buy raw materials.

Produce and sellfinished goods.

MegaLoMart


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Balance Sheet

Merchandiser

Current assets

Cash

Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assets

Cash

ReceivablesPrepaid Expenses

Inventories

Raw Materials

Work in Process

Finished Goods


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Merchandiser

Current assets

Cash

Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assets

Cash

ReceivablesPrepaid Expenses

Inventories

Raw Materials

Work in Process

Finished Goods

Balance Sheet

Partially completeproducts some

material, labor, oroverhead has been

added.

Completed productsawaiting sale.

Materials waiting tobe processed.

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Non-manufacturing Costs

SellingCosts

Costs necessary to get

the order and deliverthe product.

AdministrativeCosts

All executive,

organizational, andclerical costs.

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Learning Objective

Distinguish betweenproduct costs and periodcosts and give examples

of each.

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Product Costs Versus Period Costs

Product costs includedirect materials, direct

labor, and

manufacturingoverhead.

Period costs include allselling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

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2-16

Quick Check

Which of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany?

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.

E. Sales commissions.

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2-17

Quick Check

Which of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany?

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.

E. Sales commissions.

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2-18

Learning Objective

Understand the

differences betweenvariable costs and fixed

costs.

2 19 C t Cl ifi ti f P di ti C t


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2-19 Cost Classifications for Predicting CostBehavior

How a cost will react tochanges in the level of

activity within the

relevant range. Total variable costs

change when activitychanges.

Total fixed costsremainunchanged when activitychanges.

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Variable Cost

Yourtotal long distance telephone bill is basedon how many minutes you talk.

Minutes Talked

TotalL

ongDistance

TelephoneBill

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Variable Cost Per Unit

Minutes Talked

Pe

rMinute

Teleph

oneCharge

The cost per long distance minute talked isconstant. For example, 10 cents per minute.

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Fixed Cost

Your monthly basic telephone bill probablydoes not change when you make more local

calls.

Number of Local Calls

Mon

thlyBasic

Tele

phoneBill

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Fixed Cost Per Unit

Number of Local Calls

MonthlyBasicTelephone

Billp

erLocalCall

The average fixed cost per local call decreasesas more local calls are made.

2-24 Cost Classifications for Predicting Cost


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2 24 Cost Classifications for Predicting CostBehavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains

as activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goes

the same even when the down as activity level goes up.

activity level changes.

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Learning Objective

Understand thedifferences between directand indirect costs.

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Assigning Costs to Cost Objects

Direct costs

Costs that can beeasily and convenientlytraced to a unit of

product or other costobject.

Examples: directmaterial and direct labor

Indirect costs

Costs that cannot beeasily and convenientlytraced to a unit of

product or other costobject.

Example: manufacturingoverhead

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Learning Objective

Define and give examplesof cost classifications used

in making decisions:differential costs,

opportunity costs, and

sunk costs.

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Differential Cost and Revenue

Costs and revenues that differ amongalternatives.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.

Differential revenue is:$2,000 $1,500 = $500

Differential cost is:

$300

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Opportunity Cost

The potential benefitthat is given up when

one alternative isselected over another.

Example: If you werenot attending college,you could be earning

$15,000 per year.Your opportunity costof attending college forone year is $15,000.

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Sunk Costs

Sunk costs have already been incurred andcannot be changed now or in the future.

They should be ignored when makingdecisions.

Example: i) Cost of getting license of a business.

iii) Suppose you bought a technology by $ 20,000which is obsolete now.

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Quick Check

Suppose you are trying to decide whether to driveor take the train to Portland to attend a concert. Youhave ample cash to do either, but you dont want to

waste money needlessly. Is the cost of the trainticket relevant in this decision? In other words,should the cost of the train ticket affect the decisionof whether you drive or take the train to Portland?

A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

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Quick Check


waste money needlessly. Is the cost of the trainticket relevant in this decision? In other words,should the cost of the train ticket affect the decisionof whether you drive or take the train to Portland?

A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

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Quick Check


waste money needlessly. Is the annual cost oflicensing your car relevant in this decision?

A. Yes, the licensing cost is relevant.

B. No, the licensing cost is not relevant.

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Quick Check


waste money needlessly. Is the annual cost oflicensing your car relevant in this decision?

A. Yes, the licensing cost is relevant.

B. No, the licensing cost is not relevant.


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Further Classification of LaborCosts

Appendix 2A


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Idle Time

The labor costs incurredduring idle time are ordinarily

treated as manufacturing

overhead.

MachineBreakdowns

MaterialShortages

PowerFailures

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Overtime

The overtime premiums for all factoryworkers are usually considered to be part

of manufacturing overhead.

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L b F i B fi


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Labor Fringe Benefits

Fringe benefits include employer paidcosts for insurance programs, retirement

plans, supplemental unemployment

programs, Social Security, Medicare,workers compensation andunemployment taxes.

Some companiesinclude all of these

costs inmanufacturing

overhead.

Other companies treatfringe benefit

expenses of directlaborers as additional

direct labor costs.

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THANK YOU ALL

Documents

Lecture 3. Mgt Acc .Fall