cost concepts: managerial accounting

8/10/2019 Cost Concepts: Managerial Accounting

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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPACopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Managerial Accounting and CostConceptsChapter 2


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Learning Objective 1

Identify and give

examples of each of thethree basic

manufacturing cost

categories.


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The Product

DirectMaterials

DirectLabor

ManufacturingOverhead

Classifications of Manufacturing Costs


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Direct Materials

Raw materials that become an integralpart of the product and that can beconveniently traced directly to it.

Example: A radio installed in an automobile


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Direct Labor

Those labor costs that can be easilytraced to individual units of product.

Example: Wages paid to automobile assembly workers


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Manufacturing Overhead

Manufacturing costs that cannotbe easilytraced directly to specific units produced.

Examples: Indirect materials and indirect labor

Wages paid to employeeswho are not directly

involved in productionwork.Examples: maintenance

workers, janitors, andsecurity guards.

Materials used to supportthe production process.

Examples: lubricants andcleaning supplies used in theautomobile assembly plant.


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Nonmanufacturing Costs

SellingCosts

Costs necessary to

secure the order anddeliver the product.

AdministrativeCosts

All executive,

organizational, andclerical costs.


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Distinguish between

product costs and periodcosts and give examples

of each.


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Product Costs Versus Period Costs

Product costs includedirect materials, direct

labor, and

manufacturingoverhead.

Period costsinclude allselling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement


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Quick Check

Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.E. Sales commissions.


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Quick Check

Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.E. Sales commissions.

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Classifications of Costs

Manufacturing costs are oftenclassified as follows:

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

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Understand cost

behavior patternsincluding variable costs,fixed costs, and mixed

costs.

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Cost Classifications for Predicting Cost

Behavior

Cost behavior refers tohow a cost will react tochanges in the level of

activity. The mostcommonclassifications are:

Variable costs.

Fixed costs

Mixed costs.

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Variable Cost

Your total texting bill is based on howmany texts you send.

Number of Texts Sent

Total

TextingBill

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Variable Cost Per Unit

The cost per text sent is constant at

5 cents per text message.

Number of Texts Sent

CostP

erTextSent

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The Activity Base (Cost Driver)

A measure of whatcauses the

incurrence of avariable cost

Unitsproduced

Milesdriven

Machinehours

Laborhours

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Fixed Cost

Your monthly contract fee for your cell phone isfixed for the number of monthly minutes in yourcontract. The monthly contract fee does notchange based on the number of calls you make.

Number of Minutes UsedWithin Monthl Plan

MonthlyC

ellPhone

ContractFee

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Fixed Cost Per Unit

Within the monthly contract allotment, the averagefixed cost per cell phone call made decreases as

more calls are made.

Number of Minutes Used

Within Monthly Plan

Month

lyCellPhon

e

ContractFee


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RelevantRange

A straight lineclosely

approximates acurvilinear

variable costline within the

relevant range.

Activity

To

talCost

EconomistsCurvilinear Cost

Function

The Linearity Assumption and the Relevant

Range

Accountants Straight-Line

Approximation (constantunit variable cost)

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Fixed Costs and the Relevant Range

Fixed costs would increase

in a step fashion at a rate of

$30,000 for each additional

1,000 square feet.

For example, assume office space is available at

a rental rate of $30,000 per year in increments of

1,000 square feet.

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Rent

CostinTho

usands

ofDollars

0 1,000 2,000 3,000Rented Area (Square Feet)

0

30

60

Fixed Costs and the Relevant Range

90

RelevantRange

The relevant rangeof activity for a fixedcost is the range ofactivity over which

the graph of thecost is flat.

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Cost Classifications for Predicting Cost

Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost Increase Variable cost per unit

and decrease in proportion remains constant.

to changes in the activity level.

Fixed Total fixed cost is not affected Fixed cost per unit decreases

by changes in the activity as the activity level rises and

level within the relevant range. increases as the activity level falls.

