Chapter one BASIC COST CONCEPTS · BASIC COST CONCEPTS ... A cost that remains constant within a...
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Chapter one BASIC COST CONCEPTS
Transcript of Chapter one BASIC COST CONCEPTS · BASIC COST CONCEPTS ... A cost that remains constant within a...
Chapter one
BASIC COST CONCEPTS
OBJECTIVES
Define and illustrate a cost object
Distinguish between direct costs and indirect costs
Explain variable costs and fixed costs
Interpret unit costs cautiously
Distinguish inventoriable costs from period costs
After studying this lesson, you will be able to:
state the meaning of cost;
explain the elements of cost;
state the meaning of overheads;
explain the classification of cost
the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity.
Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services
COST MEANING
Element of Costs
material
labour
Expences
Elements of cost
Direct material
Direct Material is that material which can be easily identified and related with specific product, job, and process.
Material To produce or manufacture material is required
Indirect material
Indirect Material is that material which cannot be easily and conveniently identified and related with a particular product, job, process, and activity. Consumable stores, oil and waste, printing and stationery etc, are some examples of indirect material. Indirect materials are used in the factory, the office, or the selling and distribution department
Direct labour
Labor which takes active and direct part in the production of a commodity. Direct labour is that labour which can be easily identified and related with specific product, job, process, and activity. Direct labour cost is easily traceable to specific products
Labour
Indirect labour
Indirect labour is that labour which can not be easily identified and related with specific product, job, process, and activity. It includes all labour not directly engaged in converting raw material into finished product. It may or may not vary directly with the volume of output
All cost incurred in the production of finished goods other than material cost and labour cost are termed as expenses
Expenses
Direct expenses
These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All direct cost other than direct material and direct labour are termed as direct expenses.
OVERHEADS
The term overhead has a wider meaning than the term indirect expenses. Overheads include the cost of indirect material, indirect labour and indirect expenses. This is the aggregate sum of indirect material, indirect labour and indirect expenses
Overheads are classified into following three categories:
Factory/works/ production overheads
Office and administrative overheads
Selling and distribution overheads
Complete the equation
Overhead = Indirect material + ..................... + .....................
INTEXT QUESTIONS
Fixed Cost
A cost that remains constant within a given period of time and range of activity in spite of fluctuations in production. Per unit fixed cost varies with the change in the volume of production
Cost behavior basis
Output
[units]
Total
fixed
cost
Fixed cost
per unit
0
100
1000
2000
5000
10000
10000
10000
10000
10000
10000
10000
10000
100
10
5
2
1
Table.1 Regarding total fixed cost and fixed cost per unit.
Variable cost
Variable costs are those cost which vary directly in proportion to change in
volume of production/output. The cost which increases or decreases in the same
proportion in which the units produced is termed as variable cost
Output [units] Total
variable
cost
variable
cost per
unit
0
100
1000
2000
5000
10000
0
1000
10000
20000
50000
100000
0
10
10
10
10
10
Table.2 : Regarding total variable and variable cost per unit
Quantity Variable
cost per
unit
Total
variable
cost
Fixed
cost
Total
cost
Price
per
unit
Revenues Net profit/
losses
2000 5 …… 50000 …….. …… 40000 ……..
3000 ……… 24000 ……. 40000 ……. …….. 5000
……. 10 50000 ……… 90000 …… 150000 ……….
8000 ……… 40000 ……… 70000 15 ………. ……….
10000 ………. 40000 100000 ……. 150000 ……..
The Information provided below obtained from the records of Cairo company :
Required:
Fill the space in the previous table, according to data available
Semi-variable costs is that cost of which some part remains fixed at the given level of production and other part varies with the change in the volume of production but not in the same proportion of change in production
Semi-variable cost
For example, if the cost of production of 2000 units is Rs.26,000 and 25000 units is £.30,000
Variable cost per unit = (30000 – 26000)/(2500 – 2000)
= 4000/500
= £.8 per unit.
Verification :
Variable cost of 2000 units = 2000 × 8 =£. 16,000
Fixed cost = Total cost- variable cost
=£.26,000-£. 16,000
=£.10,000
Alternatively :
Variable cost of 2500 units = 2500 × 8 =£.20,000
Fixed cost = Total cost – variable cost
=£.30,000 –£.20,000
1- : Here are some data on the cost components of one of the
industrial companies in the first four months of 2014:
Total cost quantity Month
160000 20000 January
104000 12000 February
83000 9000 March
124000 18000 April
Required:
1- use of lowest and highest of Activities for determine the equation of
the monthly cost estimate .
2. Identification the fixed costs of the activity.
3. Assuming that the company plans to produce 24,000 units during the
month of May 2014, calculate the total expected costs for this month .
Product costs
the cost of manufacturing a product are called product cost. Product cost includes direct material, direct labour, direct expenses, and manufacturing overheads.
Product cost and period cost
Period costs
Period costs are those costs which are not charged to products but are written off as expenses against revenue of the period during which these are incurred
They are charged against the revenue of the relevant period. Period costs include all fixed costs and total administration, selling and distribution costs
Services Companies merchandisers’ income statements feature Cost of Goods
Sold as the major expense.
