ch 2 - cost terms, concepts, and classifications.ppt

7/24/2019 Ch 2 - Cost Terms, Concepts, and Classifications.ppt

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2-1

Costs Terms, Concepts andClassifications

Chapter Two

Dr. Yean Rithy


2/78

2-2

Learning Objective 1

Identify and give examplesIdentify and give examplesof each of the three basicof each of the three basic

manufacturing costmanufacturing cost

categories.categories.


3/78

2-3

The ProductThe Product

DirectMaterials

DirectMaterials

Directabor

Directabor

Manufacturing!verhead


anufacturing Costs


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2-!

"irect aterials

Raw materials that become an integral part of theproduct and that can be conveniently traced

directly to it.

#$ample% & radio installed in an automobile

#$ample% & radio installed in an automobile


5/78

2-'

"irect Labor

Those labor costs that can be easily traced toindividual units of product.

#$ample% (ages paid to automobile assembl) *or+ers

#$ample% (ages paid to automobile assembl) *or+ers


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2-

Manufacturing costs that cannotbe traced directlyto specific units produced.

anufacturing Overhead

#$amples% ndirect labor and indirect materials

#$amples% ndirect labor and indirect materials

(ages paid to emplo)ees*ho are not directl)

involved in production*or+.#$amples% maintenance

*or+ers, janitors andsecurit) guards.

aterials used to supportthe production process.

#$amples%lubricants andcleaning supplies used in theautomobile assembl) plant.


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2-


Distinguish betweenDistinguish betweenproduct costs and periodproduct costs and period

costs and give examplescosts and give examplesof each.of each.


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2-4

Product Costs 5ersus Period Costs

Product costsincludedirect materials, direct

labor, and

manufacturingoverhead.

Period costsinclude allselling costs and

administrative costs.

nventor) Cost of 6ood old

"alance#heet

Income#tatement

Sale

#$pense

Income#tatement


10/78

2-17

8uic+ Chec+

$hich of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany%

&. Manufacturing e'uipment depreciation.". (roperty taxes on corporate head'uarters.

C. Direct materials costs.

D. )lectrical costs to light the production

facility.

). #ales commissions.


11/78

2-11

8uic+ Chec+

$hich of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany%

&. Manufacturing e'uipment depreciation.". (roperty taxes on corporate head'uarters.

C. Direct materials costs.

D. )lectrical costs to light the production

facility.

). #ales commissions.


12/78

2-12

Classifications of Costs

DirectMaterialDirect

MaterialDirectaborDirectabor



(rimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows*

C i h di i d


13/78

2-13 Comparing erchandising andanufacturing &ctivities

erchandisers . . . 9u) finished goods.

ell finished goods.

anufacturers . . . 9u) ra* materials.

Produce and sellfinished goods.

egaLoart

2 1!


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2-1!

9alance heet

erchandiser

Current assetsCash

:eceivables

Prepaid #$penses

erchandise

nventor)

anufacturer

Current &ssets Cash

:eceivables

Prepaid #$penses

nventories+ :a* aterials

+ (or+ in Process

+ ;inished 6oods

2 1'


15/78

2-1'

erchandiser

Current assetsCash

:eceivables

Prepaid #$penses

erchandise

nventor)

anufacturer

Current &ssets Cash

:eceivables

Prepaid #$penses

nventories+ :a* aterials

+ (or+ in Process

+ ;inished 6oods

9alance heet

Partiall) completeproducts < some

material, labor, oroverhead has been

added.

Completed products

a*aiting sale.

aterials *aiting tobe processed.

2 1


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2-1


(repare an income(repare an income

statement includingstatement includingcalculation of the cost ofcalculation of the cost of

goods sold.goods sold.

