2016-17 Term 1

ACCT112 Management
Accounting
Week 2
Cost Concepts

2016-17-T1-Aug to Dec 2016

Seminar Outline Week 2

Classify costs according to
management needs
Identify manufacturing costs
Record manufacturing costs
Compute the cost of goods
manufactured and cost of goods sold

2016-17-T1-Aug to Dec 2016

Cost Classifications
Large volume of cost data:
Cost of inventories of materials, products
Cost of materials used in production
Salaries for admin staff and production staff
Depreciation of office and factory
Sales for past quarter and forecast sales for
future
Cost of equipment purchased
Estimated disposal value of equipment
Etc

2016-17-T1-Aug to Dec 2016

cial

e if
buy a

ure

Cost Classifications
How do we know which cost data to use?
Depends on management needs

Financial
reporting
Decisionmaking
Planning e.g. should the company buy
a new machine?
Performance evaluation e.g. has Mr M
run his department well last year? what
are the areas that can be improved?

a. Pick
st

M
well.

2016-17-T1-Aug to Dec 2016

Cost Classifications
Costs are classified differently according to
management needs

Purpose of cost
Cost classifications
classification
Product costs (inventory
1 Preparing financial
statements for external
asset -> BS)
Period costs (expense->
reporting
Income Statement)
2 Accounting for costs in Manufacturing costs (result
manufacturing
in inventory asset)
Non-manufacturing costs
companies
(expense)
3 Assigning costs to cost Direct costs
objects (product, dept, Indirect costs
div, etc)
2016-17-T1-Aug to Dec 2016

Cost Classifications
Purpose of cost
classification
4 Predicting costs

5 Making decisions

Cost classifications
Variable cost
Fixed cost
Mixed cost
Future costs that differ
between alternatives e.g.
Differential cost, Opportunity
cost
Sunk cost is not relevant for
decision-making

2016-17-T1-Aug to Dec 2016

ect to

visor
ll the
find
rk

ch of

d
cts

Direct Costs & Indirect Costs

Is the cost easily traceable to the cost
object?
E.g.
Dept A employs a supervisor
for $5,000. The supervisor
oversees production operators who
produce notebooks, smartphones,
monitors and game consoles.
If we want to find out the cost of running Dept A,
Dept A is the cost object. Is the supervisor
salary $5,000 easily traceable to Dept A?
If we want to find out the cost of producing the
notebook, notebook is the cost object. Is the
supervisor salary $5,000 easily traceable to the
notebook?
Supervisor salary is a direct cost of Dept A but
an indirect cost of the product.
2016-17-T1-Aug to Dec 2016

Calculating Product Costs for Different

Purposes
How we calculate the cost of the product
depends on the purpose -- how we are going to
use the information.

Reporting purpose: Product

(Manu) costs vs Period
(non-manu) costs

2016-17-T1-Aug to Dec 2016

For this purpose we are doing financial reporting.

Company producing Multiple Products

2016-17-T1-Aug to Dec 2016

Cost Concepts for Product Costing

Costs in a manufacturing
company
Function
of Cost?
Traceabl
e to
Cost
Object?
Cost
Object

Manufacturin
g
Costs

NonManufacturing
Costs

Indirect cost
= shared
cost

Indirec
Direct
t
Trace Allocat
e
Produc
tA

Supporti
ng

Produc
tB
2016-17-T1-Aug to Dec 2016

Others

Financial
Statement
s
10

Manufacturing or Non-Manufacturing
Cost?
Is Cost

ay

NO; cannot
required to
be captured
manufactur
in an asset
ea
-> Expense
NonManufacturing product?
Manufacturing
Cost (Product
Cost (Period Cost
Cost)
or Expense)
Examples
Examples
Lubricant for
Lubricant for office
production
equipment
machinery
Packing materials
Packing materials
for delivery to
of raw materials
customers
Salary of
Salary of salesmen
production workers
Depreciation of 11
Depreciation of 2016-17-T1-Aug to Dec 2016
shop

YES; result in
a Product ->
Asset

Manufacturing Costs

Direct
materials

Direct
labour

PRODUCT
(Cost
S Object)

N
p

S
p

Indirect manufacturing costs (aka

Manufacturing Overhead) e.g. comprising
depreciation of machines, electricity for factory,
supervisor salary

12

/o

Manufacturing Costs: Direct Costs

Cost
Object

Direct
Cost $

of

2 cr
cos

1) C
(
s
s

Can the cost be conveniently traced to the

cost object?
How significant ($) is the cost?
Examples: Cost of milk (direct material);
Cost of production
worker (direct labour)
2016-17-T1-Aug to Dec 2016

13

2) S
B
c
e
i
m

Manufacturing Costs: Indirect Costs

Cost
Object

SHARED
cost;
Not
traceable

Manu
Overhea
ds are
Common
Costs $

e.g. factory
rental;
depreciation
of machines;
thickening
agent

2016-17-T1-Aug to Dec 2016

14

Labour Costs: Idle Time (Appendix 2A)

his

Model A and Model B are assembled in the same

assembly line during the morning and afternoon
shifts respectively. 5 workers work on the line and
are each paid $10 per hour.
Idle time: The machine broke down during the
afternoon shift for Model B and workers are idle for
4 hours.
Cost of idle time = 5 x 4hrs x $10 = $200
Is Model B the cause of the machine breakdown?
How will the costs of Model A and Model B be
affected if the cost of idle time $200 is assigned
to Model B as direct labour?
Thus, cost of idle time is treated as Manfacturing
OH__.
2016-17-T1-Aug to Dec 2016

