Post on 27-Dec-2015
McGraw-Hill/Irwin
2-2-11
Basic Cost Management Concepts and Accounting for Mass Customization Operations
2Chapter Two
McGraw-Hill/Irwin
2-2-22
Process of Management
DecisionMaking
Directing
ControlPlanning
Managers need cost information toperform each of these functions.
McGraw-Hill/Irwin
2-2-33
What Do We Mean By a Cost?
A Costis the measure ofresources givenup to achieve a
particular purpose.
McGraw-Hill/Irwin
2-2-44
Manufacturing Costs
TheProduct
DirectLabor
DirectMaterial
Manufacturing Overhead
McGraw-Hill/Irwin
2-2-55
Direct 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.
McGraw-Hill/Irwin
2-2-66
Cost of salaries, wages, and fringebenefits for personnel who work
directly on manufactured products.
Direct Labor
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
McGraw-Hill/Irwin
2-2-77
All other manufacturing costsAll other manufacturing costs
Manufacturing Overhead
Materials used to support the production process. Examples: lubricants and
cleaning supplies used in an automobile assembly plant.
IndirectLabor
IndirectMaterial
OtherCosts
McGraw-Hill/Irwin
2-2-88
All other manufacturing costsAll other manufacturing costs
Manufacturing Overhead
Cost of personnel who do not work directly on
the product. Examples: maintenance workers, janitors and security
guards.
IndirectLabor
IndirectMaterial
OtherCosts
McGraw-Hill/Irwin
2-2-99
All other manufacturing costsAll other manufacturing costs
Manufacturing Overhead
Examples: depreciation on plant and equipment,
property taxes, insurance, utilities,
overtime premium, and unavoidable idle time.
IndirectLabor
IndirectMaterial
OtherCosts
McGraw-Hill/Irwin
2-2-1010
Classifications of Costs in Manufacturing Companies
PrimeCost
ConversionCost
Manufacturing costs are oftenManufacturing costs are oftencombined as follows:combined as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
McGraw-Hill/Irwin
2-2-1111
MerchandiserMerchandiser Current AssetsCurrent Assets
CashCash ReceivablesReceivables Prepaid ExpensesPrepaid Expenses MerchandiseMerchandise Inventory Inventory
ManufacturerManufacturer Current AssetsCurrent Assets
CashCash ReceivablesReceivables Prepaid ExpensesPrepaid Expenses InventoriesInventories
Raw MaterialsRaw Materials
Work in ProcessWork in Process
Finished GoodsFinished Goods
Cost Classifications on Financial Statements – Balance Sheet
McGraw-Hill/Irwin
2-2-1212
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
MerchandiserMerchandiser Current AssetsCurrent Assets
CashCash ReceivablesReceivables Prepaid ExpensesPrepaid Expenses MerchandiseMerchandise Inventory Inventory
Cost Classifications on Financial Statements – Balance Sheet
Those materials waiting to be processed.
McGraw-Hill/Irwin
2-2-1313
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Cost Classifications on Financial Statements – Balance Sheet
Partially complete products – material to
which some labor and/or overhead has
been added.
Merchandiser Current Assets
Cash Receivables Prepaid Expenses Merchandise Inventory
McGraw-Hill/Irwin
2-2-1414
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Cost Classifications on Financial Statements – Balance Sheet
MerchandiserMerchandiser Current AssetsCurrent Assets
CashCash ReceivablesReceivables Prepaid ExpensesPrepaid Expenses MerchandiseMerchandise Inventory Inventory
Completed products awaiting sale.
McGraw-Hill/Irwin
2-2-1515
Manufacturing Cost Flows
ManufacturingOverhead
Material Purchases
Direct Labor
Balance Sheet Costs Inventories
FinishedGoods
Cost of GoodsSold
Income StatementExpenses
Selling andAdministrative
Selling andAdministrative
Period Expenses
Work in Process
Raw Material
McGraw-Hill/Irwin
2-2-1616
Manufacturing Cost Flows
Selling andAdministrative
Selling andAdministrative
Period Expenses
ManufacturingOverhead
Raw Material
Work in Process
FinishedGoods
Cost of GoodsSold
Material Purchases
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material, labor andmanufacturingoverhead costs
remain in inventoryuntil the product is
sold, so they aresometimes called
inventoriable costs.