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Quick Check

Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be more

than one correct answer.)A. The cost of lighting the store.

B. The wages of the store manager.

C. The cost of ice cream.

D. The cost of napkins for customers.

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Quick Check

Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be more

than one correct answer.)A. The cost of lighting the store.

B. The wages of the store manager.

C. The cost of ice cream.

D. The cost of napkins for customers.


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Mixed Costs

The total mixed cost line can be expressedas an equation: Y= a+ bX

Where: Y = The total mixed cost.

a = The total fixed cost (the

vertical intercept of the line).

b = The variable cost per unit of

activity (the slope of the line).

X = The level of activity.

Fixed Monthly

Utility Charge

VariableCost per KW

Activity (Kilowatt Hours)

TotalU

tilityCost

X

Y

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Mixed Costs An Example

If your fixed monthly utility charge is $40, yourvariable cost is $0.03 per kilowatt hour, and your

monthly activity level is 2,000 kilowatt hours, what isthe amount of your utility bill?

Y =a +bX

Y = $40 + ($0.03 2,000)Y = $100

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Analysis of Mixed Costs

In account analysis, each account isclassified as either variable or fixed based

on the analysts knowledge of how

the account behaves.

The engineering approachclassifies

costs based upon an industrialengineers evaluation of production

methods, and material, labor, andoverhead requirements.

Account Analysis and the Engineering Approach

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Analyze a mixed cost

using a scattergraph plotand the high-low

method.

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Scattergraph Plots An Example

Assume the following hours of maintenance workand the total maintenance costs for six months.


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The High-Low Method An Example

The variable costper hourof

maintenance isequal to the changein cost divided by

the change in hours.

= $6.00/hour$2,400

400

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Total Fixed Cost = Total CostTotal Variable Cost

Total Fixed Cost = $9,800($6/hour 850 hours)

Total Fixed Cost = $9,800$5,100

Total Fixed Cost = $4,700

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Y = $4,700 + $6.00XThe Cost Equation for Maintenance

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Quick Check

Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is thevariableportion of salessalaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unitd. $0.125 per unit

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Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is thevariableportion of sales

salaries and commission?

a. $0.08 per unit

b. $0.10 per unit

c. $0.12 per unitd. $0.125 per unit

Quick Check

$4,000 40,000 units

= $0.10 per unit

Units Cost

High level 120,000 14,000$

Low level 80,000 10,000

Change 40,000 4,000$

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Quick Check

Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is the fixedportion of sales

salaries and commissions?

a. $ 2,000

b. $ 4,000

c. $10,000d. $12,000

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Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is the fixedportion of sales

salaries and commissions?

a. $ 2,000

b. $ 4,000

c. $10,000d. $12,000

Quick Check

Total cost = Total fixed cost +

Total variable cost

$14,000 = Total fixed cost +($0.10 120,000 units)

Total fixed cost = $14,000 - $12,000

Total fixed cost = $2,000

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Least-Squares Regression Method

A method used to analyze mixed costs if ascattergraph plot reveals an approximately linear

relationship between theXand Yvariables.

This method uses allof thedata points to estimatethe fixed and variablecost components of a

mixed cost. The goal of this method isto fit a straight line to thedata that minimizes the

sum of the squared errors.

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Least-Squares Regression Method

Software can be used to fit aregression line through the datapoints.

The cost analysis objective is thesame: Y= a+ bX

Least-squares regression also provides a statistic,called theR2, which is a measure of the goodness

of fit of the regression line to the data points.

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Comparing Results From

the Two Methods

The two methods just discussed providedifferent estimates of the fixed and variable cost

components of a mixed cost.

This is to be expected because each methoduses differing amounts of the data points to

provide estimates.

Least-squares regression provides the mostaccurate estimatebecause it uses all the data

points.

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Prepare incomestatements for a

merchandising companyusing the traditional and

contribution formats.

