Basic Cost Management Concepts and Accounting For Mass Customization Operations

2
Chapter
Two
Basic Cost Management

Concepts and Accounting for
Mass Customization Operations
McGraw-Hill/Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All
Process of Management
Strategy
Formulation
Planning
Managers need cost information to

perform each of these functions.
Directing
Control
Decision
Making
1-2
What Do We Mean By a Cost?

A cost
is the measure of
resources given
up to achieve a
particular purpose.
1-3
Product Costs, Period Costs and Expenses

Product costs are costs associated with goods for
sale until the time period during which the products
are sold, at which time the costs become expenses.
Period costs are costs that are expensed during the
time period in which they are incurred.
Expenses are the consumption of assets for the
purpose of generating revenue.
1-4
Cost Classifications on Financial

Statements Income Statement
Product Costs
Cost of goods sold
Period Costs
Operating expenses
1-5

Statements Balance Sheet
Manufacturer
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
1-6

Manufacturer
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
Current Assets
Cash
Those materials
waiting to be
Receivables
processed.
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
1-7

Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
Manufacturer
Partially complete
Current
Assets
products material to
Cash
which
some labor
and/or
overhead has
Receivables
been added.
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
1-8

Manufacturer
Merchandiser
Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
Current Assets
Cash
Completed
products
Receivables
awaiting sale.
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
1-9
Manufacturing Costs
Direct
Labor
Direct
Material
Manufacturing
Overhead
The
Product
1-10
Direct Material
Cost of raw material that is used to
make, and can be conveniently
traced, to the finished product.
Example:
Example:
Steel
Steel used
used to
to
manufacture
manufacture
the
theautomobile.
automobile.
1-11
Direct Labor
Cost of salaries, wages, and fringe
benefits for personnel who work
directly on manufactured products.
Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.
1-12
Manufacturing Overhead
All other manufacturing costs
Indirect
Material
Indirect
Labor
Other
Costs
Materials used to support

the production process.
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.
1-13
Indirect
Material
Indirect
Labor
Other
Costs
Cost of personnel who

do not work directly on
the product. Examples:
maintenance workers,
janitors and security
guards.
1-14
Indirect
Material
Indirect
Labor
Other
Costs
Examples: depreciation
on plant and equipment,
property taxes,
insurance, utilities,
overtime premium, and
unavoidable idle time.
1-15
Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:
Direct
Material
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
1-16
Manufacturing Cost Flows

Direct Material
Direct Labor
Work in
Process
Inventory
Manufacturing
Overhead
1-17

Direct Material
Direct Labor
Work in
Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory
1-18

Direct Material
Direct Labor
Work in
Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory
Cost of
Goods
Sold
1-19
Schedule of Cost of Goods

Manufactured
Exh.
2-7
Comet Computer Corporation

Schedule of Cost of Goods Manufactured
Raw material used
Direct labor
Total manufacturing overhead
134,980
50,000
230,000
Total manufacturing costs

Add: Work-in-process inventory, January 1
414,980
120
Subtotal
Deduct: Work-in-process inventory, December 31
415,100
100
Cost of goods manufactured
415,000
1-20

Manufactured
Exh.
2-7
Computation of Cost of Raw Material Used
Raw-material inventory, January 1

Add: Purchases of raw materials
Raw material available for use

Deduct: Raw material inventory, December 31
Raw material used
6,000
134,000
140,000
5,020
$ 134,980

Raw material used
Direct labor
134,980
50,000
230,000

414,980
120
Subtotal
415,100
100
415,000
1-21

Manufactured
Exh.
2-7
Include all direct labor

costs incurred during the
Cometcurrent
Computer
Corporation
period.
Raw material used
Direct labor
134,980
50,000
230,000

414,980
120
Subtotal
415,100
100
415,000
1-22
Exh.
2-7
Computation of Total Manufacturing Overhead

Indirect material
10,000
Indirect labor
40,000
Depreciation on factory
90,000
Depreciation on equipment
70,000
Utilities
15,000
Insuranceof Cost of Goods Manufactured
5,000
Schedule
$ 230,000
Raw material used
Direct labor
134,980
50,000
230,000

414,980
120
Subtotal
415,100
100
415,000
1-23

Manufactured
Exh.
2-9
Beginning work-inprocess inventory is

carried over from the
prior period.
Raw material used
Direct labor
134,980
50,000
230,000

414,980
120
Subtotal
415,100
100
415,000
1-24

Manufactured
Exh.
2-9
Ending work-in-process inventory

contains the cost of unfinished
Comet
Computer
goods,
and Corporation
is reported in the current
Schedule of
Cost ofsection
Goods Manufactured
assets
of the balance sheet.
Raw material used
Direct labor
134,980
50,000
230,000

414,980
120
Subtotal
415,100
100
415,000
1-25
Exh.
2-7
Income Statement for a

Manufacturer
Income Statement
For the Year Ended December 31, 20X2
Sales revenue
Less: Cost of goods sold
700,000
415,010
Gross margin
Selling and administrative expenses
284,990
174,490
Income before taxes

Income tax expense
110,500
30,000
Net income
80,500
1-26
Income Statement for a Manufacturer
Exh.
2-7

Schedule of Cost of Goods Sold
Finished-goods inventory, Jan. 1
Add: Cost of goods manufactured
Cost of goods available for sale