McGraw-Hill/Irwin
2-2-1717
Manufacturing Cost Flows
Selling andAdministrative
Selling andAdministrative
Period ExpensesPeriod expenses are not associated with manufacturing the product and are expensed in the period incurred.
ManufacturingOverhead
Raw Material
Work in Process
FinishedGoods
Cost of GoodsSold
Material Purchases
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
McGraw-Hill/Irwin
2-2-1818
Manufacturing Cost Flows
ManufacturingOverhead
Raw Material
Work in Process
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Material Purchases
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Selling andAdministrative
Period Expenses
McGraw-Hill/Irwin
2-2-1919
Types of Production ProcessesType of Production Description of Example of
Process Process Manufacturer
Job Shop Low volume DisneyLittle standardization
Unique products
Batch Multiple products CaterpillarLow volume
Assembly Line A few major products FordHigher volume
Mass Customization High volume DellMany standardized components
Customized combination of components
Continuous Flow High volume ExxonHighly standardized commodity products
McGraw-Hill/Irwin
2-2-2020
Schedule of Cost of Goods Manufactured
Let’s look at aSchedule of Cost of
Goods Manufactured forComet Computer Corporation.
McGraw-Hill/Irwin
2-2-2121
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods Manufactured
McGraw-Hill/Irwin
2-2-2222
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods Manufactured
Computation of Cost of Raw Material Used
Raw-material inventory, January 1 6,000$
Add: Purchases of raw materials 134,000
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used 134,980$
McGraw-Hill/Irwin
2-2-2323
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods Manufactured
Include all direct labor costs incurred during the
current period.
McGraw-Hill/Irwin
2-2-2424
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods ManufacturedComputation of Total Manufacturing Overhead
Indirect material 10,000$
Indirect labor 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Utilities 15,000
Insurance 5,000
Total manufacturing overhead 230,000$
McGraw-Hill/Irwin
2-2-2525
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods Manufactured
Beginning work-in-process inventory is carried over from the
prior period.
McGraw-Hill/Irwin
2-2-2626
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used 134,980$
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs 414,980$
Add: Work-in-process inventory, January 1 120
Subtotal 415,100$
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured 415,000$
Schedule of Cost of Goods Manufactured
Ending work-in-process inventory contains the cost of unfinished
goods, and is reported in the current assets section of the balance sheet.
McGraw-Hill/Irwin
2-2-2727
Now let’s look at an income statement for Comet Computer
Corporation.
Income Statement for a Manufacturer
McGraw-Hill/Irwin
2-2-2828
Income Statement for a Manufacturer
Comet Computer Corporation
Income Statement
For the Year Ended December 31, 20X2
Sales revenue 700,000$
Less: Cost of goods sold 415,010
Gross margin 284,990$
Selling and administrative expenses 174,490
Income before taxes 110,500$
Income tax expense 30,000
Net income 80,500$
McGraw-Hill/Irwin
2-2-2929
Comet Computer Corporation
Income Statement
For the Year Ended December 31, 20X2
Sales revenue 700,000$
Less: Cost of goods sold 415,010
Gross margin 284,990$
Selling and administrative expenses 174,490
Income before taxes 110,500$
Income tax expense 30,000
Net income 80,500$
Income Statement for a ManufacturerComet Computer Corporation
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1 200$
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Deduct Finished-goods inventory, Dec. 31 190
Cost of goods sold 415,010$
McGraw-Hill/Irwin
2-2-3030
Cost Classifications
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.
McGraw-Hill/Irwin
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Cost Classifications
Cost behavior means Cost behavior means how a cost will react to how a cost will react to changes in the level of changes in the level of business activity.business activity. Total Total variable costs variable costs
change when activity change when activity changes.changes.
TotalTotal fixed costs fixed costs remain remain unchanged when unchanged when activity changes.activity changes.
Activities thatcause costs to be
incurred are calledcost drivers.
McGraw-Hill/Irwin
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Identifying Cost Drivers
Cost Driver Examples
Activity Cost Driver
Machining operations Machine hoursSetup Setup hoursProduction scheduling Manufacturing ordersInspection Pieces inspectedPurchasing Purchase ordersShop order handling Shop ordersValve assembly support Customer requisitions
McGraw-Hill/Irwin
2-2-3333
Total Variable Cost Example
Your total long distance telephone bill is Your total long distance telephone bill is based on how many minutes you talk.based on how many minutes you talk.
