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- 1. Chapter 2 Cost Terminologyand Cost Behaviors Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn
- 2. Learning Objectives (1of 2) • Explain assumptions about cost behavior and why these assumptions are necessary • List the cost classifications and explain why the classifications are useful • Describe the conversion process in service and manufacturing companies
- 3. Learning Objectives (2of 2) • List product cost categories and their components • Calculate the Cost of Goods Manufactured and explain how it is used in the Income Statement
- 4. Cost Monetary measure ofresources given up to attain an objective (such as acquiring a good or delivering a service)
- 5. • Insert Exhibit2-1, is it infographic?
- 6. Cost Categories • Associationwith cost object Cost object is anything for which management wants to collect or accumulate costs • Reaction to changes in activity • Classification on the financial statements
- 7. Cost Categories • Associationwith cost object – Direct - traceable to a cost object – Indirect - not conveniently or practically traceable to a cost object • treated as overhead • allocated
- 8. Cost Categories • Associationwith cost object • Reaction to changes in activity – Variable – Fixed – Mixed – Step Relevant Range – normal operating range
- 9. Variable Cost Fixed Cost CostReaction to Changes in Activity Total $ # of Units $ # of Units Within the relevant range
- 10. Variable Cost Fixed Cost CostReaction to Changes in Activity Total Unit $ # of Units $ $ $ # of Units # of Units # of Units Within the relevant range
- 11. Total and UnitCost Behavior Varies in direct proportion to changes in activity Remains constant throughout the relevant range Remains constant throughout the relevant range Varies inversely with changes in activity throughout the relevant range Variable Cost Fixed Cost Total Cost Unit Cost
- 12. Step Cost (Fixed) Cost Reactionto Changes in Activity $ Units Within the relevant range
- 13. Mixed Cost Cost Reactionto Changes in Activity $ Units fixed Within the relevant range variable
- 14. Determining Cost Behavior •Cost Predictor – Activity accompanied by consistent, observable changes in a cost item – Predicts but may not cause the cost to change • Cost Driver – Activity that has a direct cause-effect relationship on cost – Directly causes the cost to change
- 15. Cost Categories • Associationwith cost object • Reaction to changes in activity • Classification on the financial statements – Unexpired – Expired – Product – Period
- 16. Cost Categories • Classificationon the financial statements – Unexpired – balance sheet assets – Expired – income statement expenses – Product – inventoriable costs • Prime – direct material and direct labor • Conversion – direct labor and overhead – Period – expensed in period incurred
- 17. Product Costs • Directmaterial – Measurable part of a product • Direct labor – Labor used to manufacture a product or perform a service • Overhead – Indirect production cost
- 18. Product Costs • Firstappear on the balance sheet in inventory accounts • Transferred to the income statement when product is sold
- 19. Period Costs • Sellingand administrative costs • Distribution costs – Cost to warehouse, transport, and/or deliver a product or service – Major impact on managerial decision making
- 20. Period Costs • Appearon the income statement when incurred • Expensed when incurred
- 21. Purchase raw materials or supplies Input Productor Service Output Conversion Process Change Inputs into Outputs CONVERSION
- 22. Low Degree ofConversion • Department stores • Gas stations • Jewelry stores • Travel agencies
- 23. Moderate Degree ofConversion • Florists • Meat markets • Oil-change businesses
- 24. High Degree ofConversion • Manufacturing • Construction • Agriculture • Architecture • Auditing • Mining • Printing • Restaurants
- 25. • Insert infographicExhibit 2-8
- 26. Service Company Significant amountof labor Tangible or intangible output Purchase supplies Use supplies, labor, overhead to provide service Sell to customer Input Output
- 27. Retail Company Purchase finishedgoods Resell to customers Purchase products for resale Warehouse and/or display Sell to customer Input Output
- 28. Manufacturer Significant amount oflabor and machinery Tangible output Purchase raw materials and supplies Finished product Sell to customer Input Output Production Center add labor and overhead
- 29. • Insert infographic,Exhibit 2-9
- 30. Cost Accumulation ina Manufacturing Company Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Balance Sheet Income Statement
- 31. Product Cost -Direct • Direct Material – Conveniently and economically traced to cost object
- 32. Product Cost -Direct • Direct Material – Conveniently and economically traced to cost object • Direct Labor – to manufacture a product or perform a service – includes wages paid to direct labor employees, production bonuses, payroll taxes – may include holiday and vacation pay, insurance, retirement benefits
- 33. Product Cost -Indirect • Overhead - indirect production costs – Fringe benefits, if cannot be easily traced to product – Overtime, if due to random scheduling – Cost of quality • Prevention costs • Appraisal costs • Failure costs
- 34. Product Cost Behavior •Direct Material Variable • Direct Labor Variable • Overhead Variable, fixed, or mixed
- 35. Overhead Cost Allocation Assignindirect costs to one or more cost objects • To determine full absorption cost (GAAP) • To motivate management • To compare alternative courses of action for planning, controlling, and decision making Allocation process should be rational and systematic
- 36. Allocating Overhead Actual CostSystem Product Cost Direct Materials Direct Labor Overhead Cost Used Actual Actual Actual
- 37. Allocating Overhead Actual CostSystem • The Actual Cost System is not timely • All costs must be known before calculating product cost
- 38. Allocating Overhead Actual vs.Normal Product Cost Direct Materials Direct Labor Overhead Actual Cost System Actual Actual Actual Normal Cost System Actual Actual Predetermined Overhead Rate
- 39. Predetermined Overhead Rate •Allows overhead to be assigned during the period • Compensates for fluctuations – that are not related to activity level – in activity level that do not affect fixed overhead
- 40. • Insert infographicExhibit 2-10
- 41. Flow of ProductCosts Raw Materials Inventory Accounts Payable Work in Process Inventory Raw Materials Inventory Work in Process Inventory Variable Overhead Control Fixed Overhead Control Salaries/Wages Payable
- 42. Flow of ProductCosts Variable Overhead Control Fixed Overhead Control Utilities Payable Supplies Inventory Accumulated Depreciation – Equipment Other accounts
- 43. Flow of ProductCosts Work in Process Inventory Variable Overhead Control Fixed Overhead Control Finished Goods Inventory Work in Process Inventory
- 44. Flow of ProductCosts Accounts Receivable Sales Cost of Goods Sold Finished Goods Inventory Matches revenues and expenses on the income statement
- 45. Statement of Cost ofGoods Manufactured • Beginning work in process $ 145,000 – Raw materials used $284,000 – Direct labor 436,000 – Variable overhead 115,200 – Fixed overhead 98,880 • Current period manufacturing costs 934,080 • Total costs to account for $1,079,080 • Ending work in process <20,880> • Cost of goods manufactured $1,058,200
- 46. Statement of Cost ofGoods Manufactured Raw Materials Used Beginning balance $ 73,000 Purchases of materials 280,000 Raw materials available $353,000 Ending balance <69,000> Total raw materials used $284,000 To Statement of Cost of Goods Manufactured
- 47. Schedule of Costof Goods Sold Beginning Finished Good $ 87,400 Cost of Goods Manufactured 1,058,200 Cost of Goods Available for Sale $1,145,600 Ending Finished Goods <91,600> Cost of Goods Sold $1,054,000 From Schedule of Cost of Goods Manufactured
- 48. Income Statement • Revenuexxxx • Cost of Goods Sold <1,054,000> • Gross Profit xxxx • Operating Expenses <xxxx> • Operating Income xxxx From Schedule of Cost of Goods Sold
- 49. Questions • What isthe difference between a fixed and variable cost? • What are the three components of product cost? • What are the three inventory accounts for a manufacturing company?