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The Traditional and Contribution Formats

Used primarily forexternal reporting.

Used primarily bymanagement.

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Uses of the Contribution Format

The contribution income statement format is usedas an internal planning and decision-making tool.

We will use this approach for:

1.Cost-volume-profit analysis (Chapter 5).

2.Budgeting (Chapter 8).

3.Segmented reporting of profit data (Chapter 6).

4.Special decisions such as pricing and make-or-buy analysis (Chapter 12).

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Understand the differences

between direct and indirectcosts.

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Assigning Costs to Cost Objects

Direct costs Costs that can be

easily and

conveniently tracedto a unit of productor other cost object.

Examples: direct

material and directlabor

Indirect costs Costs that cannot

be easily and

conveniently tracedto a unit of productor other cost object.

Example:

manufacturingoverhead

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Understand costclassifications used in

making decisions:differential costs,

opportunity costs, andsunk costs.

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Every decision involves a choicebetween at least twoalternatives.

Only those costs and benefitsthat differ between alternatives

are relevant in a decision. Allother costs and benefits can andshould be ignored as irrelevant.

Cost Classifications for Decision Making

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Differential Cost and Revenue

Costs and revenues that differamong alternatives.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.

Differential revenue is:$2,000 $1,500 = $500

Differential cost is:$300

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Opportunity Cost

The potential benefit that isgiven up when one alternative

is selected over another.

Example: If you werenot attending college,you could be earning

$15,000 per year.Your opportunity costof attending college forone year is $15,000.

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Sunk Costs

Sunk costs have already been incurredand cannot be changed now or in the

future. These costs should be ignoredwhen making decisions.

Example: Suppose you had purchased gold for

$400 an ounce, but now it is selling for $250 anounce. Should you wait for the gold to reach $400 anounce before selling it? You may say, Yes even

though the $400 purchase is a sunk costs.


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Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you dont want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis decision?

A. Yes, the licensing cost is relevant.

B. No, the licensing cost is not relevant.

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Quick Check

Suppose that your car could be sold now for$5,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

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Quick Check

Suppose that your car could be sold now for$5,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

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Summary of the Types of Cost

Classifications

FinancialReporting

Predicting CostBehavior

Assigning Coststo Cost Objects

Making BusinessDecisions


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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Least-Squares Regression

ComputationsAppendix 2A

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Analyze a mixed cost

using a scattergraph plotand the least-squaresregression method.

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Simple Regression Analysis

Matrix, Inc. wants toknow its average

fixed cost andvariable cost permeals served.

Using the data to theright, lets see how to

do a regression usingMicrosoft Excel.

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Simple Regression Using Excel

You will need three pieces ofinformation from yourregression analysis:

1. Estimated Variable Cost PerUnit (line slope)

2. Estimated Fixed Costs (lineintercept)

3. Goodness of fit, or R2

To get these three piecesinformation we will need tousethreeExcel functions.

SLOPE, INTERCEPT, and RSQ

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Place your cursor incell F4 and press the

= key. Click on thepull down menu and

scroll down to MoreFunctions . . .

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Scroll down to theStatistical

functions. Nowscroll down thestatistical

functions until you

highlightSLOPE


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1. In the Known_ys box, enter C4:C19 for the range.2. In the Known_xs box, enter D4:D19 for the range.



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With your cursor incell F5, press the =

key and go to the pulldown menu for

Special Functions.Select Statistical and

scroll down tohighlight the

INTERCEPTfunction.


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1. In the Known_ys box, enter C4:C19 for the range.

2. In the Known_xs box, enter D4:D19 for the range.

Here is theestimate of the

fixed costs.


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Finally, we willdetermine thegoodness of

fit, or R2, byusing the RSQ

function.


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1. In the Known_ys box, enter C4:C19 for the range.

2 In the Known xs box enter D4:D19 for the range

Here is the

estimate of R2.


cost concepts: managerial accounting

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