CCMA 2

8aslc CosL 1erms and concepLs

1 Goa nstitute of management
J cosL Lerms ?
need Lo understand]|nterpret costs (from
accounLlng reporLs)Le same way across Le
ent|re va|ue cha|n
Standard|sed understand|ng of the terms and
concepts
Goa nstitute of management
JaL ls CosL
W CosL 8esource sacrlflced/foregone Lo acleve a
speclflc ob[ecLlve
W AcLual cosL a cosL LaL as been lncurred(pasL)
W 8udgeLed cosL a predlcLed cosL(esLlmaLe Lo
elp plan)
W CosL ob[ecL anLlng of lnLeresL for wlc a cosL
ls deslred
Goa nstitute of management
W 8udgeLlng Le fuLure cosL ls a ma[or aspecL of
cosL accounLlng
W MosL lmporLanL assumpLlon ls LaL Le
budgeLed cosLs are closesL Lo Le real/llkel
cosLs
W All facLors Laken lnLo accounL
W Spendlng less Lan budgeL prlma facle means
beLLer efflclenc ln use of resource
Goa nstitute of management
CosL Cb[ecL Lxamples aL 8MJ
ost Cb[ect I||ustrat|on
9roducL 8MJ x 3 sporLs acLlvlL velcle
Servlce uealersupporL Lelepone oLllne
9ro[ecL 8u pro[ecL on uvu ssLem enancemenL
CusLomer
Perb Cambers MoLors a dealer LaL purcases
a broad range of 8MJ velcles
AcLlvlL SeLLlng up producLlon maclnes
ueparLmenL LnvlronmenLal PealL SafeL
Goa nstitute of management
CosL ssLem deLermlnaLlon of cosLs Lo varlous
cosL ob[ecLs
W CosL accumulaLlon a collecLlon of cosL daLa
ln an organlzed manner
W CosL asslgnmenL a general Lerm LaL
lncludes gaLerlng accumulaLed cosLs Lo a cosL
ob[ecL 1ls lncludes
1raclng accumulaLed cosLs wlL a dlrecL
relaLlonslp Lo Le cosL ob[ecL and
AllocaLlng accumulaLed cosLs wlL an lndlrecL
relaLlonslp Lo a cosL ob[ecL
Goa nstitute of management
ulrecL lndlrecL CosLs
W ulrecL cosLs can be convenlenLl and
economlcall Lraced (Lracked) Lo a cosL ob[ecL
W lndlrecL cosLs cannoL be convenlenLl or
economlcall Lraced (Lracked) Lo a cosL ob[ecL
Slnce Lraclng ls uneconomlcal Lese cosLs are
a||ocated to a cost ob[ect |n a rat|ona| and
systemat|c manner
Goa nstitute of management
8MJ Asslgnlng CosLs Lo a CosL Cb[ecL
Goa nstitute of management
CosL Lxamples
W ulrecL CosLs
9arLs
Assembl llne wages
W lndlrecL CosLs
LlecLrlclL
8enL
9roperL Laxes
Goa nstitute of management
acLors AffecLlng ulrecL / lndlrecL CosL
ClasslflcaLlon
W ost Mater|a||tysmaller Le value more
lmmaLerlal
ablllL Lo economlcall capLure cosL
W va||ab|||ty of |nformat|ongather|ng techno|ogy
bar codes 8lu eLc
W Cperat|ona| Des|gn 9rocess la ouL excluslve
10 Goa nstitute of management
CosL 8eavlor
W varlable cosLs canges ln LoLal ln proporLlon
Lo canges ln Le relaLed level of acLlvlL or
volume
W lxed cosLs remaln uncanged ln LoLal
regardless of canges ln Le relaLed level of
acLlvlL or volume
W CosLs are flxed or varlable onl wlL respecL Lo
a speclflc acLlvlL or a glven Llme perlod
11 Goa nstitute of management
CosL 8eavlor conLlnued
W varlable cosLs are consLanL on a perunlL basls lf a
producL Lakes 3 pounds of maLerlals eac lL sLas Le
same per unlL regardless of one Len or a Lousand
unlLs are produced
W lxed cosLs cange lnversel wlL Le level of
producLlon As more unlLs are produced Le same
flxed cosL ls spread over more and more unlLs reduclng
Le cosL per unlL
1 Goa nstitute of management
CosL 8eavlor Summarlzed
TotaI DoIIars Cost per Unit
'ariable Costs