15

Labour Costs: Overtime Premium

(Appendix 2A)
Model A and Model B are assembled in the same
assembly line during the morning and afternoon
shifts respectively. 5 workers work on the line and
are each paid $10 per hour. On a particular day,
workers during the afternoon shift put in 3 hours
overtime to assemble Model B . Overtime premium
As the 15 hours (5 workers x 3 hr) are used to
is 50% i.e. $5
assemble Model B, it is traceable to Model B -- direct
labour.
But
should the 15 hours (DL) be costed at $150 (15
hr x $10 normal rate)? OR $225 (15 hr x $15)?
How should the $5 overtime premium be treated if
the overtime is due to a rush order for Model B?
How should the $5 overtime premium be treated if
the overtime is due to production scheduling or
machine breakdown in the morning?
2016-17-T1-Aug to Dec 2016

Di

Manu
16

Summary of Classification of
Manufacturing Costs
Manufacturing Costs

Direct
Materials

Manu
Overhead/Indirect
Manufacturing Cost
Indirect materials
Indirect labour
Other indirect costs
Direct
needed for
Labour
manufacturing e.g.
depreciation of prodn
eqpt; utilities of
factory; insurance on
production facilities;
2016-17-T1-Aug to Dec 2016
17
cost of idle time

Prime Costs

Direct materials
$10

Direct labour
$25

Prime Costs = Direct Materials + Direct

Manufacturing Labour = $10 + $25 = $35
2016-17-T1-Aug to Dec 2016

18

Conversion Costs
Converts direct
material into
finished product

Conversion Costs = Direct Manu Labour +

Manufacturing Overhead
= $25 + Manufacturing Overhead
2016-17-T1-Aug
to Dec
2016cream
allocated to the
Grand
ice

19

Prime Costs and Conversion Costs

Prime Costs = Direct Materials + Direct
Manufacturing Labour = $10 + $25 = $35
Conversion Costs = Direct Manu Labour +
Manufacturing OH
= $25 + Allocated Manufacturing OH
Cost of Product = Direct Matl + Direct Labour +
Allocated Manu OH
= Prime costs + Allocated Manu OH
or
= Direct Material + Conversion costs

2016-17-T1-Aug to Dec 2016

20

Summary of Cost Items

Manufacturing
Costs
also called Product
Costs or Inventoriable
Costs

Manu OH or
Indirect Manu Cost
Direct
all costs of
Direct Labour
Materials
manufacturing a
product other than DL &
DM
Conversion
Prime Costs
Costs
Non-Manufacturing Costs
(and not supporting
manufacturing)
also called Period Costs or
Expenses
Administrative
Selling Expenses
Expenses
2016-17-T1-Aug to Dec 2016

21

Recording Manufacturing Costs

COMPLETED
PRODUCT
Direct Matls
Used
$ Labour
Direct
$
Manu
Overhead
$
Costs incurred in production are first recorded in
the WIP inventory account (ASSET).
WIP
Beg Bal
Cost of
Transferred
DM used Total
goods
to Finished
Manufactu manufactur
DL
Goods
Manu OHring
ed
account
costs
End Bal
2016-17-T1-Aug to Dec 2016

22

Cost Flows in a Manufacturing

Concern
Income
Costs

Manufacturing
Costs

Balance
Sheet

Material
Purchases

Direct Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Statement
Expenses

Inventories
Matl used

Completed
production

Non-Manu
Costs

Finished
Goods

Sold

Cost of
Goods
Sold
Selling and
Administrative
Expenses

Period Costs

2016-17-T1-Aug to Dec 2016

23

Inventory accounts in a Manufacturing

Co.
Additions
to
Inventory

Beginning
Inventory

Withdrawals
from
Inventory
Ending
Inventory

Beginni + Additions
ng
Invento
ry

= Withdrawa +Ending
ls
Invento
ry

Beg DM

+ Purchase

= DM used for +Ending

production
DM

Beg WIP

+ Manufacturin = Cost of
g costs (DM
Goods
used for
Manufactur
prodn + DL
ed
2016-17-T1-Aug to Dec 2016

+Ending
WIP
24

Cost Flows in a Manufacturing

Concern:
E.g.
1 Jan Inventories
(a) Direct Materials
(b) WIP
(c) FG

$1,000
$800
$5,000

During the year

(d) Direct material
purchases
(e) Direct labour
(f) Manu Overhead

$120,000
$300,000
$500,000

31 Dec Inventories
(g) Direct Materials
(h) WIP
(j) FG
2016-17-T1-Aug to Dec 2016

$1,300
$400
$6,000

25

Direct
Materials
(a) 1 Jan
DM used
$1,000
(d) Purchases
$119,700
$120,000
(g) 31 Dec
$1,300
WIP

(b) 1 Jan
DM used
$800
(e)$119,700
DL

COGM
$920,100

$300,000
(f) Manu OH
$500,000
(h) 31 Dec
$400
(c) 1 Jan
$5,000
COGM
$920,100
(j) 31 Dec
$6,000

Finished
Goods
COGS
$919,100

2016-17-T1-Aug to Dec 2016

DM used for prodn =

Beg DM + Purchases
End DM

COGM = Beg WIP +

Manu Costs during
period End WIP
* Total Manufacturing
Costs = DM used + DL +
Manu OH
COGS =
Beg FG + COGM - End
FG
26

Balance Sheet as at
31 Dec
Inventory
Assets
Direct Materials
$1,300
WIP
400
FG
6,000
:
etc

Income Statement for

the year
Sales
$
x,xxx,xxx
COGS
919,100
Gross Profit
$
xxx,xxx
Less Operating Expenses
:
etc
Net Profit

2016-17-T1-Aug to Dec 2016

27

Multiple Classification of Costs E.g.

manu costs

2016-17-T1-Aug to Dec 2016

28