2 1/


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2-1/

The ncome tatement

Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.

erchandising Compan)

Cost of goods sold% 9eg. merchandise

inventor) 1!,277=

> Purchases 23!,1'7

6oods available

for sale 2!,3'7=

- #nding merchandise

inventor) ?12,177@

A Cost of goods

sold 23,2'7=

2 1


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2-1

9asic #Buation for nventor) &ccounts

9eginning

balance

9eginningbalance

&dditions

to inventor)

&dditionsto inventor)+ =

#ndingbalance

#ndingbalance

(ithdra*alsfrom

inventor)

(ithdra*alsfrom

inventor)

+

2 14


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2-14

8uic+ Chec+

If your inventory balance at the beginning of themonth was ,-/// you bought ,-// during themonth and sold ,0// during the month what wouldbe the balance at the end of the month%

&. ,-///.

". , 1//.

C. ,-2//.

D. , 2//.

2 27


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2-27

8uic+ Chec+

If your inventory balance at the beginning of themonth was ,-/// you bought ,-// during themonth and sold ,0// during the month what wouldbe the balance at the end of the month%

&. ,-///.

". , 1//.

C. ,-2//.

D. , 2//.

,-/// 3 ,-// 4 ,--//,--// 5 ,0// 4 ,1//

2-21


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2-21

Learning Objective !

(repare a schedule of cost(repare a schedule of costof goods manufactured.of goods manufactured.

2-22


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2-22

chedule of Cost of 6oods anufactured

Calculates the cost of ra*material, direct labor and

manufacturing overhead used

in production.

Calculates the manufacturingcosts associated *ith goodsthat *ere finished during the

period.

2-23


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2 23

anufacturing (or+

:a* aterials Costs n Process

9eginning ra* "irect materials

materials inventor)

> :a* materials purchased

A :a* materials

available for use

in production

< #nding ra* materials

inventor)A :a* materials used

in production

&s items are removed from ra*materials inventor) and placed into

the production process, the) arecalled direct materials.

&s items are removed from ra*materials inventor) and placed into

the production process, the) arecalled direct materials.

Product Cost ;lo*s

2-2!


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2 2!

anufacturing (or+


9eginning ra* "irect materials

materials inventor) > "irect labor

> :a* materials > fg. overhead purchased A Total manufacturing

A :a* materials costs

available for use

in production



in production

Conversioncosts are costs

incurred toconvert thedirect materialinto a finished

product.

Conversioncosts are costs

incurred toconvert thedirect materialinto a finished

product.

Product Cost ;lo*s

2-2'


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2 2'

anufacturing (or+


9eginning ra* "irect materials 9eginning *or+ in

materials inventor) > "irect labor process inventor)

> :a* materials > fg. overhead > Total manufacturing purchased A Total manufacturing costs

A :a* materials costs A Total *or+ in

available for use process for the

in production period



in production

Product Cost ;lo*s

&ll manufacturing costs incurredduring the period are added to the

beginning balance of *or+ inprocess.

&ll manufacturing costs incurredduring the period are added to thebeginning balance of *or+ in

process.

2-2


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anufacturing (or+


9eginning ra* "irect materials 9eginning *or+ in

materials inventor) > "irect labor process inventor)

> :a* materials > fg. overhead > Total manufacturing

purchased A Total manufacturing costs

A :a* materials costs A Total *or+ in

available for use process for the

in production period

< #nding ra* materials < #nding *or+ in

inventor) process inventor)A :a* materials used A Cost of goods

in production manufactured

Product Cost ;lo*s

Costs associated *ith the goods thatare completed during the period are

transferred to finished goodsinventor).

Costs associated *ith the goods thatare completed during the period are

transferred to finished goodsinventor).

