CoAn Introduction to Cost Terms and Purposesst Topic 2

8/18/2019 CoAn Introduction to Cost Terms and Purposesst Topic 2

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An Introduction to Cost Terms and Purposes

Copyright © 2015 Pearson Education, Inc. All Rights Reserved


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1. Define and illustrate a cost object

2. Distinguish between direct costs andindirect costs

3. Exlain !ariable costs and fixed costs". Interret unit costs cautiousl#

$. Distinguish between in!entoriable costs anderiod costs

%. Illustrate the flow of in!entoriable anderiod costs

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&. Exlain wh# roduct costs are comuted indifferent wa#s for different uroses

'. Describe a framewor( for cost accounting

and cost management

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Cost)a sacrificed or forgone resource toachie!e a secific objecti!e.

Actual cost)a cost that has occurred.

*udgeted cost)a redicted cost. Cost object)an#thing for which a cost

measurement is desired.

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Cost accumulation)the collection of costdata in an organi+ed wa# b# means of anaccounting s#stem.

Cost assignment)a general term thatencomasses the gathering of accumulatedcosts to a cost object in two wa#s,Tracing accumulated costs with a direct

relationshi to the cost object and

Allocating accumulated costs with an indirectrelationshi to a cost object.

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Direct costs can be con!enientl# andeconomicall# traced -trac(ed to a costobject.

Indirect costs cannot be con!enientl# oreconomicall# traced -trac(ed to a costobject. Instead of being traced/ these costsare allocated to a cost object in a rationaland s#stematic manner.

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Copyright © 2015 Pearson Education, Inc. All Rights Reserved$2


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Direct Costs0arts -steel or tires for a car/ as an exame

Assembl# line wages

Indirect CostsElectricit#

ent

0roert# taxes

0lant administration exenses

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The materialit# of the cost in uestion. The a!ailable informationgathering technolog#. Design of oerations.

45TE, a secific cost ma# be both a direct cost

of one cost object and an indirect cost ofanother cost object.

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The ProductThe Product

'irect(aterials

'irect(aterials

'irect)a*or

'irect)a*or

(anu+acturingverhead



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aw materials that become an integral art of theroduct and that can be con!enientl# traced

directl# to it.

Example: A radio installed in an automobileExample: A radio installed in an automobile


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Those labor costs that can be easil# traced toindi!idual units of roduct.

Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers


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6anufacturing costs that cannot be traced directl# tosecific units roduced.

Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials

Wages paid to employeeswho are not directly

involved in productionwork.Examples: maintenance

workers !anitors andsecurity guards.

"aterials used to supportthe production process.

Examples: lubricants andcleaning supplies used in theautomobile assembly plant.


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#elling$osts

$osts necessary to get

the order and deliverthe product.

Administrative$osts

All executive

organi%ational andclerical costs.


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'istinguish *et-een'istinguish *et-eenproduct costs and periodproduct costs and period

costs and give ea/plescosts and give ea/pleso+ each.o+ each.


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Product costs includedirect materials, direct

labor, and

manufacturingoverhead.

Period costs include allselling costs and

administrative costs.

Inventory $ost o& 'ood #old

alanceheet

Inco/etate/ent

Sale

Expense

Inco/etate/ent


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7hich of the following costs would be considered aeriod rather than a roduct cost in amanufacturing coman#8

A. 6anufacturing euiment dereciation.*. 0roert# taxes on cororate headuarters.

C. Direct materials costs.

D. Electrical costs to light the roduction

facilit#.E. 9ales commissions.


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7hich of the following costs would be considered aeriod rather than a roduct cost in amanufacturing coman#8A. 6anufacturing euiment dereciation.

*. 0roert# taxes on cororate headuarters.

C. Direct materials costs.

D. Electrical costs to light the roduction facilit#.

E. 9ales commissions.


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'irect(aterial'irect

(aterial'irect)a*or 'irect)a*or



Pri/eCost

ConversionCost

6anufacturing costs are oftenclassified as follows,


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Merchandisers . . . Buy finished goods.

Sell finished goods.

Manufacturers . . . Buy raw materials.

Produce and sell finishedgoods.

"ega(o"art


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Merchandiser

Current assetsCash

ReceivablesPrepaid Epenses

Merchandise !nventory

"anu&acturer

$urrent Assets $ash

)eceivables

Prepaid Expenses

Inventories )aw "aterials

Work in Process

*inished 'oods


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Merchandiser

Current assetsCash

ReceivablesPrepaid Epenses

Merchandise !nventory

"anu&acturer

$urrent Assets $ash

)eceivables

Prepaid Expenses

Inventories )aw "aterials

Work in Process

*inished 'oods

Partially completeproducts + some

material labor oroverhead has been

added.

$ompleted productsawaiting sale.

"aterials waiting tobe processed.