Change in
proportion with
output
More output = More cost
Fixed Costs
Unchanged in
relation to output
Change inversely
with output
More output = lower cost
per unit
1
TotaI cost Cost Per Unit
'ariable Costs
Change in
proportion with
output
More output = More cost
Unchanged in
relation to output
Fixed Costs Unchanged in
relation to output
Change
inversely with
output
More output = lower cost
per unit
Goa nstitute of management
CosL 8eavlor vlsuallzed
1 Goa nstitute of management
CLer CosL ConcepLs
W ost Dr|ver a varlable LaL causall affecLs
cosLs over a glven Llme spanakln Lo varlable
cosL
W e|evant ange Le band of normal acLlvlL
level (or volume) ln wlc Lere ls a speclflc
relaLlonslp beLween Le level of acLlvlL (or
volume) and a glven cosL
or example flxed cosLs are consldered flxed onl
wlLln Le relevanL range
1 Goa nstitute of management
8elevanL 8ange vlsuallzed
1 Goa nstitute of management
DnlL cosLrange of ouLpuL
W Dn|t costs shou|d be used caut|ous|y Slnce
unlL cosLs cange wlL a dlfferenL level of
ouLpuL or volume lL ma be more prudenL Lo
base declslons on a LoLal cosL basls
DnlL cosLs LaL lnclude flxed cosLs sould alwas
reference a glven level of ouLpuL or acLlvlL
DnlL CosLs are also called Average CosLs
1 Goa nstitute of management
MulLlple ClasslflcaLlon of CosLs
W CosLs ma be classlfled as
ulrecL / lndlrecL and
varlable / lxed
W 1ese mulLlple classlflcaLlons glve rlse Lo
lmporLanL cosL comblnaLlons
ulrecL varlable
ulrecL lxed
lndlrecL varlable
lndlrecL lxed
1 Goa nstitute of management
MulLlple ClasslflcaLlon of CosLs
vlsuallzed
1 Goa nstitute of management
Lxamples
9roblem 217 and 223
0 Goa nstitute of management
CCS1 8LPAvlCD8
8elevanL cosLs
Small Anlmal Cllnlc
SM -IM I-I
Small Anlmal Cllnlc ls a nonproflL cllnlc LaL provldes llmlLed
veLerlnarlan servlces prlmarll vacclnaLlons for Le
surroundlng communlL 1e cllnlc as been growlng eac
ear and lLs manager expecLs Lls Lrend Lo conLlnue 1e
recenL growL as acLuall been drlven b an economlc
downLurn JlL rlslng unemplomenL more people are
unable Lo pa regular veLerlnarlan fees Man ave Lurned
Lo Small Anlmal Cllnlc wlc carges a lower raLe for
servlces A local foundaLlon as provlded Small Anlmal Cllnlc
a maLclng granL for lLs servlces or example lf a peL owner
pas $30for an examlnaLlon and vacclnes Le foundaLlon wlll
maLc Le fee wlL an addlLlonal $ 30 1ls supporL as
enabled Le cllnlc Lo keep lLs raLes low
As parL of er operaLlng plans LeLlcla 8rown Le manager
of Small Anlmal Cllnlc would llke Lo creaLe a budgeL of nexL
ear's revenues and cosLs LeLlcla esLlmaLes LaL Le cllnlc
wlll provlde servlces for 3800 vlslLs nexL ear 1e
accounLanL !os Pard deLermlned LaL Le cost ob[ect |s
the c||n|c and Le cost dr|ver for the c||n|c as a who|e |s
the number of an|ma| v|s|ts 1en from Le accounLlng
records e ldenLlfled f|ve re|evant costs for the c||n|c parL
Llme veLerlnarlans Lecnlclans LreaLmenL supplles renL
and admlnlsLraLlon cosLs Pe performed analsls aL Le
accounL level Lo obLaln Le lnformaLlon needed Lo esLlmaLe
fuLure cosLs
1e lnformaLlon for Le lasL Lree ears follows 8ecause
Small Anlmal Cllnlc ls a nonproflL organlzaLlon lLs proflL ls
referred Lo as surplus

