ch 2.pptx

Cost Accounting
Seventeenth Edition, Global Edition
Chapter 2
An Introduction to Cost Terms and
Purposes
Copyright © 2021 Pearson Education Ltd.

Basic Cost Terminology
• Cost – a sacrificed or forgone resource to achieve a
specific objective.
• Cost object – anything for which a cost measurement is
desired
2
Copyright ©2018 John Wiley & Sons, Inc.

Product Costs Versus Period Costs
LO 2 3

Product and Period Cost
4

• Product Costs
• Components:
o Direct materials
o Direct labor
o Manufacturing overhead (Includes indirect material and
indirect labor)
• Costs that are an integral part of producing product.
• Recorded in “Inventory” account
• Product costs are converted to Cost of Goods Sold
when it is sold.
LO 2 5

• Period Costs
• Charged to expense as incurred
• Non-manufacturing costs.
• Includes all selling and administrative expenses
• For Example, managers salaries
LO 2 6

Other Classification of the Product Cost
Prime Cost = Direct Materials + Direct Labor
Conversion Cost = Direct Labor + Manufacturing Overhead
7

Cost Behavior Analysis
• According to cost behavior analysis, costs can be classified as:
1. Variable costs—costs that change in total in relation to some
chosen activity or output.
2. Fixed costs—costs that do not change in total in relation to some
chosen activity or output.
3. Mixed costs—costs that have both fixed and variable components;
also called semi-variable costs.
LO 1
8

Copyright © 2021 Pearson Education Ltd.
Variable and Fixed Costs
Exhibit 2.3 Graphs of Variable and Fixed Costs

1. Variable Costs
• Costs that vary in total directly and proportionately with
changes in the activity level.
o Example: If the activity level increases 10 percent,
total variable costs increase 10 percent.
o Example: If the activity level decreases by 25 percent,
total variable costs decrease by 25 percent.
• Variable costs remain constant the same per unit at
every level of activity.
LO 1
10

Variable Costs
Illustration of total variable costs
Damon Company manufactures tablet computers
that contain a $10 camera (variable cost per unit
$10). As Damon manufactures each tablet, the total
cost of the cameras used increases by $10.
ILLUSTRATION shows, total cost of the cameras
will be $20,000 if Damon produces 2,000 tablets,
and $100,000 when it produces 10,000 tablets. We
also can see that a variable cost remains the same
per unit as the level of activity changes.
So that, variable cost varies in total but still
constant per unit.
LO 1
11

Variable Costs
Illustration of unit variable costs
Damon Company manufactures tablet computers
that contain a $10 camera. As Damon manufactures
each tablet, the total cost of the cameras used
increases by $10.
ILLUSTRATION shows, the unit cost of $10 for
the camera is the same whether Damon produces
2,000 or 10,000 tablets.
So that, variable cost varies in total but still
constant per unit.
LO 1
12

Variable Costs
Behavior of total and unit variable costs
LO 1
13

Fixed Costs
– Costs that remain the same in total regardless of
changes in the activity level within a relevant range.
– Fixed cost per unit cost varies inversely with activity:
As volume increases, unit cost declines, and vice versa.
– Examples:
o Property taxes
o Insurance
o Rent
o Supervisory salaries
o Depreciation on buildings and equipment
LO 1
14

Fixed Costs
Illustration of total fixed costs
Damon Company leases its productive
facilities at a cost of $10,000 per month.
Total fixed costs of the facilities will
remain constant at every level of
activity.
LO 1
15

Fixed Costs
Illustration of fixed costs per unit
Damon Company leases its productive
facilities at a cost of $10,000 per month.
Total fixed costs of the facilities will
remain constant at every level of activity.
But, on a per unit basis, the cost of rent
will decline as activity increases,
llustration shows. At 2,000 units, the unit
cost per tablet computer is $5 ($10,000 ÷
2,000). When Damon produces 10,000
tablets, the unit cost of the rent is only $1
per tablet ($10,000 ÷ 10,000).
LO 1
16

Relevant Range
Range of activity over which a company expects to operate during a
year.
A relevant range is the range of the cost driver in which a specific
relationship between cost and the level of activity or volume is valid. A
fixed cost is fixed only in relation to a given relevant range (within
specific capacity).
LO 1
17

Mixed Costs
• Costs that have both a variable element and a fixed element.
• Change in total but not proportionately with changes in
activity level.
LO 1
18

Contribution Margin Income Statement
• A statement for internal use.
• Classifies costs and expenses as fixed or variable.
• Reports contribution margin in the body of the statement.
o Contribution margin – amount of revenue remaining after
deducting variable costs.
o Contribution Margin = Revenue – Total Variable Costs
o Contribution Margin per Unit = Selling Price – Variable Cost per unit
LO 3 19

