Livestock statistics - concepts, definitions and classifications
Cost Terms, Concepts, and Classifications
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Transcript of Cost Terms, Concepts, and Classifications
Cost Terms, Concepts, and Classifications
Chapter 2
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Comparing Merchandising and Manufacturing Activities
Merchandisers . . . Buy finished
goods. Sell finished goods.
Manufacturers . . . Buy raw materials. Produce and sell
finished goods.
MegaLoMart
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The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Manufacturing Costs
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Direct Materials
Those materials that become an integral part of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobileExample: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
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I do not like getting my temperature taken by the vet!
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Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials
Wages paid to employees who are not directly
involved in production work.
Examples: maintenance workers, janitors and
security guards.
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
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Classifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
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Nonmanufacturing Costs
Marketing and Selling Cost
Costs necessary to get the order and deliver the
product.
Administrative Cost
All executive, organizational, and
clerical costs.
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Quick Check
Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
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Quick Check
Which of the following costs would be Which of the following costs would be considered manufacturing overhead at Boeing? considered manufacturing overhead at Boeing? (More than one answer may be correct.)(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.A. Depreciation on factory forklift trucks.
B. Sales commissions.B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.D. The wages of a production shift supervisor.
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Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing
overhead.
Period costs are not included in product
costs. They are expensed on the
income statement.Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
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For Your Consideration …
Take a look at Review Problems 1 & 2
on pages 48 and 49.
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Cost Classifications for Predicting Cost Behavior
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.
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.
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Total Variable Cost
Your total long distance telephone bill is 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
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
The cost per long distance minute talked is constant. For example, 10 cents per minute.
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Total Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local
calls.
Number of Local Calls
Mon
thly
Bas
ic
Tel
epho
ne B
ill
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Fixed Cost Per Unit
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 more local calls are made.
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Cost Classifications for Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goesthe same even when the down as activity level goes up. activity level changes.
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Cost Behavior
MerchandisersCost of Goods Sold
MerchandisersCost of Goods Sold
ManufacturersDirect Material, Direct Labor, and Variable
Manufacturing Overhead
ManufacturersDirect Material, Direct Labor, and Variable
Manufacturing Overhead
Merchandisers and Manufacturers
Sales commissions and shipping costs
Merchandisers and Manufacturers
Sales commissions and shipping costs
Service Organizations Supplies and travel
Service Organizations Supplies and travel
Examples of normally variable costsExamples of normally variable costs
Examples of normally fixed costsExamples of normally fixed costs
Merchandisers, manufacturers, and service organizations
Real estate taxes, Insurance, Sales salariesDepreciation, Advertising
Merchandisers, manufacturers, and service organizations
Real estate taxes, Insurance, Sales salariesDepreciation, Advertising
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Examples
Advertising and Research and Development
Examples
Advertising and Research and Development
Examples
Depreciation on Buildings and
Equipment
Examples
Depreciation on Buildings and
Equipment
Types of Fixed Costs
Discretionary
May be altered in the short-term by current managerial decisions
Discretionary
May be altered in the short-term by current managerial decisions
Committed
Long-term, cannot be reduced in the short
term.
Committed
Long-term, cannot be reduced in the short
term.
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Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the
business grows more space is rented,
increasing the total cost.
Fixed Costs and Relevant Range
Continue
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Ren
t C
ost
in
T
ho
usa
nd
s o
f D
oll
ars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and Relevant Range
90
Relevant
Range
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
Exh.5-6
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How does this type of fixed cost differ
from a step-variable cost?
Step-variable costs can be adjusted more
quickly and . . .
The width of the activity steps is much
wider for the fixed cost.
Fixed Costs and Relevant Range
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Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
A mixed cost has both fixed and variablecomponents. Consider the example of utility cost.
A mixed cost has both fixed and variablecomponents. Consider the example of utility cost.
Mixed Costs
Total mixed cost
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Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Mixed Costs
Total mixed cost Y
= a + bX
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The Analysis of Mixed Costs
Engineering Approach
Account Analysis
High-Low Method
Least-Square Regression Method
Scattergraph Plot
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Account Analysis & Engineering Estimates
Each account is classified as eithervariable or fixed based on the analyst’s
knowledge of how the account behaves.