2-2/


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Product Cost ;lo*s

2-2


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anufacturing Cost ;lo*s

;inished6oods

Cost of

6oodsold

elling and&dministrative

(eriod Costselling and&dministrative

anufacturingOverhead

(or+ inProcess

"irect Labor

"alance #heet Costs Inventories

Income#tatement)xpenses

aterial Purchases :a* aterials

2-24


29/78

8uic+ Chec+

"eginning raw materials inventory was ,02///.During the month ,267/// of raw material waspurchased. & count at the end of the monthrevealed that ,21/// of raw material was stillpresent. $hat is the cost of direct material used%

&. ,267///

". ,262///

C. ,21////

D. , 2///

2-37


30/78

8uic+ Chec+

"eginning raw materials inventory was ,02///.During the month ,267/// of raw material waspurchased. & count at the end of the monthrevealed that ,21/// of raw material was stillpresent. $hat is the cost of direct material used%

&. ,267///

". ,262///

C. ,21////

D. , 2///

2-31


31/78

8uic+ Chec+

Direct materials used in production totaled,21////. Direct labor was ,068/// andfactory overhead was ,-1////. $hat were

total manufacturing costs incurred for themonth%

&. ,888///

". ,108///C. ,788///

D. Cannot be determined.

2-32


32/78

Direct materials used in production totaled,21////. Direct labor was ,068/// andfactory overhead was ,-1////. $hat were

total manufacturing costs incurred for themonth%

&. ,888///

". ,108///C. ,788///

D. Cannot be determined.

8uic+ Chec+

2-33


33/78

8uic+ Chec+

"eginning wor9 in process was ,-28///.Manufacturing costs incurred for the monthwere ,108///. There were ,2///// of

partially finished goods remaining in wor9in process inventory at the end of themonth. $hat was the cost of goodsmanufactured during the month%

&. ,--7////". , :-////C. , 67////D. Cannot be determined.

2-3!


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"eginning wor9 in process was ,-28///.Manufacturing costs incurred for the monthwere ,108///. There were ,2///// of

partially finished goods remaining in wor9in process inventory at the end of themonth. $hat was the cost of goodsmanufactured during the month%

&. ,--7////". , :-////C. , 67////D. Cannot be determined.

8uic+ Chec+

2-3'


35/78

8uic+ Chec+

"eginning finished goods inventory was,-0////. The cost of goods manufacturedfor the month was ,67////. &nd the ending

finished goods inventory was ,-8////.$hat was the cost of goods sold for themonth%

&. , 2////.

". ,6;////.C. ,61////.

D. ,67////.

2-3


36/78

8uic+ Chec+

"eginning finished goods inventory was,-0////. The cost of goods manufacturedfor the month was ,67////. &nd the ending

finished goods inventory was ,-8////.$hat was the cost of goods sold for themonth%

&. , 2////.

". ,6;////.C. ,61////.

D. ,67////.

,-0//// 3 ,67//// 4 ,1:////

,1://// 5 ,-8//// 4 ,6;////

2-3/


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Learning Objective '


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Cost Classifications for Predicting Cost9ehavior

=ow a cost will react tochanges in the level of

activity within the

relevant range. Total variable costs

change when activitychanges.

Total fi$ed costsremainunchanged when activitychanges.

=ow a cost will react tochanges in the level of

activity within the

relevant range. Total variable costs

change when activitychanges.

Total fi$ed costsremainunchanged when activitychanges.

2-34


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5ariable Cost

Your total long distancetelephone bill is basedon how many minutes you tal9.

Minutes Tal9ed

Total

ongDistance

Telephone"ill

2-!7


40/78

5ariable Cost Per nit

Minutes Tal9ed

(e

rMinute

TelephoneCharge

The cost per long distance minutetal9ed isconstant. >or example -/ cents per minute.

2-!1

;i d C


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;i$ed Cost

Your monthly basic telephone billprobablydoes not change when you ma9e more local

calls.

?umber of ocal Calls

Monthly"asic

Tele

phone"ill

2-!2

;i d C t P it


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;i$ed Cost Per nit

?umber of ocal Calls

Monthly

"asicTeleph

one

"illp

erocalCall

The average fixed cost per local calldecreasesas more local calls are made.

2-!3 Cost Classifications for Predicting Cost


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Cost Classifications for Predicting Cost9ehavior

9ehavior of Cost ?*ithin the relevant range@

Cost n Total Per nit

5ariable Total variable cost changes 5ariable cost per unit remainsas activit) level changes. the same over *ide ranges

of activit).

