Download to read offline
More Related Content
Similar to #1 Basic Cost Terms and Concepts Basic Cost Terms and Concepts.pptx
#1 Basic Cost Terms and Concepts Basic Cost Terms and Concepts.pptx
- 1. Week 1 Basic CostTerms and Concepts Cost and Investment Management 1 Laboratorium PSMI 2025 Departemen Teknik Sistem dan Industri Institut Teknologi Sepuluh Nopember (ITS)
- 2. Learning Objectives 1. Explainwhat is meant by the word cost. 2. Distinguish among product costs, period costs, and expenses.
- 3. 3 Process of Management Strategy Formulatio n Planning Control Decision Making Directing Managersneed cost information to perform each of these functions. • The process of management involves formulating strategy, planning, control, decision making and directing operational activities. • Management accounting information helps managers perform each of these functions more effectively.
- 4.
- 5.
- 6. 6 What do wemean by a cost? At the most basic level, a cost may be defined as the sacrifice made, usually measured by the resources given up, to achieve a particular purpose. A cost is the measure of resources given up to achieve a particular purpose. Expended directly The reduction in value of a recorded asset such as plant and equipment (via depreciation) or inventory (via cost of goods sold) Cash Depreciation A promise to use up cash in the future, recognized as a liability (account payable) Liability
- 7. 9 Types of ProductionProcesses Type of Production Description of Example of Process Process Manufacturer Job Shop Low volume Disney Little standardization Unique products Batch Multiple products Caterpillar Low volume Assembly Line A few major products Ford Higher volume Mass Customization High volume Dell Many standardized components Customized combination of components Continuous Flow High volume Exxon Highly standardized commodity products The nature of the manufacturing process can affect the manufacturing costs incurred.
- 8.
- 9. 11 Direct Material Cost ofraw material that is used to make, and can be conveniently traced, to the finished product. Example: Steel used to manufacture the automobile
- 10. 12 Direct Labor Cost ofsalaries, wages, and fringe benefits for personnel who work directly on manufactured products. Example: Operator
- 11. 13 Manufacturing Overhead All othermanufacturing costs Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant. Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time. Indirect Material Other Costs Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards. Indirect Labor
- 12. 14 Classifications of Costs inManufacturing Companies Manufacturing costs are often combined as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Since they are the costs of “converting” raw material into finished products
- 13. 15 Manufacturing Cost Flows Workin Process Inventory Direct Material Direct Labor Manufacturing Overhead Finished Goods Inventory Cost of Goods Sold The total cost of direct material, direct labor, and manufacturing overhead transferred from work-in-process inventory to finished-goods inventory is called the cost of goods manufactured. The costs then are stored in finished goods until the time period when the products are sold. At that time, the product costs are transferred from finished goods to the cost of goods sold, which is an expense of the period when the sale is made.
- 14. 16 Cost Drivers Activities thatcause costs to be incurred are called COST DRIVERS: Cost Driver Examples Activity Cost Driver Machining operations Machine hours Setup Setup hours Production scheduling Manufacturing orders Inspection Pieces inspected Purchasing Purchase orders Shop order handling Shop orders Valve assembly support Customer requisitions
- 15. 17 Cost Classifications Cost behaviormeans how a cost will react to changes in the level of business activity. Variable Costs Fixed Costs Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.
- 16. 18 Variable Cost Your totalcable pay-per-view bill is based on how many movies you watch. The cost per movie watched is constant. For example, $4.00 per movie. Total Variable Cost Example Variable Cost Per Unit Example
- 17. 19 Fixed Cost Your monthlycable bill probably does not change when you watch movies on channels that you have elected to be paid on a monthly basis (HBO). The average cost per HBO movie decreases as more HBO movies are watched. Total Fixed Cost Example Fixed Cost Per Unit Example
- 18.
- 19. 21 Example Cost of nationaladvertising for an airline is indirect to a particular flight. Direct and Indirect Costs Costs that can be easily and conveniently traced to a product or department. Direct Costs Costs that must be allocated in order to be assigned to a product or department. Indirect Costs Example Cost of paint in the paint department of an automobile assembly plant.
- 20. 22 Controllable and UncontrollableCosts A cost that can be significantly influenced by a manager is a controllable cost.
- 21. 23 Opportunity Cost The potentialbenefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
- 22. Sunk Costs All costsincurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions. • Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost. 2-24
- 23. Differential Costs Costs thatdiffer between alternatives. Example: You can earn $1,500 per month in your hometown or $2,000 per month in a nearby city. Your commuting costs are $50 per month in your hometown and $300 per month to the city. What is your differential cost? $300 - $50 = $250 2-25
- 24. Marginal Costs andAverage Costs The extra cost incurred to produce one additional unit. The total cost to produce a quantity divided by the quantity produced. Marginal and average costs are largely a function of cost behavior -- variable and fixed costs. 2-26
- 25. Costs and Benefitsof Information Costs Benefits More information does not mean more benefits if information overload results. 2-27 • Another important task of the managerial accountant is to weigh the benefits of providing information against the costs of generating, communicating, and using that information. • When managers receive more data than they can utilize effectively, information overload occurs. • In deciding how much and what type of information to provide, managerial accountants should consider these human limitations.
Editor's Notes
- #9 Production processes can be classified into five generic types. The nature of the manufacturing process can affect the manufacturing costs incurred. The management team is in a better position to control these costs if the relationship of the production process to the types of costs incurred is understood. (LO4)
- #15 As direct material is consumed in production, its cost is added to work-in-process inventory. Similarly, the costs of direct labor and manufacturing overhead are accumulated in work in process. (LO5) When products are finished, their costs are transferred from work-in-process inventory to finished-goods inventory. The total cost of direct material, direct labor, and manufacturing overhead transferred from work-in-process inventory to finished-goods inventory is called the cost of goods manufactured. (LO5) The costs then are stored in finished goods until the time period when the products are sold. At that time, the product costs are transferred from finished goods to cost of goods sold, which is an expense of the period when the sale is made.
- #24 Sunk costs are costs that have been incurred in the past. Consequently, they do not affect future costs and cannot be changed by any current or future action. (LO10)
- #25 A differential cost is the amount by which the cost differs under two alternative actions. (LO10)
- #26 A special case of the differential-cost concept is the marginal cost, which is the extra cost incurred when one additional unit is produced. Marginal costs typically differ across different ranges of production quantities because the efficiency of the production process changes. (LO10)
- #27 Another important task of the managerial accountant is to weigh the benefits of providing information against the costs of generating, communicating, and using that information. When managers receive more data than they can utilize effectively, information overload occurs. In deciding how much and what type of information to provide, managerial accountants should consider these human limitations. (LO10)