2.2 Distinguish between direct costs and indirect costs 2.3 Explain variable costs and fixed costs 2.4 Interpret unit costs cautiously 3 Learning Objectives 3
2.5 Distinguish inventoriable costs from period costs
2.6 Illustrate the flow of inventoriable and period costs 2.7 Explain why product costs are computed in different ways for different purposes 2.8 Describe a framework for cost accounting and cost management. 4 Basic Cost Terminology (1 of 2) 4
Cost – a sacrificed or forgone resource to achieve a specific
objective. Actual cost – a cost that has occurred Budgeted cost – a predicted cost Cost object – anything for which a cost measurement is desired 5 Basic Cost Terminology (2 of 2) 5
Cost Accumulation – the collection of cost data in an organized way by
means of an accounting system Cost Assignment – a general term that encompasses the gathering of accumulated costs to a cost object in two ways: Tracing costs with a direct relationship to the cost object, and
Allocating accumulated costs with an indirect relationship to a cost
object. 6 COST OBJECT EXAMPLES AT BMW 6 Cost Object Illustration Product A BMW X6 sports activity vehicle Telephone hotline providing information and Service assistance to BMW dealers R&D project on DVD system enhancement in BMW Project cars Herb Chambers Motors, a dealer that purchases a Customer broad range of BMW vehicles Setting up machines for production or maintaining Activity production equipment Department Environmental, Health and Safety department 7 Direct and Indirect Costs 7
Direct costs can be conveniently and economically traced
(tracked) to a cost object. Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner. 8 Cost Assignment to a Cost Object (BMW Example) 8 9 Cost Behavior Patterns: Variable Costs and Fixed Costs – (1 of 2)
Variable costs change, in total, in proportion to changes in the
related level of activity or volume of output produced. Fixed costs remain unchanged, in total, for a given time period, despite changes in the related level of activity or volume of output produced. Costs are fixed or variable for a specific activity and/or for a given time period. 10 Cost Behavior Patterns: Variable Costs and Fixed Costs – (2 of 2)
Variable costs are constant on a per-unit basis. If a product
takes 5 pounds of material each, it stays the same per unit regardless if one, ten or a thousand units are produced. Fixed costs per unit change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit. 11 Graphs of variable and fixed costs
PANEL A: Variable Costs of Steering Wheels at PANEL B: Supervision Costs for the BMW X6 $60 per BMW X6 Assembled Assembly Line (in Millions) 12 Other Cost Concepts 12
Mixed costs have both fixed and variable elements.
Cost driver – a variable, such as the level of activity or volume, that causally affects costs over a given time span. Relevant range – the band or range of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and the cost in question. Fixed costs are considered fixed only within the relevant range. Examples of the Multiple Classifications of 13
Costs 13 14 Types of Inventory - Manufacturing
Direct materials – resources in-stock and available for use
Work-in-process (or progress) – goods partially worked on but not yet completed, often abbreviated as WIP Finished goods – goods completed but not yet sold 15
Classifications of Manufacturing Costs
Also known as inventoriable costs: Direct materials – acquisition costs of all material that will
become part of the cost object.
Direct labor – compensation of all manufacturing labor that can be traced to the cost object. Indirect manufacturing – all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way. 16
Inventoriable Costs vs Period Costs
Inventoriable costs are all costs of a product that are
considered assets in a company’s balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold. For manufacturing companies, all manufacturing costs are inventoriable costs. Period costs are all costs in the income statement other than cost of goods sold. They are treated as expenses of the accounting period in which they are incurred. 17 Exercise 2-23 17 18 Cost Flows Illustrated 19 Multiple-Step Income Statement, Part One 20
Multiple –Step Income Statement, Part Two
21
Other Cost Considerations
Prime cost is a term referring to all direct manufacturing costs (materials
and labor). Conversation cost is a term referring to direct labor and indirect manufacturing costs. Overtime premium labor costs are considered part of indirect overhead costs. Idle time refers to the wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling, and the like. 22 Illustration 22
Selected account balances for the year ended Dec 31 are provided below for ABC Company: Inventory balances at the beginning and the end of the year were as follows: The total manufacturing costs incurred for the year were $683,000; the goods available for sale = $740,000; and the total cost of goods sold = $660,000. Assume there were no indirect materials.
(in USD) Selling and administrative expenses 110,000 Purchases of raw materials (direct) 290,000 Direct labor a? Advertising expense 80,000 Manufacturing overhead 270,000 Sales salaries 50,000 23
Beginning of the Year (in USD) End of the Year (in USD) Raw materials 40,000 10,000 Work in process b? 35,000 Finished goods 50,000 d?
1. Calculate: a) direct labor used; b) beginning work in process inventory; c) cost of
goods manufactured and d) ending finished goods inventory. (Hint: prepare a schedule of cost of goods manufactured and the cost of goods sold section) 24 Costs of Goods Manufactured and Cost of Goods Sold 24
Beginning raw materials 40,000
Purchases of raw materials 290,000 Raw materials available 330,000 Ending raw materials -10,000 Raw materials used 320,000 Direct labor used 93,000 Manufacturing overhead 270,000 Manufacturing costs incurred for the year 683,000 Beginning work in process inventory 42,000 Ending work in process inventory -35,000 Costs of goods manufactured 690,000 Beginning Finished goods 50,000 The goods available for sale 740,000 Ending finished goods -80,000 Costs of goods sold 660,000 25 2. Supposed that sales for the year totalled $1,350,000. Calculate a) gross margin and b) operating income for the year. (Hint: prepare a schedule of 25 income statement)
Income Statement
Sales 1,350,000 Costs of goods sold -660,000 Gross margin 690,000 Operating expenses: Selling and administrative expenses -110,000 Advertising expense -80,000 Sales salaries -50,000 Operating income 450,000 26
Assignment 26
Please do Exercise 2-33 Inventoriable versus period