;i$ed Total fi$ed cost remains &verage fi$ed cost per unit goes

the same even *hen the do*n as activit) level goes up.

activit) level changes.

2-!!

8 i + Ch +


44/78

8uic+ Chec+

$hich of the following costs would be variable withrespect to the number of cones sold at a "as9ins @Robbins shop% AThere may be more than onecorrect answer.B

&. The cost of lighting the store.

". The wages of the store manager.

C. The cost of ice cream.

D. The cost of nap9ins for customers.

2-!'

8 i + Ch +


45/78

8uic+ Chec+

$hich of the following costs would be variable withrespect to the number of cones sold at a "as9ins @Robbins shop% AThere may be more than onecorrect answer.B

&. The cost of lighting the store.

". The wages of the store manager.

C. The cost of ice cream.

D. The cost of nap9ins for customers.

2-!

L i Obj ti


46/78

Learning Objective


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&ssigning Costs to Cost Objects

"irect costs

Costs that can beeasil) and convenientl)traced to a unit of

product or other costobject.

#$amples% directmaterial and direct labor

ndirect costs

Costs that cannot beeasil) and convenientl)traced to a unit of

product or other costobject.

#$ample% manufacturingoverhead

2-!

L i Obj ti /


48/78

Learning Objective /

Define and give examplesDefine and give examples

of cost classifications usedof cost classifications used

in ma9ing decisions*in ma9ing decisions*differential costsdifferential costs

opportunity costs andopportunity costs and

sun9 costs.sun9 costs.

2-!4

C t Cl ifi ti f " i i +i


49/78

)very decision involves a choice between atleast two alternatives.

!nly those costs and benefits that differbetween alternatives are relevant in a decision.&ll other costs and benefits can and should be

ignored.

Cost Classifications for "ecision a+ing

2-'7

"ifferential Cost and :evenue


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"ifferential Cost and :evenue

Costs and revenues that differ amongCosts and revenues that differ amongalternatives.alternatives.

#$ample% Dou have a job pa)ing =1,'77 per month in)our hometo*n. Dou have a job offer in a neighboringcit) that pa)s =2,777 per month. The commuting costto the cit) is =377 per month.

#$ample% Dou have a job pa)ing =1,'77 per month in)our hometo*n. Dou have a job offer in a neighboringcit) that pa)s =2,777 per month. The commuting costto the cit) is =377 per month.

"ifferential revenue is%=2,777 < =1,'77 A ='77

"ifferential cost is%

=377

2-'1

Opportunit) Cost


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Opportunit) Cost

The potential benefit that isgiven up *hen one

alternative is selected overanother.

)xample* If you werenot attending collegeyou could be earning

,-8/// per year.Your opportunity costof attending college forone year is ,-8///.

2-'2

un+ Costs


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un+ Costs

un+ costs have alread) been incurred and cannot bechanged no* or in the future. The) should be ignored

*hen ma+ing decisions.

)xample* You bought an automobile that cost,-//// two years ago. The ,-//// cost is sun9because whether you drive it par9 it trade it or sell

it you cannot change the ,-//// cost.

2-'3

8uic+ Chec+


53/78

8uic+ Chec+

#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the cost of the traintic9et relevant in this decision% In other wordsshould the cost of the train tic9et affect the decisionof whether you drive or ta9e the train to (ortland%

&. Yes the cost of the train tic9et is relevant.

". ?o the cost of the train tic9et is not relevant.

2-'!

8uic+ Chec+


54/78

8uic+ Chec+

#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the cost of the traintic9et relevant in this decision% In other wordsshould the cost of the train tic9et affect the decisionof whether you drive or ta9e the train to (ortland%

&. Yes the cost of the train tic9et is relevant.

". ?o the cost of the train tic9et is not relevant.

2-''

8uic+ Chec+


55/78

8uic+ Chec+

#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the annual cost oflicensing your car relevant in this decision%

&. Yes the licensing cost is relevant.

". ?o the licensing cost is not relevant.

