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GENERAL INFORMATION GENERAL INFORMATION G. WALRAEVENS : [email protected] – 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

PPT CHAPTER 17 (2014-2015)-2.ppt

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Page 1: PPT CHAPTER 17 (2014-2015)-2.ppt

GENERAL INFORMATIONGENERAL INFORMATION

• G. WALRAEVENS : [email protected] – 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

Page 2: PPT CHAPTER 17 (2014-2015)-2.ppt

CHAPTER 17

Classification of costs

2

Page 3: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 4: PPT CHAPTER 17 (2014-2015)-2.ppt

The following case is not included in the manual

The following case is not included in the manual

4

CHAPTER 17

Classification of costs

Page 5: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 6: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 7: PPT CHAPTER 17 (2014-2015)-2.ppt

A costis the measure ofresources givenup to achieve a

particular purpose.

Wh

at d

o w

e m

ean

by

a co

st ?

7

Page 8: PPT CHAPTER 17 (2014-2015)-2.ppt

Wh

at d

o w

e m

ean

by

a co

st ?

RESOURCES

SACRIFICED or FORGONE

COST OBJECT

8

Page 9: PPT CHAPTER 17 (2014-2015)-2.ppt

Wh

at d

o w

e m

ean

by

a co

st ?

RESOURCES

SACRIFICED or FORGONE

COST OBJECT

MaterialsLabour

MachinesEnergy

9

Page 10: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 11: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 12: PPT CHAPTER 17 (2014-2015)-2.ppt

Cla

ssif

icat

ion

of

cost

s Variable & Fixed costs

Direct & Indirect costs

Product & Period costs

12

Page 13: PPT CHAPTER 17 (2014-2015)-2.ppt

COST BEHAVIOR

VARIABLECOSTS

FIXEDCOSTS

SEMI-VARIABLECOSTS

SEMI-FIXEDCOSTS

Cla

ssif

icat

ion

of

cost

s :

vari

able

& f

ixed

co

sts

13

Page 14: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 15: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 16: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 17: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 18: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 19: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 20: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 21: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 22: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 23: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 24: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 25: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 26: PPT CHAPTER 17 (2014-2015)-2.ppt

Cla

ssif

icat

ion

of

cost

s Variable & Fixed costs

Direct & Indirect costs

Product & Period costs

26

Page 27: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 28: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 29: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 30: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 31: PPT CHAPTER 17 (2014-2015)-2.ppt

TheProduct

Cla

ssif

icat

ion

of

cost

s :

dir

ect

& in

dir

ect

cost

sManufacturing CostsManufacturing Costs

DIRECTMATERIALS

DIRECTLABOUR

INDIRECTCOSTS

31

Page 32: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 33: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 34: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 35: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 36: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 37: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 38: PPT CHAPTER 17 (2014-2015)-2.ppt

Cla

ssif

icat

ion

of

cost

s Variable & Fixed costs

Direct & Indirect costs

Product & Period costs

38

Page 39: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 40: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 41: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 42: PPT CHAPTER 17 (2014-2015)-2.ppt

42

CHAPTER 17

Classification of costs

Page 479Page 480

RECOMMENDED EXERCISES

B 17.6B 17.5

Page 43: PPT CHAPTER 17 (2014-2015)-2.ppt

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

Page 44: PPT CHAPTER 17 (2014-2015)-2.ppt

EXTRA EXERCISEEXTRA EXERCISE

44

Product Period Variable Fixed

A

B

C

D

E

F

G

H

I