Anlmal vlslLs 2300 3000 3300
veLerlnar fees $ 72300 $ 90000 $ 103000
oundaLlon maLclng granL 72300 90000 103000
1oLal 8evenue 143000 180000 210000
Lxpenses
9arLLlme veLerlnarlans 24000 32800 42000
1ecnlclans 71000 78000 78049
1reaLmenL supplles 4000 4600 3200
8enL 8000 8300 8730
AdmlnlsLraLlon 38000 39600 41200
1oLal Lxpenses 143000 163300 173199
Surplus $ 0 $ 16300 $ 34801
1echn|c|ans
9aroll records over 2003 sow LaL Le Lecnlcal sLaff ls
permanenL and pald on a salar basls 1e Lecnlclans clean
examlnaLlon rooms prepare supplles lll ouL paper work
andle Le recepLlon desk and asslsL Le veLerlnarlans wlL
eac vlslL ecause they work on many d|fferent tasks
Iosh conc|udes that th|s cost |s |nd|rect and f|xed
A 23 salar lncrease ls expecLed for 2006
Some deta||s on the behav|our of the re|evant costs are g|ven be|ow
art t|me Veter|nar|ans
1e paroll records sow a loL of varlaLlons ln Le cosL of veLerlnarlans
9arL Llme veLerlnarlans are ca||ed |n as necessary and are pa|d on an
hour|y bas|s MosL of the|r t|me |s spent w|th an|ma|s so !os
deLermlnes lL ls a d|rect cost 1erefore e Llnks LaL Le amounL of
Llme Le veLerlnarlans spend wlL eac anlmal mlgL be cosL drlver
Powever Le accounLlng ssLem does noL record Le vlslL Llme per anlmal
lnsLead records are avallable for Le LoLal number of anlmal vlslLs !os
conslders oLer poLenLlal cosL drlvers suc as number of veLerlnarlans on
call and Le ours Le cllnlc ls open buL ellmlnaLes Lem because Le
seem less llkel Lan number of anlmal vlslLs Lo ave a causeandeffecL
relaLlonslp wlL veLerlnarlan wages 1erefore e caLegorlzes
veLerlnarlan fees as a varlable cosL and plans Lo use number of anlmal
vlslLs as Le cosL drlver
1e veLerlnarlan cosLs are sowlng an lncrease ear afLer ear Pe
esLlmaLes LaL for no |ncreases |n rates are p|anned under head
1reatment Supp||es
!os belleves LaL a LreaLmenL suppl ls elLer a varlable or
mlxed cosL Pe learns from Le Lecnlclans LaL LreaLmenL
supplles lnclude lLems LaL var dependlng on Le servlces
provlded suc as vacclnaLlon serum and srlnges Pe also
learns LaL supplles lnclude lLems suc as lab coaLs for cllnlc
emploees LaL var b number of emploees raLer Lan
vlslLs Pe concludes LaL Le cost of treatment supp||es |s
m|xed cost and e belleves that number of an|ma| v|s|ts has
a causeandeffect re|at|onsh|p for the var|ab|e port|on
!os learns LaL few slgnlflcanL canges occurred ln Le cosL or
use of LreaLmenL supplles over Le pasL Lree ears
1erefore he dec|des to use a|| three years' data to est|mate
the cost funct|on
D ent
8enL can cange annuall wen Le lease ls renewed
Powever renL canges depend on local raLes raLer Lan on
Le level of operaLlng acLlvlL aL Le cllnlc Accordlngl e
caLegorlzes renL as a flxed cosL
ne does not update th|s f|gure because he |earns that the
property manager |s not p|ann|ng to |ncrease rent for
1herefore h|s est|mate for rent |s a|so 587
dm|n|strat|on
AdmlnlsLraLlon lncludes cosLs Lo seL up flles for new
anlmals and offlce supplles relaLed Lo Le
paperwork for eac vlslL !os revlews Le general
ledger enLrles and flnds LaL Le remalnder of Le