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Prepare an inco/ePrepare an inco/e

state/ent includingstate/ent includingcalculation o+ the cost o+calculation o+ the cost o+

goods sold.goods sold.


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Cost of goods sold for manufacturers differs onl#slightl# from cost of goods sold for merchandisers.

"erchandising $ompany

$ost o& goods sold: ,eg. merchandise

inventory -/001

2 Purchases /3-40

'oods available

&or sale /53401

6 Ending merchandise

inventory 7-/-008

9 $ost o& goods

sold /3/401


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,eginningbalance

,eginningbalance

Additionsto inventory

Additionsto inventory+ =

Endingbalance

Endingbalance

Withdrawals&rom

inventory

Withdrawals&rom

inventory

+


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If #our in!entor# balance at the beginning of themonth was :1/;;;/ #ou bought :1;; during themonth/ and sold :3;; during the month/ whatwould be the balance at the end of the month8A. :1/;;;.

*. : ';;.

C. :1/2;;.

D. : 2;;.


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If #our in!entor# balance at the beginning of themonth was :1/;;;/ #ou bought :1;; during themonth/ and sold :3;; during the month/ whatwould be the balance at the end of the month8A. :1/;;;.

*. : ';;.

C. :1/2;;.

D. : 2;;.

31,000 4 3100 31,10031,100 3!00 3%00


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Prepare a schedule o+ costPrepare a schedule o+ costo+ goods /anu+actured.o+ goods /anu+actured.


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$alculates the cost o& rawmaterial direct labor and

manu&acturing overhead used

in production.

$alculates the manu&acturingcosts associated with goodsthat were &inished during the

period.


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"anu&acturing Work

)aw "aterials $osts In Process

,eginning raw ;irect materials

materials inventory

2 )aw materials

purchased

9 )aw materials

available &or use

in production

+ Ending raw materials

inventory9 )aw materials used

in production

As items are removed &rom rawmaterials inventory and placed into

the production process they arecalled direct materials.

As items are removed &rom rawmaterials inventory and placed into

the production process they arecalled direct materials.


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"anu&acturing Work


,eginning raw ;irect materials

materials inventory 2 ;irect labor

2 )aw materials 2 "&g. overhead

purchased 9 Total manu&acturing

9 )aw materials costs

available &or use

in production



in production

$onversioncosts are costs

incurred toconvert thedirect materialinto a &inished

product.

$onversioncosts are costs

incurred toconvert the

direct materialinto a &inished

product.


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"anu&acturing Work


,eginning raw ;irect materials ,eginning work in

materials inventory 2 ;irect labor process inventory

2 )aw materials 2 "&g. overhead 2 Total manu&acturing

purchased 9 Total manu&acturing costs

9 )aw materials costs 9 Total work in

available &or use process &or the

in production period



in production

All manu&acturing costs incurredduring the period are added to the

beginning balance o& work inprocess.

All manu&acturing costs incurredduring the period are added to thebeginning balance o& work in

process.


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"anu&acturing Work


,eginning raw ;irect materials ,eginning work in

materials inventory 2 ;irect labor process inventory

2 )aw materials 2 "&g. overhead 2 Total manu&acturing

purchased 9 Total manu&acturing costs

9 )aw materials costs 9 Total work in

available &or use process &or the

in production period

+ Ending raw materials + Ending work in

inventory process inventory9 )aw materials used 9 $ost o& goods

in production manu&actured

$osts associated with the goods thatare completed during the period are

trans&erred to &inished goodsinventory.

$osts associated with the goods thatare completed during the period are

trans&erred to &inished goodsinventory.


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*inished'oods

$ost o&

'oods#old

#elling andAdministrative

Period Costs#elling andAdministrative

"anu&acturing


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*eginning raw materials in!entor# was :32/;;;.During the month/ :2&%/;;; of raw material wasurchased. A count at the end of the monthre!ealed that :2'/;;; of raw material was stillresent. 7hat is the cost of direct material used8

A. :2&%/;;;

*. :2&2/;;;

C. :2';/;;;D. : 2/;;;


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*eginning raw materials in!entor# was :32/;;;.During the month/ :2&%/;;; of raw material wasurchased. A count at the end of the monthre!ealed that :2'/;;; of raw material was still

resent. 7hat is the cost of direct material used8A. :2&%/;;;

*. :2&2/;;;

C. :2';/;;;D. : 2/;;;


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Direct materials used in roduction totaled:2';/;;;. Direct labor was :3&$/;;; and factor#o!erhead was :1';/;;;. 7hat were totalmanufacturing costs incurred for the month8

A. :$$$/;;;*. :'3$/;;;C. :%$$/;;;

D. Cannot be determined.


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Direct materials used in roduction totaled:2';/;;;. Direct labor was :3&$/;;; and factor#o!erhead was :1';/;;;. 7hat were totalmanufacturing costs incurred for the month8

