The document discusses various cost concepts and classifications including: - Fixed vs variable vs mixed costs and how they behave differently with changes in activity. - Functional classifications like product, marketing, R&D costs. - Behavioral classifications like committed vs discretionary fixed costs. - Responsibility classifications that assign costs to cost centers like departments A, B, C. - Composition of manufacturing costs including direct materials, direct labor, and manufacturing overhead. - Methods for separating mixed costs into fixed and variable components like scatterplot, high-low, and least squares.

1. Cost Concepts - 1
COST CONCEPTS
AND CLASSIFICATIONS
Fixed vs Direct vs
Variable Indirect
Functional vs Behavioral

2. Cost Concepts - 2
COST CLASSIFICATIONS
Functional
Product
Marketing
R&D
Admin

3. Cost Concepts - 3
COST CLASSIFICATIONS
Functional – Product Detail
Product
Marketing
R&D
Admin
Materials
Labor
Mfg.
Overhead
Prime costs = Dir. Materials + Dir. Labor
Conversion costs = Dir. Labor + Total Mfg.
Overhead

4. Cost Concepts - 4
COST CLASSIFICATIONS
Behavioral
Product
Marketing
R&D
Admin
Fixed
Variable

5. Cost Concepts - 5
COST CLASSIFICATIONS
Responsibility
Product
Marketing
R&D
Admin
Fixed
Variable
A
B
C

6. Cost Concepts - 6
COST RELATIONSHIPS: MANUFACTURING COMPANY
Direct Mat.
(Beg)
Direct Mat.
Purchases
Direct Mat.
(End)
Direct labor
incurred
Direct Mat.
Used
+
-
Overhead costs
applied
Tot. Mfg. Costs
incurred
Cost of Goods
Mfg.
Cost of Goods
Sold
WIP (Beg)
WIP (End)
++
--
Fin Goods
(End)
Fin Goods
(Beg)
+
+
PRIOR
PERIOD
NEXT
PERIOD

7. Cost Concepts - 7
Income Statement
Manufacturing Company
Beg. WIP
+ Direct Mat’l
Used
+ Direct Labor
+ Mfg. Overhead
- End. WIP
=
Cost of Goods Mfg.Cost of Goods Mfg.
Beg. Fin. Goods
+
$2,400,000
Cost of Goods Mfg.
$2,400,000
Cost of Goods Mfg.
-End. Finished Goods
=
$2,600,000
Cost of Goods Sold
$2,600,000
Cost of Goods Sold
$4,000,000
Sales
$4,000,000
Sales
-
$2,600,000
Cost of Goods Sold
$2,600,000
Cost of Goods Sold
=
$1,400,000
Gross Margin
$1,400,000
Gross Margin
-
• Selling expenses
• Admin. expenses
• Income taxes
$900,000
Other Oper.Expenses
$900,000
Other Oper.Expenses
=
$500,000
Net Income
$500,000
Net Income

8. Cost Concepts - 8
• Selling Expenses
• Administrative Expenses
• Income taxes
• Direct Materials/ Supplies
• Direct Labor
• Indirect Costs or Overhead
INCOME STATEMENT
Service Organization
$2,600,000
Cost of Services
$2,600,000
Cost of Services
$900,000
Operating Expenses
$900,000
Operating Expenses
$4,000,000
Sales
$4,000,000
Sales
$500,000
Net Income
$500,000
Net Income
$1,400,000
Gross Margin
$1,400,000
Gross Margin
-
=
-
=

9. Cost Concepts - 9
Total fixed costsTotal fixed costs do not respond to changesdo not respond to changes
in unit level cost drivers within a period.in unit level cost drivers within a period.
Total fixed costsTotal fixed costs do not respond to changesdo not respond to changes
in unit level cost drivers within a period.in unit level cost drivers within a period.
Total
fixed
costs (Y)
Total activity (X)
0
0
Basic Cost Behavior PatternsBasic Cost Behavior Patterns

10. Cost Concepts - 10
Committed fixed costs are
required to maintain the
current service or production
capacity to fill previous legal
commitments.
Committed fixed costs are
required to maintain the
current service or production
capacity to fill previous legal
commitments.
Fixed CostsFixed Costs

11. Cost Concepts - 11
Discretionary fixed costs are set
at a fixed amount each year at the
discretion of management.
Discretionary fixed costs are set
at a fixed amount each year at the
discretion of management.
Fixed CostsFixed Costs