2-'

8uic+ Chec+


56/78

8uic+ Chec+

#uppose you are trying to decide whether to driveor ta9e the train to (ortland to attend a concert. Youhave ample cash to do either but you dont want towaste money needlessly. Is the annual cost oflicensing your car relevant in this decision%

&. Yes the licensing cost is relevant.

". ?o the licensing cost is not relevant.

2-'/

8uic+ Chec+


57/78

8uic+ Chec+

#uppose that your car could be sold now for,8///. Is this a sun9 cost%

&. Yes it is a sun9 cost.

". ?o it is not a sun9 cost.

2-'

8uic+ Chec+


58/78

8uic+ Chec+

#uppose that your car could be sold now for,8///. Is this a sun9 cost%

&. Yes it is a sun9 cost.

". ?o it is not a sun9 cost.

2-'4 ummar) of the T)pes of Cost


59/78

) )pClassifications

>inancial reporting

(redicting cost behavior

&ssigning costs to cost obects

Decision ma9ing

2-7


60/78

;urther Classification of LaborCosts

&ppendix 2&

2-1

Learning Objective


61/78

Learning Objective

A&ppendix 2&BA&ppendix 2&B

(roperly account for labor(roperly account for laborcosts associated with idlecosts associated with idle

time overtime and fringetime overtime and fringe

benefits.benefits.

2-2

dle Time


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dle Time

The labor costs incurredduring idle time are ordinaril)treated as manufacturing

overhead.

achine9rea+do*ns

aterialhortages

Po*er ;ailures

2-3

Overtime


63/78

Overtime

The overtime premiums for all factor)*or+ers are usuall) considered to be part

of manufacturing overhead.

2-!

Labor ;ringe 9enefits


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Labor ;ringe 9enefits

;ringe benefits include emplo)er paidcosts for insurance programs, retirement

plans, supplemental unemplo)ment

programs, ocial ecurit), edicare,*or+ersE compensation andunemplo)ment ta$es.

ome companiesinclude all of these

costs inmanufacturing

overhead.

Other companies treatfringe benefit

e$penses of directlaborers as additional

direct labor costs.

2-'


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Cost of 8ualit)

&ppendix 2"

2-



66/78


A&ppendix 2"BA&ppendix 2"B

Identify the four types ofIdentify the four types of'uality costs and explain'uality costs and explain

how they interact.how they interact.

2-/

8ualit) of Conformance


67/78

8ualit) of Conformance

(hen the over*helming majorit) ofproducts produced conform to design

specifications and are free from

defects.

2-

Prevention and &ppraisal Costs


68/78

Prevention and &ppraisal Costs

PreventionCosts

upport activities *hosepurpose is to reduce the

number of defects

&ppraisal Costsncurred to identif)

defective products beforethe products are shipped

2-4

nternal and #$ternal ;ailure Costs


69/78

nternal and #$ternal ;ailure Costs

nternal ;ailureCosts

ncurred as a result ofidentif)ing defects

before the) are shipped

#$ternal ;ailureCosts

ncurred as a result ofdefective products beingdelivered to customers

2-/7

#$amples of 8ualit) Costs


70/78

#$amples of 8ualit) Costs

Prevention Costs+8ualit) training+8ualit) circles+tatistical processcontrol activities

&ppraisal Costs+Testing F inspecting

incoming materials+;inal product testing+"epreciation of testing

eBuipment

nternal ;ailure Costs+crap+poilage+:e*or+

#$ternal ;ailure Costs

+Cost of field servicing Fhandling complaints

+(arrant) repairs+Lost sales

2-/1

"istribution of 8ualit) Costs


71/78

"istribution of 8ualit) Costs

(hen Bualit) of conformance is lo*, total

Bualit) cost is high and consists mostl) ofinternal and e$ternal failure.

Total Bualit) costs drop rapidl) as the Bualit)of conformance increases.

Companies reduce their total Bualit) costs b)focusing their efforts on prevention andappraisal because the cost savings fromreduced defects usuall) over*helm the

costs of additional prevention andappraisal.