A. :$$$/;;;*. :'3$/;;;C. :%$$/;;;

D. Cannot be determined.


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*eginning wor( in rocess was :12$/;;;.6anufacturing costs incurred for the month were:'3$/;;;. There were :2;;/;;; of artiall#finished goods remaining in wor( in rocess

in!entor# at the end of the month. 7hat wasthe cost of goods manufactured during themonth8

A. :1/1%;/;;;

*. :


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*eginning wor( in rocess was :12$/;;;.6anufacturing costs incurred for the month were:'3$/;;;. There were :2;;/;;; of artiall#finished goods remaining in wor( in rocess

in!entor# at the end of the month. 7hat wasthe cost of goods manufactured during themonth8

A. :1/1%;/;;;

*. :


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*eginning finished goods in!entor# was :13;/;;;.The cost of goods manufactured for the month was:&%;/;;;. And the ending finished goods in!entor#was :1$;/;;;. 7hat was the cost of goods sold for

the month8A. : 2;/;;;.*. :&";/;;;.C. :&';/;;;.D. :&%;/;;;.


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*eginning finished goods in!entor# was :13;/;;;.The cost of goods manufactured for the month was:&%;/;;;. And the ending finished goods in!entor#was :1$;/;;;. 7hat was the cost of goods sold for

the month8A. : 2;/;;;.*. :&";/;;;.C. :&';/;;;.D. :&%;/;;;.

31!0,000 4 3$#0,000 3%&0,000

3%&0,000 3150,000 3$"0,000


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6nderstand the6nderstand the

di++erences *et-eendi++erences *et-eenvaria*le costs and +iedvaria*le costs and +ied

costs.costs.


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=ow a cost will react tochanges in the le!el of

acti!it# within the

rele!ant range. Total variable costs change

when acti!it# changes.

Total fied costs remain

unchanged when acti!it#changes.

=ow a cost will react tochanges in the le!el of

acti!it# within the

rele!ant range. Total variable costs change

when acti!it# changes.

Total fied costs remain

unchanged when acti!it#changes.


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>our total long distance telehone bill is based on howman# minutes #ou tal(.

(inutes 7al8ed

7 o t a l ) o n g ' i s t a n c e

7 e l e p h o n e 0 i l l


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(inutes 7al8ed

P e r ( i n u t e

7 e l e p h o n e C h a r g e

The cost per long distance minute tal(ed is

constant. ?or examle/ 1; cents er minute.


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>our monthl# basic telephone bill robabl# does not change when #ou ma(e more local calls.

9u/*er o+ )ocal Calls

( o n t h l y 0 a s i c

7 e l e

p h o n e 0 i l l


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9u/*er o+ )ocal Calls

( o n t h l y

0 a s i c 7 e l e p h o n e

0 i l l p

e r ) o c a l C a l l

The a!erage fixed cost per local call decreasesas more local calls are made.


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,ehavior o& $ost 7within the relevant range8

$ost In Total Per =nit

>ariable Total variable cost changes >ariable cost per unit remainsas activity level changes. the same over wide ranges

o& activity.

*ixed Total &ixed cost remains Average &ixed cost per unit goes

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

activity level changes.


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7hich of the following costs would be !ariable withresect to the number of cones sold at a *as(ins @obbins sho8 -There ma# be more than onecorrect answer.

A. The cost of lighting the store.

*. The wages of the store manager.

C. The cost of ice cream.

D. The cost of na(ins for customers.


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7hich of the following costs would be !ariable withresect to the number of cones sold at a *as(ins @obbins sho8 -There ma# be more than onecorrect answer.

A. The cost of lighting the store.

*. The wages of the store manager.

C. The cost of ice cream.

D. The cost of na(ins for customers.


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A semi!ariable

cost is artl#fixed and artl#!ariable.

Consider the+ollo-ing electric

utility ea/ple.


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*ixed "onthly

=tility $harge

>ariable

=tility $harge

Activity 7?ilowatt @ours8

T o

t a l = t i l i t y $

o s t

T o t a l

s e m i

v a r i a b l e c

o s t

#lope is

variable costper unit

o& activity.


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6nderstand the6nderstand the

di++erences *et-een directdi++erences *et-een direct

and indirect costs.and indirect costs.


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"irect costs

Costs that can beeasily and convenientlytraced to a unit of

product or other costob#ect.

Eamples$ direct materialand direct labor

!ndirect costs

Costs that cannot beeasily and convenientlytraced to a unit of

product or other costob#ect.

Eample$ manufacturingoverhead


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'e+ine and give ea/ples'e+ine and give ea/ples

o+ cost classi+ications usedo+ cost classi+ications used

in /a8ing decisions:in /a8ing decisions:di++erential costs,di++erential costs,

opportunity costs, andopportunity costs, and

sun8 costs.sun8 costs.


