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Cost Terms, Concepts, and Classifications

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Title: Cost Terms, Concepts, and Classifications


1
Cost Terms, Concepts, and Classifications
  • UAA ACCT 202
    Principles of Managerial Accounting
    Dr. Fred Barbee

Chapter
2
Specify Tag the Cost
  • We need to place an adjective (tag) on the cost
    to identify what it is.

Direct Cost
3
Cost Flows in a Manufacturing Firm
Direct Materials
Direct Labor
Work-in- Process
Finished Goods
Cost-of Goods Sold
Mfg. Overhead
4
Cost 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
5
Cost 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.

6
Direct 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
8
Direct 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
9
Manufacturing Costs
Manufacturing Overhead
10
Manufacturing Costs
Materials that are directly traceable to the
goods or services being produced (physical
observation).
Steel in cars, wood in furniture, etc.
11
Direct Materials
  • DM in Theory
  • Every component
  • DM in Reality
  • Must apply cost-benefit rule

12
DM What is Cost?
  • The invoice price of the raw materials,
  • Shipping costs,
  • Import duties, and
  • A reduction for any allowable discounts for
    prompt payment.

13
Manufacturing Costs
Labor that is directly traceable to the goods
being produced.
Assembly line workers, chefs, pilots
14
Manufacturing Costs
Manufacturing Overhead
All production costs other than direct materials
and direct labor.
Utilities, security, janitorial, etc.
15
MOH Other Names
  • Overhead
  • Burden
  • Indirect Manufacturing Costs
  • Factory Expenses

16
MOH A Few Examples
  • Factory Supervision,
  • Factory Telephone, heat, light, power,
  • Factory bookkeeping salaries,
  • Insurance
  • Depreciation/factory equipment
  • Indirect materials, labor.

17
Nonmanufacturing Costs
  • All costs not associated with the production of
    goods.
  • Selling Costs
  • Administrative Costs

18
Cost 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
19
Cost 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
20
Cost 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
21
Cost 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
22
Product 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.
23
Balance Sheet Presentation
24
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25
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26
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27
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28
Variable Costs
  • Total costs that vary in direct proportion to
    changes in the level of activity within the
    relevant range.

29
Total Variable Costs
30
Per Unit Variable Cost
31
Fixed Costs
  • Costs that remain constant in total, regardless
    of the changes in activity within the relevant
    range.

32
Total Fixed Costs
33
Per Unit Fixed Costs
34
Curvilinear Costs and the Relevant Range
Economists Curvilinear Cost Function

Accountants Straight-Line Approximation
Volume (Activity Base)
35
Anything for which a separate measurement of
costs is desired (products, customers,
departments, etc.)
Direct Costs
Cost Object
Indirect Costs
36
Costs 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
37
Different Costs for Different Purposes
38
Product 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
40
On the other hand, for these decisions, we might
be able to ignore some of the costs.
41
Product 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
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