12. Cost Concepts - 12
Total variable costsTotal variable costs increase in proportionincrease in proportion
to increases in unit level cost drivers.to increases in unit level cost drivers.
Total variable costsTotal variable costs increase in proportionincrease in proportion
to increases in unit level cost drivers.to increases in unit level cost drivers.
Total
variable
costs (Y)
Total activity (X)
0
0
Basic Cost Behavior PatternsBasic Cost Behavior Patterns

13. Cost Concepts - 13
Total mixed costsTotal mixed costs contain fixed and variablecontain fixed and variable
cost elements. They increase, but not in directcost elements. They increase, but not in direct
proportion to increases in unit level cost drivers.proportion to increases in unit level cost drivers.
Total mixed costsTotal mixed costs contain fixed and variablecontain fixed and variable
cost elements. They increase, but not in directcost elements. They increase, but not in direct
proportion to increases in unit level cost drivers.proportion to increases in unit level cost drivers.
Total
mixed
costs (Y)
Total activity (X)
0
0
Sometimes
called
semivariable
costs
Basic Cost Behavior PatternsBasic Cost Behavior Patterns

14. Cost Concepts - 14
Total step costsTotal step costs are constant over a range ofare constant over a range of
activity for a unit level cost driver but moves toactivity for a unit level cost driver but moves to
a different amount at different ranges.a different amount at different ranges.
Total step costsTotal step costs are constant over a range ofare constant over a range of
activity for a unit level cost driver but moves toactivity for a unit level cost driver but moves to
a different amount at different ranges.a different amount at different ranges.
Total
step
costs (Y)
Total activity (X)
0
0
Basic Cost Behavior PatternsBasic Cost Behavior Patterns

15. Cost Concepts - 15
 Variable costs--The cost of the
ingredients used to make the pizzas
 Fixed costs--Depreciation, property
taxes, and property insurance
 Mixed costs--Cost of electricity
 Step costs--Employee wages
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
Pizza HutPizza Hut

16. Cost Concepts - 16
Total
costs
(Y)
Value of independent variable (X)
0
0
Fixed costs (a)
Variable costs (b)
Total costs
Y = a + bX
Variable costs are
layered on top of
fixed costs.
Variable costs are
layered on top of
fixed costs.
Slope,
b =
∆Y
∆X
Total Cost Behavior With A Single
Unit Level Cost Driver
Total Cost Behavior With A Single
Unit Level Cost Driver

17. Cost Concepts - 17
Y = a + bX
total costsvertical axis intercept
(an approximation of
fixed costs)
slope (an
approximation of
variable costs per unit
of X)
value of
independent
variable
Equation for Total CostsEquation for Total Costs

18. Cost Concepts - 18
Methods for Separating Mixed Cost
Into Fixed and Variable
Components
 Scatterplot Method
 The High-Low Method
 Specific quantitative methods
– The Method of Least Squares

19. Cost Concepts - 19
Month Utility Costs Unit Produced
January $2,000 200
February 2,500 400
March 4,500 600
April 5,000 800
May 7,500 1,000
Mixed Costs: An Example

20. Cost Concepts - 20
Units Produced
Utility
Cost
$8,000
6,000
4,000
2,000
0 200 400 600 800 1,000
.
Scatterplot Method
.
.
.
.
Analyst can fit line
based on his or her
experience
Important: Cost function is only
relevant within relevant range

21. Cost Concepts - 21
High activity period
Low activity period
Number of Packaging
Shipments Costs
January 6,000 $17,000
February 9,000 26,000
March 12,000 32,000
April l0,000 20,000
Variable cost
per unit (b) =
Difference in total costs
Difference in activity
b = $32,000 - $17,000
12,000 - 6,000
Continued on nextContinued on next
slideslide
High-Low Cost EstimationHigh-Low Cost Estimation

22. Cost Concepts - 22
Variable cost
per unit (b) = $2.50
JanuaryJanuary
a = Total costs - Variable costs
$17,000 = a + ($2.50 x 6,000 shipments)
a = $2,000
MarchMarch
$32,000 = a + ($2.50 x 12,000 shipments)
a = $2,000
Same answer!
High-Low Cost EstimationHigh-Low Cost Estimation

23. Cost Concepts - 23
Y = $2,000 x $2.50XY = $2,000 x $2.50XY = $2,000 x $2.50XY = $2,000 x $2.50X
Total packing
department costs
Number of
shipments
High-Low Cost EstimationHigh-Low Cost Estimation