Minutes Talked
Tot
al L
ong
Dis
tanc
eT
elep
hone
Bill
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Variable Cost Per Unit Example
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
The cost per long distance minute talked is The cost per long distance minute talked is constant. For example, 5 cents per minute.constant. For example, 5 cents per minute.
McGraw-Hill/Irwin
2-2-3535
Total Fixed Cost Example
Your monthly basic telephone bill probably Your monthly basic telephone bill probably does not change when you make more local does not change when you make more local
calls. calls.
Number of Local Calls
Mon
thly
Bas
ic
Tel
epho
ne B
ill
McGraw-Hill/Irwin
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Fixed Cost Per Unit Example
Number of Local Calls
Mon
thly
Bas
ic T
elep
hone
B
ill p
er L
ocal
Cal
l
The average cost per local call decreases as The average cost per local call decreases as more local calls are made.more local calls are made.
McGraw-Hill/Irwin
2-2-3737
Cost Classifications
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.
McGraw-Hill/Irwin
2-2-3838
Cost Behavior Question
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
McGraw-Hill/Irwin
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Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Cost Behavior Question
McGraw-Hill/Irwin
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Cost Behavior Question
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
McGraw-Hill/Irwin
2-2-4141
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Cost Behavior Question
McGraw-Hill/Irwin
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Direct and Indirect Costs
Direct costsDirect costs Costs that can beCosts that can be
easily and conveniently easily and conveniently traced to a product or traced to a product or department.department.
Example: Example: cost of paint cost of paint in the paint department in the paint department of an automobile of an automobile assembly plant.assembly plant.
Indirect costsIndirect costs Costs that must be Costs that must be
allocated in order to be allocated in order to be assigned to a product or assigned to a product or department. department.
Example: Example: cost of cost of national advertising for national advertising for an airline is indirect to a an airline is indirect to a particular flight.particular flight.
McGraw-Hill/Irwin
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A cost can be direct to the department, but indirect to units of product produced in the department. Example: department manager’s salary.
Tracing costs directly to departments or products facilitates responsibility accounting.
Direct and Indirect Costs
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A cost that can be significantly influencedA cost that can be significantly influencedby a manager is a controllable cost.by a manager is a controllable cost.
Controllable andUncontrollable Costs
Cost item Manager Classificaton
Cost of food used Restaurant Controllablein a restaurant manager
Cost of national Restaurant Uncontrollableadvertising by a managerrestaurant chain
McGraw-Hill/Irwin
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Opportunity Cost
The potential benefit that is The potential benefit that is given up when one given up when one alternative is selected over alternative is selected over another.another. Example: Example: If you wereIf you were
not attending college,not attending college,you could be earningyou could be earning$20,000 per year. $20,000 per year. Your opportunity costYour opportunity costof attending college for one of attending college for one year is $20,000.year is $20,000.
McGraw-Hill/Irwin
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Sunk Costs
All costs incurred in the past that cannot be changed All costs incurred in the past that cannot be changed by any decision made now or in the future.by any decision made now or in the future.
Sunk costs should not be considered in decisions. Sunk costs should not be considered in decisions.
Example: Example: You bought an automobile that cost You bought an automobile that cost $12,000 two years ago. The $12,000 cost is $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.it, or sell it, you cannot change the $12,000 cost.
McGraw-Hill/Irwin
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Differential Costs
Costs that differ between alternatives. Costs that differ between alternatives.
Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in yourhometown and $300 per month to the city.
What is your differential cost?
McGraw-Hill/Irwin
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Differential Costs
Costs that differ between alternatives. Costs that differ between alternatives.
Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in yourhometown and $300 per month to the city.
What is your differential cost? $300 - $50 = $250
McGraw-Hill/Irwin
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Marginal Costs and Average Costs
The extra costincurred to produceone additional unit.
The total cost toproduce a quantity
divided by thequantity produced.
Marginal and average costs arelargely a function of cost behavior
-- variable and fixed costs.
McGraw-Hill/Irwin
2-2-5050
Costs and Benefits of Information
Costs Benefits
More information does not mean more benefits if information overload results.