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Basic concepts of cost accounting

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Basic Concepts of Cost Accounting

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Basic concepts of cost accounting

  1. 1. 2-1 Basic Cost Accounting Concepts
  2. 2. 2-2 What is Cost Accounting? The branch of accounting that deals with calculation of cost per unit, management of cost per unit and control of cost per unit is called cost accounting
  3. 3. 2-3 Objectives of Cost Accounting 1-To calculate accurate profit 2-To calculate correct value of ending inventories 3-To calculate correct value of C.G.S 4- To calculate accurate price of Goods
  4. 4. 2-4 Learning Objective 1 Identify and give examples of each of the three basic manufacturing cost categories.
  5. 5. 2-5 Classifications of Manufacturing Costs TThhee PPrroodduucctt Direct Materials Direct Labor Manufacturing Overhead or FOH
  6. 6. 2-6 Direct Materials Raw materials that become an integral part of the product and that can be easily traceable Example: Tyres iinn aann aauuttoommoobbiillee
  7. 7. 2-7 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile aasssseemmbbllyy wwoorrkkeerrss
  8. 8. 2-8 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials aanndd iinnddiirreecctt llaabboorr
  9. 9. 2-9 Nonmanufacturing Costs Administrative Costs All executive, organizational, and clerical costs.
  10. 10. 2-10 Learning Objective 2 What is difference between product costs and period costs and give examples of each.
  11. 11. 2-11 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
  12. 12. 2-12 Quick Check  Which of the following costs would be considered a period rather than a product cost in 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.
  13. 13. 2-13 Quick Check  Which of the following costs would be considered a period rather than a product cost in 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.
  14. 14. 2-14 Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost
  15. 15. 2-15 Learning Objective 3 Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.
  16. 16. 2-16 Cost Classifications for Predicting Cost Behavior Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are: ▫ Variable costs. ▫ Fixed costs ▫ Mixed costs.
  17. 17. 2-17 Variable Cost Your total texting bill is based on how many texts you send. Total Texting Bill Number of Texts Sent
  18. 18. 2-18 Variable Cost Per Unit The cost per text sent is constant at Rs. 2 per text message. Number of Texts Sent Cost Per Text Sent
  19. 19. 2-19 Fixed Cost Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee
  20. 20. 2-20 Fixed Cost Per Unit Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee
  21. 21. 2-21 Fixed Costs and the Relevant Range FFoorr eexxaammppllee,, aassssuummee ooffffiiccee ssppaaccee iiss aavvaaiillaabbllee aatt aa rreennttaall rraattee ooff $$3300,,000000 ppeerr yyeeaarr iinn iinnccrreemmeennttss ooff 11,,000000 ssqquuaarree ffeeeett.. FFiixxeedd ccoossttss wwoouulldd iinnccrreeaassee aatt aa rraattee ooff $$3300,,000000 ffoorr eeaacchh aaddddiittiioonnaall 11,,000000 ssqquuaarree ffeeeett..
  22. 22. 2-22 Fixed Costs and the Relevant Range Rent Cost in Thousands 90 60 of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 30 0 Relevant Range
  23. 23. 2-23 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 increase and level within the relevant range. increases as the activity level falls.
  24. 24. 2-24 Quick Check  Which of the following costs would be variable with respect to the number of cones sold at a Baskins & 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.
  25. 25. 2-25 Quick Check  Which of the following costs would be variable with respect to the number of cones sold at a Baskins & 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.
  26. 26. 2-26 Mixed Costs (also called semivariable costs) A mixed cost contains both variable and fixed elements. Consider the example of utility cost. Variable Cost per KW Fixed Monthly Utility Charge Activity (Kilowatt ) Total Utility Cost X Y Total mixed cost
  27. 27. 2-27 Mixed Costs Variable Cost per KW Fixed Monthly Utility Charge Activity (Kilowatt Hours) Total Utility Cost X Y Total mixed cost
  28. 28. 2-28 Mixed Costs – An Example If your fixed monthly IIff yyoouurr ffiixxeedd mmoonntthhllyy uuttiilliittyy cchhaarrggee iiss $$4400,, yyoouurr vvaarriiaabbllee ccoosstt iiss $$00..0033 ppeerr kkiilloowwaatttt aanndd yyoouurr mmoonntthhllyy aaccttiivviittyy lleevveell iiss 22,,000000 kkiilloowwaatttt ,, wwhhaatt iiss tthhee aammoouunntt ooff yyoouurr uuttiilliittyy bbiillll??
  29. 29. 2-29 Learning Objective 4 Analyze a mixed cost using a scattergraph plot and the high-low method.
  30. 30. 2-30 Scattergraph Plots – An Example Assume the following hours of maintenance work and the total maintenance costs for six months.
  31. 31. 2-31 The Scattergraph Method Plot the data points on a graph (Total Cost Y vs. Activity X). X Y Hours of Maintenance Total Maintenance Cost
  32. 32. 2-32 The High-Low Method – An Example TThhee vvaarriiaabbllee ccoosstt ppeerr hhoouurr ooff mmaaiinntteennaannccee iiss eeqquuaall ttoo tthhee cchhaannggee iinn ccoosstt ddiivviiddeedd bbyy tthhee cchhaannggee iinn hhoouurrss.. $2,400 = $$66..0000//hhoouurr 400
  33. 33. 2-33 The High-Low Method – An Example Total Fixed Cost = TToottaall CCoosstt –– TToottaall VVaarriiaabbllee CCoosstt TToottaall FFiixxeedd CCoosstt == $$99,,880000 –– (($$66//hhoouurr ×× 885500 hhoouurrss)) TToottaall FFiixxeedd CCoosstt == $$99,,880000 –– $$55,,110000 TToottaall FFiixxeedd CCoosstt == $$44,,770000
  34. 34. 2-34 The High-Low Method – An Example The Cost Equation for Maintenance YY == $$44,,770000 ++ $$66..0000XX
  35. 35. 2-35 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit
  36. 36. 2-36 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit
  37. 37. 2-37 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
  38. 38. 2-38 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
  39. 39. 2-39 Learning Objective 5 Prepare income statements for a merchandising company using the traditional and contribution formats.
  40. 40. 2-40 The Traditional and Contribution Formats Comparison of the Contribution Income Statement with the Traditional Income Statement Traditional Format Contribution Format Sales $ 100,000 Sales $ 100,000 Cost of goods sold 70,000 Variable expenses 60,000 Gross margin $ 30,000 Contribution margin $ 40,000 Selling & admin. expenses 20,000 Fixed expenses 30,000 Net operating income $ 10,000 Net operating income $ 10,000
  41. 41. 2-41 Learning Objective 6 Understand the differences between direct and indirect costs.
  42. 42. 2-42 Assigning Costs to Cost Objects Direct costs • Costs that can be easily traced to a unit of product • Examples: direct material and direct labor Indirect costs • Costs that cannot be easily traced to a unit of product • Example: manufacturing overhead
  43. 43. 2-43 Learning Objective 7 Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
  44. 44. 2-44 Differential Cost and Revenue Costs and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The travelling cost to the city is $300 per month. Differential revenue is: Differential cost is: $2,000 – $1,500 = $500 $300
  45. 45. 2-45 Opportunity Cost The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending cost accounting class, you could be earning $25,00 per semester. Your opportunity cost of attending accounting class for one semester is $25,00.
  46. 46. 2-46 Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.
  47. 47. 2-47 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have enough cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
  48. 48. 2-48 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
  49. 49. 2-49 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.
  50. 50. 2-50 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.
  51. 51. 2-51 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.
  52. 52. 2-52 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.
  53. 53. 2-53 Thank You

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