admlnlsLraLlve cosL ls for salarles general offlce
supplles and Lelepone wlc !os lncludes are
flxed cosLs 1us e concludes LaL adm|n|strat|on
|s a m|xed cost w|th an|ma| v|s|ts as the cost dr|ver
for the var|ab|e port|on
lven 1ls lnformaLlon
(1) 9repare a budgeL for Le ear 2006 Laklng
3800 vlslLs as esLlmaLed b LeLlcla no
ma[or canges are expecLed on Le
revenue slde
(2) JaL ls Le proflL llkel Lo be
ulfferenL 1pes of lrms
W ManufacLurlngsecLor companles creaLe and
sell Lelr own producLs
W MercandlslngsecLor companles producL
resellers
W ServlcesecLor companles provlde servlces
(lnLanglble producLs)
1 Goa nstitute of management
1pes of ManufacLurlng lnvenLorles
W ulrecL MaLerlals resources lnsLock and
avallable for use
W Jorkln9rocess (or progress) producLs
sLarLed buL noL eL compleLed CfLen
abbrevlaLed as Jl9
W lnlsed oods producLs compleLed and
read for sale
Goa nstitute of management
1pes of 9roducL CosLs
W Also known as lnvenLorlable CosLs
ulrecL MaLerlals
ulrecL Labor
lndlrecL ManufacLurlng facLor cosLs LaL are noL
Lraceable Lo Le producL CLer common names
for Lls Lpe of cosL lnclude ManufacLurlng
Cveread cosLs or acLor Cveread cosLs
Goa nstitute of management
AccounLlng ulsLlncLlon 8eLween CosLs
W Inventor ab|e costs producL manufacLurlng
cosLs 1ese cosLs are caplLallzed as asseLs
(lnvenLor) unLll Le are sold
W er|od costs have no future va|ue and are
expensed as |ncurred
Goa nstitute of management
CosL lows
W 1e CosL of oods ManufacLured and Le CosL
of oods Sold secLlon of Le lncome
SLaLemenL are accounLlng represenLaLlons of
Le acLual flow of cosLs Lroug a producLlon
ssLem
noLe Le lmporLance of lnvenLor accounLs ln Le
followlng accounLlng reporLs and ln Le cosL flow
carL
Goa nstitute of management
CosL lows vlsuallzed
Goa nstitute of management
CosL of oods ManufacLured
Goa nstitute of management
MulLlpleSLep lncome SLaLemenL
Goa nstitute of management
CLer CosL ConslderaLlons
W 9rlme cosL ls a Lerm referrlng Lo all dlrecL
manufacLurlng cosLs (labor and maLerlals)
W Converslon cosL ls a Lerm referrlng Lo dlrecL
labor and facLor overead cosLs collecLlvel
W CverLlme labor cosLs are consldered parL of
overead due Lo Le lnablllL Lo preclsel
know Le Lrue cause of Lese cosLs
Goa nstitute of management
ulfferenL ueflnlLlons of CosLs
for ulfferenL AppllcaLlons
W 9rlclng and producLmlx declslons ma use a
super" cosL approac (compreenslve)
W ConLracLlng wlL governmenL agencles ver
speclflc deflnlLlons of cosL for cosL plus proflL"
conLracLs
W 9reparlng exLernaluse flnanclal sLaLemenLs
AA9drlven producL cosLs onl
0 Goa nstitute of management
ulfferenL ueflnlLlons of CosLs
for ulfferenL AppllcaLlons
1 Goa nstitute of management
1ree Common eaLures of
CosL AccounLlng CosL ManagemenL
1 CalculaLlng Le cosL of producLs servlces and
oLer cosL ob[ecLs
2 CbLalnlng lnformaLlon for plannlng conLrol
and performance evaluaLlon
3 Analzlng Le relevanL lnformaLlon for
maklng declslons
Goa nstitute of management
81ampa Cff|ce u|pment Manufactures and se||s meta| she|v|ng It began
operat|ons on Ianuary 1 osts |ncurred for are as fo||ows (V stands for
Var|ab|e I stands for f|xed)