Each account is classified as eithervariable or fixed based on the analyst’s
knowledge of how the account behaves.
Cost estimates are based on an evaluation of production methods, and material, labor and overhead
requirements.
Cost estimates are based on an evaluation of production methods, and material, labor and overhead
requirements.
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Plot the data points on a graph (total cost vs. activity).
Plot the data points on a graph (total cost vs. activity).
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
The Scattergraph Method
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0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
Quick-and-Dirty Method
Intercept is the estimated fixed cost = $10,000
Intercept is the estimated fixed cost = $10,000
Draw a line through the data points with about anequal numbers of points above and below the line.
Draw a line through the data points with about anequal numbers of points above and below the line.
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0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
Quick-and-Dirty MethodThe slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
Vertical distance is the change in cost.
Vertical distance is the change in cost.
Horizontal distance is
the change in activity.
Horizontal distance is
the change in activity.
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WiseCo recorded the following production activity and maintenance costs for two months:
Using these two levels of activity, compute:• the variable cost per unit; • the fixed cost; and then• express the costs in equation form Y = a + bX.
The High-Low Method
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Changein costChange in units
The High-Low Method
Variable cost per unit = Change in cost ÷ change in units
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The High-Low Method
Variable cost per unit = $2,400 ÷ 3,000 units
= $0.80 per unit
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The High-Low Method
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
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Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX)
Y = $3,400 + $0.80X
The High-Low Method
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Software can be used to fit a regression line through the data points.
The cost analysis objective is the same: Y = a + bx
Least-Squares Regression Method
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
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0 1 2 3 4
To
tal
Co
st
10
20
0
Activity
**
***
**
***
Least-Squares Regression Method
R2 is the percentage of the variation in total cost explained by the activity.
R2 is the percentage of the variation in total cost explained by the activity.
R2 for this relationship is near100% since the data points are
very close to the regression line.
X
Y
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Cost Estimation MethodsRegression Analysis
A statistical method used to create an equation relating independent (or X) variables to dependent
(or Y) variables.
Past data is used to estimate relationships between costs and activities.
A statistical method used to create an equation relating independent (or X) variables to dependent
(or Y) variables.
Past data is used to estimate relationships between costs and activities.
Dependent variables are caused by the
independent variables.
Dependent variables are caused by the
independent variables.
Independent variables are the cost drivers that are correlated with the dependent variables.
Independent variables are the cost drivers that are correlated with the dependent variables.
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Hey, Ed !
Remember who received a mid-semester deficiency
in statistics in 1972 and 1973!
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Caution: Before doing the analysis, take time
to determine if a logical relationship
between the variables exists.
Caution: Before doing the analysis, take time
to determine if a logical relationship
between the variables exists.
Cost Estimation MethodsRegression Analysis
The simple cost model is actually a regression model:
TC = F + VX
The simple cost model is actually a regression model:
TC = F + VX
This model will only be useful within a relevant range of
activity.
This model will only be useful within a relevant range of
activity.
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Direct Costs and Indirect Costs
Direct costs
Costs that can beeasily and conveniently traced to a unit of product or other cost objective.
Examples: direct material and direct labor
Indirect costs
Costs cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
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Differential Costs and Revenues
Costs and revenues that differ among alternatives.
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.
Differential revenue is: $2,000 – $1,500 = $500
Differential cost is: $300
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Quick Check
Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
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Quick Check
Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
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Quick Check
Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of 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
Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of 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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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.
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Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when
making decisions.
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.
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Further Classification of Labor Costs
Idle TimeTreated as
manufacturing overhead cost
Overtime Premium of
Factory Workers
Treated as manufacturing overhead cost
Labor Fringe Benefits
Treated as indirect labor or direct labor
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Further Classification of Labor Costs
Idle TimeTreated as
manufacturing overhead cost
Overtime Premium of
Factory Workers
Treated as manufacturing overhead cost
Labor Fringe Benefits
Discovery Channel :: Video :: "Best Of" Moments
Treated as indirect labor or direct labor
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The Contribution Format
Total Unit
Sales Revenue 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net operating income 10,000$
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs
and provides for income.
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The Contribution Format
Total Unit
Sales Revenue 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net operating income 10,000$
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs
and provides for income.
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End of Chapter 2