Title: Basic Cost Management Concepts and Accounting for Mass Customization Operations
12
Chapter Two
- Basic Cost Management Concepts and Accounting
for Mass Customization Operations
2Process of Management
Managers need cost information toperform each of
these functions.
3What Do We Mean By a Cost?
A Costis the measure ofresources givenup to
achieve aparticular purpose.
4Manufacturing Costs
5Direct Material
Cost of raw material that is used tomake, and
can be convenientlytraced, to the finished
product.
6Direct Labor
Cost of salaries, wages, and fringebenefits for
personnel who workdirectly on manufactured
products.
Example Wages paid to anautomobile
assemblyworker.
7Manufacturing Overhead
- All other manufacturing costs
IndirectLabor
IndirectMaterial
OtherCosts
Materials used to support the production process.
Examples lubricants and cleaning supplies used
in an automobile assembly plant.
8Manufacturing Overhead
- All other manufacturing costs
IndirectLabor
IndirectMaterial
OtherCosts
Cost of personnel who do not work directly on the
product. Examples maintenance workers,
janitors and security guards.
9Manufacturing Overhead
- All other manufacturing costs
IndirectLabor
IndirectMaterial
OtherCosts
Examples depreciation on plant and equipment,
property taxes, insurance, utilities, overtime
premium, and unavoidable idle time.
10Classifications of Costs in Manufacturing
Companies
- Manufacturing costs are oftencombined as follows
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
11Cost Classifications on Financial Statements
Balance Sheet
- Merchandiser
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
- Manufacturer
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
- Raw Materials
- Work in Process
- Finished Goods
12Cost Classifications on Financial Statements
Balance Sheet
- Manufacturer
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
- Raw Materials
- Work in Process
- Finished Goods
- Merchandiser
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Those materials waiting to be processed.
13Cost Classifications on Financial Statements
Balance Sheet
- Manufacturer
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
- Raw Materials
- Work in Process
- Finished Goods
- Merchandiser
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Partially complete products material to which
some labor and/or overhead has been added.
14Cost Classifications on Financial Statements
Balance Sheet
- Manufacturer
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
- Raw Materials
- Work in Process
- Finished Goods
- Merchandiser
- Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Completed products awaiting sale.
15Manufacturing Cost Flows
Balance
Sheet Costs
Inventories
Material Purchases
Raw Material
Direct Labor
ManufacturingOverhead
Selling andAdministrative
16Manufacturing Cost Flows
Income StatementExpenses
Balance
Sheet Costs
Inventories
Raw Material
Material Purchases
Work in Process
Direct Labor
ManufacturingOverhead
Cost of GoodsSold
FinishedGoods
Selling andAdministrative
Selling andAdministrative
Period Expenses
17Manufacturing Cost Flows
Income StatementExpenses
Balance
Sheet Costs
Inventories
Raw Material
Material Purchases
Work in Process
Direct Labor
ManufacturingOverhead
Cost of GoodsSold
FinishedGoods
Period expenses are not associated with
manufacturing the product and are expensed in
the period incurred.
Selling andAdministrative
Selling andAdministrative
Period Expenses
18Manufacturing Cost Flows
Income StatementExpenses
Balance
Sheet Costs
Inventories
Raw Material
Material Purchases
Work in Process
Direct Labor
ManufacturingOverhead
Cost of GoodsSold
FinishedGoods
Selling andAdministrative
Selling andAdministrative
Period Expenses
19Types of Production Processes
20Schedule of Cost of Goods Manufactured
21Schedule of Cost of Goods Manufactured
22Schedule of Cost of Goods Manufactured
23Schedule of Cost of Goods Manufactured
Include all direct labor costs incurred during
the current period.
24Schedule of Cost of Goods Manufactured
25Schedule of Cost of Goods Manufactured
Beginning work-in-process inventory is carried
over from the prior period.
26Schedule 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.
27Income Statement for a Manufacturer
28Income Statement for a Manufacturer
29Income Statement for a Manufacturer
30Cost 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.
31Cost Classifications
Activities thatcause costs to be incurred are
calledcost drivers.
- 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.
32Identifying Cost Drivers
33Total Variable Cost Example
- Your total long distance telephone bill is
based on how many minutes you talk.
Total Long DistanceTelephone Bill
Minutes Talked
34Variable Cost Per Unit Example
- The cost per long distance minute talked is
constant. For example, 5 cents per minute.
Per MinuteTelephone Charge
Minutes Talked
35Total Fixed Cost Example
- Your monthly basic telephone bill probably
does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls
36Fixed Cost Per Unit Example
- The average cost per local call decreases as more
local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
37Cost Classifications
38Cost 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.
39Cost 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.
40Cost 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.
41Cost 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.
42Direct and Indirect Costs
- Direct costs
- Costs that can beeasily and conveniently traced
to a product or department. - Example cost of paint in the paint department
of an automobile assembly plant.
- Indirect costs
- Costs that must be allocated in order to be
assigned to a product or department. - Example cost of national advertising for an
airline is indirect to a particular flight.
43Direct and Indirect Costs
- A cost can be direct to the department, but
indirect to units of product produced in the
department. - Example department managers salary.
- Tracing costs directly to departments or products
facilitates responsibility accounting.
44Controllable andUncontrollable Costs
- A cost that can be significantly influencedby
a manager is a controllable cost.
45Opportunity Cost
- The potential benefit that is given up when one
alternative is selected over another. - Example If you werenot attending college,you
could be earning20,000 per year. Your
opportunity costof attending college for one
year is 20,000.
46Sunk Costs
- All costs incurred in the past that cannot be
changed by any decision made now or in the
future. - Sunk costs should not be considered in
decisions. - Example You bought an automobile that cost
12,000 two years ago. The 12,000 cost is sunk
because whether you drive it, park it, trade it,
or sell it, you cannot change the 12,000 cost.
47Differential Costs
- 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?
48Differential Costs
- 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
49Marginal Costs and Average Costs
The extra costincurred to produceone additional
unit.
The total cost toproduce a quantitydivided by
thequantity produced.
Marginal and average costs arelargely a function
of cost behavior -- variable and fixed costs.
50Costs and Benefits of Information
More information does not mean more benefits if
information overload results.
51End of Chapter 2