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E!er# decision in!ol!es a choice between at least twoalternati!es.

5nl# those costs and benefits that differ betweenalternati!es are rele!ant in a decision. All other costsand benefits can and should be ignored.


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Costs and re!enues that differCosts and re!enues that differamong alternati!es.among alternati!es.

Example: ou have a !ob paying 1-400 per month inyour hometown. ou have a !ob o&&er in a neighboringcity that pays 1/000 per month. The commuting costto the city is 1300 per month.

Example: ou have a !ob paying 1-400 per month inyour hometown. ou have a !ob o&&er in a neighboringcity that pays 1/000 per month. The commuting costto the city is 1300 per month.

;i&&erential revenue is: 1/000 + 1-400 9 1400

;i&&erential cost is:

1300


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%he potential benefit that isgiven up when one

alternative is selected overanother.

Ea/ple: I+ you -erenot attending college,you could *e earning

315,000 per year.;our opportunity costo+ attending college +orone year is 315,000.


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Sun& costs have already been incurred and cannotbe changed now or in the future. %hey should be

ignored when ma&ing decisions.

Ea/ple: ;ou *ought an auto/o*ile that cost 310,000t-o years ago. 7he 310,000 cost is sun8 *ecause-hether you drive it, par8 it, trade it, or sell it, you

cannot change the 310,000 cost.


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9uose #ou are tr#ing to decide whether to dri!eor ta(e the train to 0ortland to attend a concert.>ou ha!e amle cash to do either/ but #ou dontwant to waste mone# needlessl#. Is the cost of the

train tic(et rele!ant in this decision8 In otherwords/ should the cost of the train tic(et affect thedecision of whether #ou dri!e or ta(e the train to0ortland8

A. >es/ the cost of the train tic(et is rele!ant.*. 4o/ the cost of the train tic(et is not rele!ant.


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9uose #ou are tr#ing to decide whether to dri!eor ta(e the train to 0ortland to attend a concert.>ou ha!e amle cash to do either/ but #ou dontwant to waste mone# needlessl#. Is the cost of the

train tic(et rele!ant in this decision8 In otherwords/ should the cost of the train tic(et affect thedecision of whether #ou dri!e or ta(e the train to0ortland8

A. >es/ the cost of the train tic(et is rele!ant.*. 4o/ the cost of the train tic(et is not rele!ant.


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9uose #ou are tr#ing to decide whether to dri!eor ta(e the train to 0ortland to attend a concert.>ou ha!e amle cash to do either/ but #ou dontwant to waste mone# needlessl#. Is the annual cost

of licensing #our car rele!ant in this decision8A. >es/ the licensing cost is rele!ant.

*. 4o/ the licensing cost is not rele!ant.


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9uose #ou are tr#ing to decide whether to dri!eor ta(e the train to 0ortland to attend a concert.>ou ha!e amle cash to do either/ but #ou dontwant to waste mone# needlessl#. Is the annual cost

of licensing #our car rele!ant in this decision8A. >es/ the licensing cost is rele!ant.

*. 4o/ the licensing cost is not rele!ant.


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9uose that #our car could be sold now for:$/;;;. Is this a sun( cost8A. >es/ it is a sun( cost.

*. 4o/ it is not a sun( cost.


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9uose that #our car could be sold now for:$/;;;. Is this a sun( cost8A. >es/ it is a sun( cost.

*. 4o/ it is not a sun( cost.


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Bariable costs)change in total in roortionto changes in the related le!el of acti!it# or!olume of outut roduced.

?ixed costs)remain unchanged in total/ for a

gi!en time eriod/ desite changes in therelated le!el of acti!it# or !olume of oututroduced.

Costs are fixed or !ariable onl# with resect

to a secific acti!it# or a gi!en time eriod.

#%2


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Bariable costs are constant on a erunitbasis. If a roduct ta(es $ ounds ofmaterials each/ it sta#s the same er unitregardless if one/ ten/ or a thousand units

are roduced. ?ixed costs er unit change in!ersel# with

the le!el of roduction. As more units areroduced/ the same fixed cost is sreado!er more and more units/ reducing thecost er unit.

#&2


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Total ;ollars $ost per =nit


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Cost dri!er)a !ariable/ such as the le!el ofacti!it# or !olume/ that causall# affects costso!er a gi!en time san.

ele!ant range)the band or range of normalacti!it# le!el -or !olume in which there is asecific relationshi between the le!el ofacti!it# -or !olume and the cost in uestion.?or examle/ fixed costs are considered fixed

onl# within the rele!ant range.

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CoAn Introduction to Cost Terms and Purposesst Topic 2

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Transcript of CoAn Introduction to Cost Terms and Purposesst Topic 2