An introduction to cost terms and purpose


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An introduction to cost terms and purpose

  1. 1. An Introduction to Cost terms and purpose Chapter 2
  2. 2. Accounting The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character and interpreting the results thereof.
  3. 3. Types of Accounting Financial Accounting is the process of summarizing financial data taken from an organization’s accounting records and publishing in the form of annual reports for the benefit of people outside the organization.
  4. 4. Types of Accounting Management Accounting is concerned with the provisions and use of accounting information to managers within an organizations, to provide them with the basis to make informed business decisions.
  5. 5. Cost Cost defined as resource sacrificed (used) or forgone to achieve a specific objective. A cost Object Actual cost Budgeted cost
  6. 6. Stages of costs Cost Accumulation is the collection of cost data in some organized way by means of accounting system Cost Assignment is a term that encompass both i. Tracing accumulated costs that have a direct relationship to a cost object ii. Allocating accumulated costs that have an indirect relationship to cost object
  7. 7. Types of Cost an its Behavior$ Fixed Costs: costs that remain constant regardless of the quantity of product produced. Output Variable Costs: costs that$ increase linearly and proportionately as production volume increases. Output Profit = (Sales Revenue-Variable Cost) - Fixed Cost
  8. 8. Types of Cost and its Behavior Cost Driver: Any activity or event that causes costs to be incurred. Direct material (DM), direct labor (DL), and Manufacturing Cost: manufacturing overhead (MOH). Sales and General All costs associated with running the business, Administrative Costs: excluding production costs. Direct and Indirect Costs: Costs that can either be traced (direct) or not traced (indirect) to a specific department in the organization. Controllable and Costs used to describe the extent of a manager’s Uncontrollable Costs: influence on cost. Product/Period Cost: Refers to the timing which costs become expenses.
  9. 9. Economic Terms• Opportunity Benefit lost because the choice of one Cost: action precludes another action.• Sunk Cost: Costs that have already been incurred and can not be altered by current or future decisions.• Differential and Difference in the costs incurred under two Incremental alternative actions. Cost: Cost associated with producing one• Marginal Cost: additional unit.• Average Cost Total cost for the quantity produced, divided per Unit: by the number of units produced.
  10. 10. Industry Differentiation on the basis of Cost Manufacturing sector companies Merchandising sector companies Service sector companies
  11. 11. Industry Differentiation on the basis of Cost Types of Inventories (manufacturing)  Direct material inventory  Work in process inventory  Finished goods inventory
  12. 12. Elements of Manufacturing Cost Direct Material Direct Labor Manufacturing Overhead  Indirect Material  Indirect Labor  All other cost related to manufacturing
  13. 13. Elements of Manufacturing Cost Primecost Prime cost = Direct material + Direct labor Conversion cost Conversion cost = Direct labor + Manufacturing overhead cost
  14. 14. Cost Distinction according to GAAP Product Costs I. Direct material II. Direct labor III. Manufacturing overheads Period Costs I. Selling Expense II. General & Administrative Expense
  15. 15. Types of Cost System Job Order SystemThe job order cost system is used whenproducts are made based on specificcustomer orders. Each product produced isconsidered a job. Costs are tracked by job.Services rendered can also be considered ajob.
  16. 16. Types of Cost System Process Cost SystemProcess costing is used when products aremanufactured under conditions ofcontinuous processing or under massproduction methods. In fact, process costingprocedures are often termed "continuousor mass production cost accountingprocedures".
  17. 17. CALCULATING COST OF GOODSMANUFACTURED Step1: Calculation of direct material cost Step 2: Total manufacturing costs Step 3: Cost of goods manufactured
  18. 18. STEP 1: CALCULATING DIRECTMATERIAL COST Direct material $ Beginning inventory **** Add: Raw material purchased **** Raw material available for use **** Less: Ending inventory (****) Direct material used *****
  19. 19. STEP 2: TOTAL MANUFACTURINGCOSTTotal manufacturing cost $Direct material used ***Add: Direct labor cost ***Add: Manufacturing overhead cost ***Total manufacturing cost ****
  20. 20. STEP 3: COST OF GOODSMANUFACTUREDCost of goods manufactured $Total manufacturing cost ****Add: Beginning W-I-P ****Cost of goods to be accounted for ****Less: Ending W-I-P (***)Cost of goods manufactured ****
  21. 21. CALCULATION OF COST OF GOODSSOLDCost of goods sold $Cost of goods manufactured ****Add: Beginning Finished goods ****Cost of goods available for sale ****Less: Ending Finished goods (****)Cost of goods sold *****
  22. 22. Manufacturing Facility Direct Material PurchasedDirect Material Storage Raw MaterialsIt’s a Warehouse! Direct Material UsedFinished Goods W-I-P : Direct Material Direct Labor Inventory Manufacturing Overhead Costs