Income Statement
Month Ended December 31, 2015
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0,000
Expenses:
Salary expense . . . . . . . . . . . . . . . . .. . . . . . . . . . $,000
Office rent expense . . . . . . . . . . . . . . . . . . . . . . .,000
Depreciation expense—furniture and equipment 000
Marketing expense . . . . . . . . . . . . . . . . . .. . . ... .. 0000
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0,000
Ex. The Information provided below obtained from the
records of new Cairo company
Revenues $160,000 Expenses:
Salary expense. . 18,000 , Depreciation expense furniture and equipment .. 3,500 , Marketing expense . 2,500 (130,000)
Prepare the Income Statement at Month Ended December 31, 2015
Income Statement
Month Ended December 31, 2015
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Expenses:
Salary expense . . . . . . . . . . . . . . . . .. . . . . . . . . . $106,000
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . 18,000
Depreciation expense—furniture and equipment .. 3,500
Marketing expense . . . . . . . . . . . . . . . . . .. . . ... .. 2,500 (130,000)
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Merchandising Companies In contrast with service companies, merchandisers’
income statements feature Cost of Goods Sold as the major expense. Consider Apex Showrooms, a merchandiser of lighting fixtures. Apex’s only inventoriable costs are for the purchase of chandeliers and track lights that it buys to resell, plus freight in.
Merchandisers such as Apex compute the Cost of Goods Sold as follows:
Beginning inventory
+ Purchases and freight in
$ 000
0,000
What Apex had at the beginning of the period
What Apex bought during the period
= Cost of goods available
for sale
− Ending inventory
0000
0000
Total available for sale during the period
What Apex had left at the end of the period
= Cost of goods sold 0000 What Apex sold
Merchandiser’s Income Statement Apex Showrooms
Income Statement
Month Ended December 31, 20xx
Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $000,000
Cost of goods sold:
Beginning inventory . . . . . . . . . . . . . . .. . . . $ 0000
+ Purchases and freight . . . . . . . . . . . . . . . . . 00,000
= Cost of goods available for sale . . . . . . .. . . 00000
-Ending inventory . . . . . . . . . . . . . . . . . . . . . . (00,000)
Cost of goods sold . . . . . . . . . .…. . . . . . . . . . . ………. . 00000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0000
Operating expenses:
Showroom rent expense . . . . . . . . . . . . . . . . . . . 0,000
Sales salary expense . . . . . . .. . . . . . . . . . . . . 0,000 0,000
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 00000
Ex : The Information provided below obtained from the
records of new Mansura company
Merchandiser’s Income Statement Apex Showrooms
Sales revenue. $150,000 : Beginning inventory $ 9,500 , Purchases and freight 110,000 , Ending inventory 13,000
Operating expenses:
Showroom rent expense. 5,000
Sales salary expense 4,000
Prepare the Income Statement at Month Ended December 31, 2015
Merchandiser’s Income Statement Apex Showrooms
Income Statement
Month Ended December 31, 2015
Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Cost of goods sold:
Beginning inventory . . . . . . . . . . . . . . .. . . . $ 9,500
+ Purchases and freight . . . . . . . . . . . . . . . . . 110,000
= Cost of goods available for sale . . . . . . .. . . 119,500
-Ending inventory . . . . . . . . . . . . . . . . . . . . . . (13,000)
Cost of goods sold . . . . . . . . . .…. . . . . . . . . . . ………. . 106,500
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,500
Operating expenses:
Showroom rent expense . . . . . . . . . . . . . . . . . . . 5,000
Sales salary expense . . . . . . .. . . . . . . . . . . . . 4,000 9,000
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,500
Manufacturing Companies
cost of goods manufactured
This is the manufacturer’s cost to obtain new finished goods that are ready to sell (only finished goods are sold), so it is the manufacturer’s counterpart to the merchandiser’s purchases
cost of goods manufactured
The cost of goods manufactured summarizes the activities that take place in a manufacturing plant over the period (and their associated costs). Let’s begin by reviewing these activities. the manufacturer starts by buying materials, Then it uses direct labor and plant and equipment (whose costs are part of manufacturing overhead) to transform these materials into work in process inventory. When the work in process inventory is completed, it becomes finished goods inventory. These are all inventoriable product costs because they are plant-related
Schedule of Cost of Goods Manufactured Year Ended December 2015 Beginning work in process inventory .…….. …….. . . . $ 2,000 Add: Direct materials used Beginning materials inventory . . . . .. . . . $ 9,000 Purchases of direct materials plus freight in . . . . . . . . . . . . . . . . . . . . . . 27,000 Available for use . . . . . . . . . . . . . . . . . . . 36,000 Ending materials inventory. . . . . . . . . . . (22,000) Direct materials used . . . . . . . . . . . . . . . . ……….. . $14,000 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. . .19,000 Manufacturing overhead: Indirect materials . . . . . . . . . . . . . . . . . . . . $ 1,500 Indirect labor . . . . . . . . . . . . . . . . . . .. . . . . . 3,500 Depreciation—plant building and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Plant utilities, insurance, and property taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,000 12,000 Total manufacturing costs incurred during year . . . . . . . . . . . . . . . . . . . . . . . . …………………. . 45,000 Total manufacturing costs to account for . . ……………... . 47,000 Less: Ending work in process inventory . ……………… . . . (5,000) Costs of goods manufactured . . . . . . . . . . . . ……………... .$42,000
PANEL B: Manufacturer’s Income Statement Top-Flight
Income Statement Year Ended December 31, 2015
Sales revenue. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . $65,000
Cost of goods sold:
Beginning finished goods inventor. . . . . . . . $ 6,000
+ Cost of goods manufactured*. . . . . . . . . . . . . 42,000
=Cost of goods available for sale . . . . . . . . . . . 48,000
Ending finished goods inventory . . . . . . . . (8,000)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Operating expenses:
Sales salary expense . . . . . . . . . . . . . . . . . . . . . . . 3,000
Delivery expense . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 10,000
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