24. Cost Concepts - 24
Direct materials, the cost
of primary raw materials
converted into finished
goods. The word “direct”
indicates costs that are
easily or directly traced to a
finished product or service.
Direct materials, the cost
of primary raw materials
converted into finished
goods. The word “direct”
indicates costs that are
easily or directly traced to a
finished product or service.
Direct labor, the wages earned by
production employees for the time
they spend converting raw
materials into finished products.
Direct labor, the wages earned by
production employees for the time
they spend converting raw
materials into finished products.
Manufacturing overhead
includes all manufacturing costs
other than direct materials and
direct labor.
Manufacturing overhead
includes all manufacturing costs
other than direct materials and
direct labor.
Composition of
Manufacturing Costs
Composition of
Manufacturing Costs

25. Cost Concepts - 25
Direct
Materials
Direct
Labor
Overhead to
be Assigned
Finished
Goods
Conventional Product Costing
Work in
Process
Traceable
Indirect ?

26. Cost Concepts - 26
 Prime costs = Direct materials +
Direct labor
 Conversion costs = Direct labor +
Manufacturing overhead
(fixed & variable)
Composition of
Manufacturing Costs
Composition of
Manufacturing Costs

27. Cost Concepts - 27
Percent of
Total
Manufacturing
Costs
0
100
1900 1950 2000
Year
Total
manufacturing
costs
Direct materials has increased
Direct labor has decreased
Manufacturing overhead has
increased
Changing Composition of
Total Manufacturing Costs
Changing Composition of
Total Manufacturing Costs

28. Cost Concepts - 28
The Basic Concept of
Overhead Application
Applied overhead = Overhead rate x Actual
activity
 Applied overhead is the basis for computing per-
unit overhead cost
 Applied overhead is rarely equal to a period's
actual overhead costs.
Key considerations

29. Cost Concepts - 29
CONVENTIONAL PRODUCT
COSTING
Overhead Application
Predetermined Total budgeted overhead
Overhead Rate = Expected level of activity *
• Conventional costing typically used volume (or a
surrogate for volume such as DLH)
• Problems
- Budgeted overhead contains both fixed and
variable costs
- Selection of expected level of activity

30. Cost Concepts - 30
Select An Appropriate Activity
Base
Criterion:
Cause and Effect
Relationship
Possible Measures of
Production Activity
1. Units produced
2. Direct labor
hours
3. Direct labor dollars
4. Machine hours
5. Direct materials
Choice of Activity
Base to be Used
for Computing the
Predetermined
Overhead Rate

31. Cost Concepts - 31
Comparison of Traditional and
Contemporary Cost Management
Systems
Cost
Information
System
Traditional Contemporary
1. Unit-based drivers
2. Allocation intensive
3. Narrow view of
product costs
4. Focus on cost mgt.
5. Little activity information
6. Maximizes unit
production
7. Uses financial measures
of performance
1. Uses of nonunit drivers
2. Tracing intensive
3. Expanded product costing
4. Managing activities
5. Detailed activity
information
6. System-wide performance
appraisals
7. Use of nonfinancial
measures of performance

32. Cost Concepts - 32
Impact of Computers on
Manufacturing
Impact of Computers on
Manufacturing
Automatic
identification systems
(AIS) allow inventory
and production
information to be
entered into a
computer without
writing or keying.

33. Cost Concepts - 33
Impact of Computers on
Manufacturing
Impact of Computers on
Manufacturing
Computer-aided
design (CAD)
involves the use of
computers to
design products.

34. Cost Concepts - 34
Computer-aided manufacturingComputer-aided manufacturing
(CAM)(CAM) involves the use of computersinvolves the use of computers
to control machine operations.to control machine operations.
Impact of Computers on
Manufacturing
Impact of Computers on
Manufacturing

35. Cost Concepts - 35
Impact of Computers on
Manufacturing
Impact of Computers on
Manufacturing
Flexible manufacturing
systems (FMS) are an extension
of computer-aided
manufacturing techniques
through a series of
manufacturing operations.
Flexible manufacturing
systems (FMS) are an extension
of computer-aided
manufacturing techniques
through a series of
manufacturing operations.
Computer-integrated
manufacturing (CIM) is the
ultimate extension of CAD, CAM,
and FMS concepts to a completed
automated and computer-
controlled factory.
Computer-integrated
manufacturing (CIM) is the
ultimate extension of CAD, CAM,
and FMS concepts to a completed
automated and computer-
controlled factory.
In their advanced stages, factories
utilizing flexible manufacturing
systems and computer-integrated
manufacturing are sometimes referred
to as “lights-out factories”because
they can be operated in the dark.
In their advanced stages, factories
utilizing flexible manufacturing
systems and computer-integrated
manufacturing are sometimes referred
to as “lights-out factories”because
they can be operated in the dark.