Total Bualit) costs are minimied *hen theBualit) of conformance is slightl) less

than 177G.

2-/2



72/78


A&ppendix 2"BA&ppendix 2"B

(repare and interpret a(repare and interpret a'uality cost report.'uality cost report.

2-/3

Dear 2 Dear 1

8ualit) Cost :eport;or Dears 1 and 2


73/78

8ualit) costreports providean estimate of

the financialconseBuences

of thecompan)Es

current defectrate.

&mount PercentH &mount PercentH

(revention costs*

#ystems development ;/////, /.1/E 26////, /.8;E

Fuality training 2-//// /.;2E -0//// /.27E

#upervision of prevention activities 6//// /.-;E ;//// /./1E

Fuality improvement 02//// /.7;E 2-//// /.;2ETotal prevention cost -////// 2.//E 78//// -.0/E

&ppraisal costs*

Inspection 7///// -.2/E 87//// -.-2E

Reliability testing 81//// -.-7E ;2//// /.1;E

#upervision of testing and inspection -2//// /.2;E 1//// /.-7E

Depreciation of test e'uipment 2///// /.;/E -;//// /.21E

Total appraisal cost -8///// 0.//E -2///// 2.;/E

Internal failure costs *

?et cost of scrap :///// -.1/E 68//// -.8/E

Rewor9 labor and overhead -;0//// 2.17E 1-//// -.72E

Downtime due to defects in 'uality -6//// /.0;E -///// /.2/E

Disposal of defective products 8///// -.//E 0;//// /.71E

Total internal failure cost 0////// 7.//E 2////// ;.//E

)xternal failure costs*

$arranty repairs ;///// /.1/E :///// -.1/E

$arranty replacements 16//// -.6;E 20///// ;.7/E

&llowances -0//// /.27E 70//// -.27E

Cost of field servicing 7///// -.2/E -02//// 2.7;E

Total external failure cost 2////// ;.//E 8-8//// -/.0/E

Total 'uality cost 68/////, -8.//E ://////, -1.//E

G &s a percentage of total sales. In each year sales totaled ,8///////.

2-/!

8ualit) Cost :eports in 6raphic ;orm


74/78

8ualit) Cost :eports in 6raphic ;orm

=17

4

/

'

!

3

2

1&ppraisal

7Prevention Prevention

1 2

Dear

8ualit)Cost?inm

illions@

&ppraisal

nternal

;ailure

#$ternal

;ailure

nternal

;ailure

#$ternal

;ailure

27

1

1

1!

12

17

!

2&ppraisal

7Prevention Prevention

1 2

Dear

8uali

t)CostasaPercentageof1ales

&ppraisal

nternal

;ailure

#$ternal

;ailure

nternal

;ailure

#$ternal

;ailure

8ualit)reportscan also

beprepared

ingraphicform.

2-/'

ses of 8ualit) Cost nformation


75/78

8 )

Ielp managers see thefinancial significance of

defects.

Ielp managers identif)the relative importanceof the Bualit) problems.

Ielp managers see*hether their Bualit)

costs are poorl)distributed.

2-/

Limitations of 8ualit) Cost nformation


76/78

8 )

impl) measuring Bualit)cost problems does notsolve Bualit) problems.

:esults usuall) lagbehind Bualit)

improvement programs.

The most importantBualit) cost, lost sales, is

often omitted fromBualit) cost reports.

2-//

O 4777 tandards


77/78

O 4777 standards have becomeinternational measures of Bualit).

To become O 4777 certified, acompan) must demonstrate%

1. & Bualit) control s)stem is in use, and thes)stem clearl) defines an e$pected level ofBualit).

2. The s)stem is full) operational and is

bac+ed up *ith detailed documentation ofBualit) control procedures.

3. The intended level of Bualit) is beingachieved on a sustained basis.

2-/

#nd of Chapter 2


78/78

p

ch 2 - cost terms, concepts, and classifications.ppt

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