Contribution Margin Income
Statement
Vargo Video Company produces cell phones. Relevant data for the
cell phones sold by this company in June 2020 are as follows.
Unit selling price of cell phone $500
Unit variable costs* $300
Total monthly fixed costs** $200,000
Units sold 1,600
*Includes variable manufacturing costs and variable selling and administrative
expenses.
**Includes fixed manufacturing costs and fixed selling and administrative
expenses.
LO 3 20

CVP Income Statement
Illustration
The CVP income statement for Vargo Video therefore would be
reported as follows.
LO 3 21

Manufacturing Overhead
In general, overheads are costs that cannot be traced directly to a
specific product or unit.
The three main classifications of production costs are:
1) Direct materials
2) Direct labor
3) Manufacturing (or factory) overhead
Direct materials (DM) and direct labor (DL) are usually simple to
trace to individual units or products because direct materials and
direct labor costs are directly and obviously part of the production
process.
22

Manufacturing Overhead
• Overhead costs are production and operation costs that a
company cannot trace to any specific product or unit of a
product.
• Because overhead costs are incurred and paid for by the
company and are necessary for the production process, it
is essential that the company know what these costs are
and allocate them to the various products being
manufactured.
• Allocation to products manufactured must occur so that
the full costs of production and operation are known in
order to set the selling prices for the different products.
23

Three Categories of Manufacturing
Overhead
The categories of costs included in factory overhead (OH) are:
1) Indirect materials – materials not identifiable with a specific
product or job, such as cleaning supplies, small or disposable tools,
machine lubricant, and other supplies.
2) Indirect labor – salaries and wages not directly attributable to a
specific product or job, such as salary of plant managers.
3) General manufacturing overheads, such as facilities costs
(factory rent, electricity, and utilities) and equipment costs,
including depreciation and amortization on plant facilities and
equipment.
24

Allocating Manufacturing Overhead Using
Traditional Method
• Traditionally, manufacturing overhead costs have been allocated
to the individual products based on either the direct labor
hours, machine hours, materials cost, units of production, weight
of production or some similar measure that is easy to measure
and calculate.
• For example, if a company allocates factory overhead based on
direct labor hours, for every hour of direct labor allowed per unit
of output, a certain amount of factory overhead is allocated to, or
applied to, each unit actually produced.
25

Determining the Allocation Base
• When choosing the allocation base (for example, direct labor
hours or machine hours), the base used should closely reflect the
reality of the way in which the costs are actually incurred.
• For example, in a highly automated manufacturing environment,
direct labor would most likely not be a good allocation base for
factory overhead because labor would not be a large part of the
production process. Machine hours would probably be a better
allocation base to use.
26

Seven steps to assign costs to an individual
job.
• Step 1: Identify the Job That Is the Chosen Cost Object.
• Robinson Company produces sport shirts. It received two job orders (Job 103 to
A customer and Job 104 to B customer). It opened a job cost sheet for each
customer as a following:
27
Job 103
A- Customer Direct
Material
Direct
Labor
Applied
MOH
Total Cost
Job 104
B- Customer Direct
Material
Direct
Labor
Applied
MOH
Total Cost

Seven steps to assign costs to an individual job.
Step 2: Identify the Direct Costs of the Job
Robinson company assigned direct material and direct manufacturing labor to
each job as a following:
Job 103 Job 104
Direct Material Used $1,200 $1800
Direct Manuf. Labor (100Hour @$8) (120Hour@$8)
28
Job 103
A- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
1,200
(100x$8)
800
Job 104
B- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
1,800
(120x$8)
960

Seven steps to assign costs to an individual job
Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to
the Job.
Robinson, chooses direct manufacturing labor-hours as the sole allocation base
for assigning all indirect manufacturing costs to jobs.
……………………………………………………………………………
Step 4: Identify the budgeted manufacturing overhead and budgeted
allocation base.
In 2020, budgeted manufacturing overhead costs total $1,120,000. Budgeted Labor
Hours 28,000 Hour
29

Step 5: Compute the Indirect-Cost Rate for Each Cost-Allocation Base.
30

Step 6: Compute the Indirect Costs Allocated to the Job.
31
Job 103
A- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
$1,200
(100x$8)
$800
100 x $40
$4,000
Job 104
B- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
1,800
(120x$8)
960
120x$40
$4,800

Step 7: Compute the total Costs for each Job.
32
Job 103
A- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
$1,200 $800
100 x $40
$4,000 $6,000
Job 104
B- Customer Direct
Material
Direct
Labor
Allocated
MOH
Total Cost
1,800 960
120x$40
$4,800 $7,560

ch 2.pptx

Recommended

Recommended

More Related Content

Similar to ch 2.pptx

Similar to ch 2.pptx (20)

More from NadeemSRimawi

More from NadeemSRimawi (12)

Recently uploaded

Recently uploaded (20)

ch 2.pptx

Editor's Notes