Deduct Finished-goods inventory, Dec. 31
200
415,000
415,200
190
Income Statement
$ 415,010
Cost of goods sold
Sales revenue
Less: Cost of goods sold
700,000
415,010
Gross margin
Selling and administrative expenses
284,990
174,490
Income before taxes

Income tax expense
110,500
30,000
Net income
80,500
1-27
Identifying Cost Drivers

Cost Driver Examples
Activity
Cost Driver
Purchasing
Shop order handling
Valve assembly support
Purchase orders
Shop orders
Customer requisitions
Activities
that
Machining operations
Machine hours
cause costs to
be hours
Setup
Setup
Production scheduling
Manufacturing orders
incurred are called
Inspection
Pieces inspected
cost drivers.
1-28
Cost Classifications
Cost behavior means
how a cost will react
to changes in the
level of business
activity.
1-29
Cost behavior means
how a cost will react
to changes in the level
of business activity.
Total variable costs
change when activity
changes.
Total fixed costs remain
unchanged when activity
changes.
1-30
Total Variable Cost Example
Total Long Distance

Telephone Bill
Your total long distance telephone bill is

based on how many minutes you talk.
Minutes Talked
1-31
Variable Cost Per Unit Example
Per Minute
Telephone Charge
The cost per long distance minute talked is

constant. For example, 5 cents per minute.
Minutes Talked
1-32
Total Fixed Cost Example
Monthly Basic
Telephone Bill
Your monthly basic telephone bill probably

does not change when you make more local
calls.
Number of Local Calls

1-33
Fixed Cost Per Unit Example
Monthly Basic Telephone

Bill per Local Call
The average cost per local call decreases as

more local calls are made.
Number of Local
Calls
1-34
Summary of Variable and Fixed Cost Behavior
Cost
In Total
Per Unit
Variable
Total variable cost changes

as activity level changes.
Variable cost per unit

remains the same over
wide ranges of activity.
Total fixed cost remains

the same even when the
activity level changes.
Fixed cost per unit

goes down as activity
level goes up.
Fixed
1-35
Direct and Indirect Costs

Direct costs
Indirect costs
Costs that can be

easily and
conveniently traced to
a product or
department.
Costs that must be

allocated in order to
be assigned to a
product or
department.
Example: cost of
paint in the paint
department of an
automobile assembly
plant.
Example: cost of
national advertising
for an airline is
indirect to a particular
flight.
1-36
Direct and Indirect Costs

A cost can be direct to the department,
but indirect to units of product produced
in the department.
Example: department managers salary.
Tracing costs directly to departments or

products helps to identify and eliminate
non-value added costs.
1-37
Controllable and
Uncontrollable Costs
A cost that can be significantly influenced
by a manager is a controllable cost.
Cost item
Manager
Classificaton
Cost of food used Restaurant

in a restaurant
manager
Controllable
Cost of national
advertising by a
restaurant chain
Uncontrollable
Restaurant
manager
1-38
Opportunity Cost
The potential benefit 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.
1-39
Sunk Costs
All costs incurred 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.
1-40
Differential Costs
Costs that differ between alternatives.
Example: You can work in your home town or in a nearb

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
1-41
Marginal Costs and Average

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.
1-42
Costs and Benefits of Information
Costs
Benefits
More information does not mean more

benefits if information overload results.
1-43

Basic Cost Management Concepts and Accounting For Mass Customization Operations

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basic Cost Management Concepts and Accounting For Mass Customization Operations

Uploaded by

Copyright:

Available Formats

2

Basic Cost Management

Copyright 2008 by The McGraw-Hill Companies, Inc. All

Managers need cost information to

What Do We Mean By a Cost?

Product Costs, Period Costs and Expenses

Cost Classifications on Financial

Cost of goods sold

Cost Classifications on Financial

Cost Classifications on Financial

Cost Classifications on Financial

Cost Classifications on Financial

Materials used to support

Cost of personnel who

Manufacturing Cost Flows

Manufacturing Cost Flows

Manufacturing Cost Flows

Schedule of Cost of Goods

Comet Computer Corporation

Total manufacturing costs

Cost of goods manufactured

Schedule of Cost of Goods

Computation of Cost of Raw Material Used

Raw-material inventory, January 1

Raw material available for use

Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Total manufacturing costs

Cost of goods manufactured

Schedule of Cost of Goods

Include all direct labor

Total manufacturing costs

Cost of goods manufactured

Schedule of Cost of Goods Manufactured

Computation of Total Manufacturing Overhead

Raw material used

Total manufacturing costs

Cost of goods manufactured

Schedule of Cost of Goods

Beginning work-inprocess inventory is

Total manufacturing costs

Cost of goods manufactured

Schedule of Cost of Goods

Ending work-in-process inventory

Total manufacturing costs

Cost of goods manufactured

Income Statement for a

Income before taxes

Income Statement for a Manufacturer

Comet Computer Corporation

Cost of goods available for sale

Cost of goods sold

Income before taxes

Identifying Cost Drivers

Total Variable Cost Example

Total Long Distance

Your total long distance telephone bill is

Variable Cost Per Unit Example

The cost per long distance minute talked is

Total Fixed Cost Example

Your monthly basic telephone bill probably

Number of Local Calls

Fixed Cost Per Unit Example