ulrecL maLerlals used $ 140000 v

ulrecL manufacLurlng labor cosLs 30000 v
9lanL energ cosLs 3000 v
lndlrecL manufacLurlng labor cosLs 10000 v
lndlrecL manufacLurlng labor cosLs 16000
CLer lndlrecL manufacLurlng cosLs 8000 v
CLer lndlrecL manufacLurlng cosLs 24000
MarkeLlng dlsLrlbuLlon and cusLomerservlce cosLs 122830 v
MarkeLlng dlsLrlbuLlon and cusLomerservlce cosLs 40000
AdmlnlsLraLlve cosLs 30000 Goa nstitute of management
varlable manufacLurlng cosLs are varlable wlL respecL Lo unlLs produced varlable
markeLlng dlsLrlbuLlon and cusLomerservlce cosLs are varlable wlL respecL Lo unlLs
sold
lnvenLor daLa are
eg|nn|ng
Ianuary 1
nd|ng
December 1
ulrecL maLerlals 0 lb 2000 lbs
Jork ln progress 0 unlLs 0 unlLs
lnlsed goods 0 unlLs ? unlLs

!roduction in 00 was 100,000 units. Two pounds of direct materials are

used to make one unit of finished product.
Revenues in 00 were $,00. The selling price per unit and the
purchase price per pound of direct materials were stable throughout the
year. The company's ending inventory of finished goods is carried at the
average unit manufacturing cost for 00. Finished-goods inventory at
December 1,00, was $0,0.
1. Calculate direct materials inventory, total cost, December 1, 00.
. Calculate finished-goods inventory, total units, December 1, 00.
. Calculate selling price in 00.
. Calculate operating income for 00.
Goa nstitute of management
248 An audlLor for Le lnLernal 8evenue Servlce ls Lrlng Lo reconsLrucL some parLlall desLroed
records of Lwo Lax paers or eac of Le cases ln Le accompanlng llsL flnd Le unknowns
deslgnaLed b Le leLLers A Lroug u
ase 1
(|n thousands)
ase
AccounLs recelvable 12/31 $ 6000 $ 2100
CosL of goods sold A 20000
AccounLs paable 1/1 3000 1700
AccounLs paable 12/31 1800 1300
lnlsed goods lnvenLor 12/31 8 3300
ross margln 11300 C
Jorklnprocess lnvenLor 1/1 0 800
Jorklnprocess lnvenLor 12/31 0 3000
lnlsed goods lnvenLor 1/1 4000 4000
ulrecL maLerlals used 8000 12000
ulrecL manufacLurlng labor 3000 3000
ManufacLurlng overead cosLs 7000 u
9urcases of dlrecL maLerlals 9000 7000
8evenues 32000 31800
AccounLs recelvable 1/1 2000 1400 Goa nstitute of management

PANEL A: INCOME STATEMENT

Revenues
Cost of goods sold:
Beginning finished goods inventory, January 1, 00
Cost of goods manufactured (see !anel B)
Cost of goods available for sale
Ending finished goods inventory, December 1, 00
Cost of goods sold
Gross margin (or gross profit)
Operating ncome
PANEL B: COST OF GOODS MANUFACTURED
Direct materials:
Beginning inventory, January 1, 00
!urchases of direct materials
Cost of direct materials available for use
Ending inventory, December 1, 00
Direct materials used
Direct manufacturing labor
Manufacturing overhead costs:
ndirect manufacturing labor
Supplies
Heat, light, and power
Depreciation - plant building
Depreciation - plant equipment
Miscellaneous
Total manufacturing overhead costs
Manufacturing costs incurred during 00
Beginning work-in-process inventory, January 1,00
Total manufacturing costs to account for
Ending work-in-process inventory, December 1,00
Cost of goods manufactured (to ncome Statement)
Goa nstitute of management