basic concepts of cost accounting
TRANSCRIPT
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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
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Objectives of Cost Accounting1-To calculate accurate profit2-To calculate correct value of ending inventories 3-To calculate correct value of C.G.S4- To calculate accurate price of Goods
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Learning Objective 1
Identify and give examples of each of the
three basic manufacturing cost
categories.
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The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead or FOH
ManufacturingOverhead or FOH
Classifications of Manufacturing Costs
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Direct Materials
Raw materials that become an integral part of the product and that can be
easily traceable
Example: Tyres in an automobileExample: Tyres in an automobile
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Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
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Manufacturing OverheadManufacturing costs that cannot be easily traced directly to specific units produced.
Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor
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Learning Objective 2
What is difference between product costs
and period costs and give examples of each.
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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
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
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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.
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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.
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Classifications of Costs
Manufacturing costs are oftenclassified as follows:
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
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Learning Objective 3
Understand cost behavior patterns
including variable costs, fixed costs, and mixed
costs.
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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.
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Variable Cost
Your total texting bill is based on how many texts you send.
Number of Texts Sent
To
tal T
ext
ing
Bill
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Variable Cost Per Unit
The cost per text sent is constant at Rs. 2 per text message.
Number of Texts Sent
Co
st P
er T
ext
Sen
t
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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 UsedWithin Monthly Plan
Mo
nth
ly C
ell
Ph
on
e C
on
tra
ct F
ee
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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 UsedWithin Monthly Plan
Mo
nth
ly C
ell
Ph
on
e
Co
ntr
act
Fe
e
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Fixed Costs and the Relevant Range
Fixed costs would increase Fixed costs would increase at a rate of $30,000 for each at a rate of $30,000 for each additional 1,000 square feet. additional 1,000 square feet.
For example, assume office space is available at For example, assume office space is available at a rental rate of $30,000 per year in increments of a rental rate of $30,000 per year in increments of
1,000 square feet. 1,000 square feet.
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Ren
t C
ost
in T
hous
ands
of
Do
llars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and the Relevant Range
90
Relevant
Range
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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 unitand decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreasesby changes in the activity as the activity level increase and
level within the relevant range. increases as the activity level falls.
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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.
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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.
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Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt )
Tot
al U
tility
Cos
t
X
Y
A mixed cost contains both variable and fixed elements. Consider the example of utility cost. A mixed cost contains both variable and fixed elements. Consider the example of utility cost.
Mixed Costs(also called semivariable costs)
Total mixed cost
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Mixed Costs
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal U
tility
Co
st
X
Y
Total mixed cost
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Mixed Costs – An Example
If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt and your monthly variable cost is $0.03 per kilowatt and your monthly activity level is 2,000 kilowatt , what is the amount of activity level is 2,000 kilowatt , what is the amount of
your utility bill?your utility bill?
If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt and your monthly variable cost is $0.03 per kilowatt and your monthly activity level is 2,000 kilowatt , what is the amount of activity level is 2,000 kilowatt , what is the amount of
your utility bill?your utility bill?
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Scattergraph Plots – An ExampleAssume the following hours of maintenance work
and the total maintenance costs for six months.
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Plot the data points on a graph (Total Cost Y vs. Activity X).
Plot the data points on a graph (Total Cost Y vs. Activity X).
The Scattergraph Method
X
Y
Hours of Maintenance
Tota
l M
aint
enan
ce C
ost
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The High-Low Method – An Example
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
= $6.00/hour$6.00/hour$2,400
400
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The High-Low Method – An Example
Total Fixed Cost = Total Cost – Total Variable CostTotal Fixed Cost = Total Cost – Total Variable Cost
Total Fixed Cost = $9,800 – ($6/hour Total Fixed Cost = $9,800 – ($6/hour × 850 hours)× 850 hours)
Total Fixed Cost = $9,800 – $5,100Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = Total Fixed Cost = $4,700$4,700
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The High-Low Method – An Example
YY = $4,700 + $6.00 = $4,700 + $6.00XXThe Cost Equation for Maintenance
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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 unitb. $0.10 per unit c. $0.12 per unitd. $0.125 per unit
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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 unitb. $0.10 per unit c. $0.12 per unitd. $0.125 per unit
Quick Check
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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. $ 2,000b. $ 4,000 c. $10,000d. $12,000
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. $ 2,000b. $ 4,000 c. $10,000d. $12,000
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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. $ 2,000b. $ 4,000 c. $10,000d. $12,000
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. $ 2,000b. $ 4,000 c. $10,000d. $12,000
Quick Check
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Learning Objective 5
Prepare income statements for a
merchandising company using the traditional and
contribution formats.
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The Traditional and Contribution Formats
Comparison of the Contribution Income Statement with the Traditional Income Statement
Traditional Format Contribution Format
Sales 100,000$ 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$
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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
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Learning Objective 7
Understand cost classifications used in
making decisions: differential costs,
opportunity costs, and sunk costs.
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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.
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: $2,000 – $1,500 = $500
Differential cost is: $300
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Opportunity Cost
The potential benefit that is given up when one alternative
is selected over another.Example: If you werenot attending cost accounting class,you could be earning$25,00 per semester. Your opportunity costof attending accounting class for one semester is $25,00.
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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.
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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.
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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.
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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.
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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.
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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.
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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.