Title: Cost Terms, Concepts, and Classifications
1Cost Terms, Concepts, and Classifications
- UAA ACCT 202
Principles of Managerial Accounting
Dr. Fred Barbee
Chapter
2Specify Tag the Cost
- We need to place an adjective (tag) on the cost
to identify what it is.
Direct Cost
3Cost Flows in a Manufacturing Firm
Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
4Cost Flows in a Manufacturing Firm
Manufacturing Costs Costs incurred in the
manufacture of goods being produced.
Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
- Known as product (inventoriable) costs.
- They are expensed when the product is sold.
Mfg. Overhead
5Cost Flows in a Manufacturing Firm
- Those materials that become an integral part of
the finished product and can be physically
traced to the product.
Direct Materials
- Those factory labor costs that can be physically
traced to the production of the finished
product.
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
- All costs associated with the manufacture of a
product except direct materials and direct
labor.
6Direct Materials
Nonmanufacturing Costs Costs incurred for other
than production activities.
- Known as Period costs.
- They are expensed in the period in which they
are incurred.
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
Sold
Sales
-
Cost of Goods Sold
Income Statement
Gross Margin
-
Nonmanufacturing Expenses
Net Income
7- General Administrative Expenses
- All executive, organizational, and clerical
costs associated with the general management
of the firm. - Selling Distribution Expenses
- All costs necessary to secure customer orders and
get the products/services to the customer.
Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
Sold
Sales
-
Cost of Goods Sold
Income Statement
Gross Margin
-
Nonmanufacturing Expenses
Net Income
8Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Product Costs
Mfg. Overhead
Sold
Sales
-
Cost of Goods Sold
Income Statement
Gross Margin
-
Nonmanufacturing Expenses
Period Costs
Net Income
9Manufacturing Costs
Manufacturing Overhead
10Manufacturing Costs
Materials that are directly traceable to the
goods or services being produced (physical
observation).
Steel in cars, wood in furniture, etc.
11Direct Materials
- DM in Theory
- Every component
- DM in Reality
- Must apply cost-benefit rule
12DM What is Cost?
- The invoice price of the raw materials,
- Shipping costs,
- Import duties, and
- A reduction for any allowable discounts for
prompt payment.
13Manufacturing Costs
Labor that is directly traceable to the goods
being produced.
Assembly line workers, chefs, pilots
14Manufacturing Costs
Manufacturing Overhead
All production costs other than direct materials
and direct labor.
Utilities, security, janitorial, etc.
15MOH Other Names
- Overhead
- Burden
- Indirect Manufacturing Costs
- Factory Expenses
16MOH A Few Examples
- Factory Supervision,
- Factory Telephone, heat, light, power,
- Factory bookkeeping salaries,
- Insurance
- Depreciation/factory equipment
- Indirect materials, labor.
17Nonmanufacturing Costs
- All costs not associated with the production of
goods. - Selling Costs
- Administrative Costs
18Cost Flows in a Manufacturing Firm
Manufacturing Costs
Balance Sheet
Unused
DM
DM Inv.
Used
Unfinished
Used
DL
WIP Inv.
WIP
Product Costs
Applied
MOH
FG Inv.
Finished
Sales
-
COGS
Sold
Gross Margin
Income Statement
-
SA
Period Costs
Net Income
19Cost Flows in a Manufacturing Firm
Manufacturing Costs
Balance Sheet
Inventory
Unused
DM
DM Inv.
Used
Unfinished
Used
DL
WIP Inv.
WIP
Product Costs
Applied
MOH
FG Inv.
Finished
Sales
Product Costs Costs assigned to products (i.e.,
Work in Process Inventory.
They attach themselves to units
of product and remain with the product until it
is sold.
-
COGS
Sold
Gross Margin
Income Statement
Expense
-
SA
Net Income
20Cost Flows in a Manufacturing Firm
Manufacturing Costs
Balance Sheet
Inventory
Unused
DM
DM Inv.
Used
Unfinished
Used
DL
WIP Inv.
WIP
Product Costs
Applied
MOH
FG Inv.
Finished
Expense
Sales
-
COGS
Sold
Gross Margin
Income Statement
-
SA
Net Income
21Cost Flows in a Manufacturing Firm
Period Costs Expired non product costs. Always
charged to expense in the period in which they
occur.
Manufacturing Costs
Balance Sheet
Unused
DM
DM Inv.
Used
Unfinished
Used
DL
WIP Inv.
WIP
Applied
MOH
FG Inv.
Finished
Sales
-
COGS
Sold
Gross Margin
Income Statement
-
SA
Period Costs
Net Income
22Product Costs Vs. Period Costs
DM, DL, MOH, SA Costs
DM, DL MOH
DM, DL MOH
DM, DL MOH
SA
SA
SA
Selling and Administrative Costs
Expensed in the current period.
23Balance Sheet Presentation
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28Variable Costs
- Total costs that vary in direct proportion to
changes in the level of activity within the
relevant range.
29Total Variable Costs
30Per Unit Variable Cost
31Fixed Costs
- Costs that remain constant in total, regardless
of the changes in activity within the relevant
range.
32Total Fixed Costs
33Per Unit Fixed Costs
34Curvilinear Costs and the Relevant Range
Economists Curvilinear Cost Function
Accountants Straight-Line Approximation
Volume (Activity Base)
35Anything for which a separate measurement of
costs is desired (products, customers,
departments, etc.)
Direct Costs
Cost Object
Indirect Costs
36Costs that are related to and directly traceable
to the identified cost objective. (Direct
Material, Direct Labor)
Cost Object
Direct Costs
Costs that are related to, but not traceable to,
the identified cost objective. (Manufacturing
overhead)
Indirect Costs
37Different Costs for Different Purposes
38Product Costing Definitions
Value-Chain
Operating Traditional
Product Costs
Product Costs Product Costs
Research and Development
Production
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions Product-Mix Decisions Strategic
Profitability Analysis
Strategic Design Decisions Tactical
Profitability Analysis
External Financial Reporting
39 Value-Chain
Product Costs
Research and Development
Production
Marketing
Customer Service
If making any of these types of decisions, I need
to look at all costs.
Pricing Decisions Product-Mix Decisions Strategic
Profitability Analysis
40On the other hand, for these decisions, we might
be able to ignore some of the costs.
41Product Costing Definitions
For external financial reporting, we need only
these costs because that is what GAAP says we
need.
Value-Chain
Operating Traditional
Product Costs
Product Costs Product Costs
Research and Development
Production
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions Product-Mix Decisions Strategic
Profitability Analysis
Strategic Design Decisions Tactical
Profitability Analysis
External Financial Reporting