Cost Terms, Concepts, and Classifications

UAA ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

Chapter

Specify Tag the Cost

We

need to place an adjective (tag) on the cost to identify what it is.

Cost Flows in a Manufacturing Firm

Direct Materials
Direct Labor Mfg. Overhead Work-inProcess Finished Goods Cost-of Goods Sold

Cost Flows in a Manufacturing Firm Manufacturing Costs

Costs incurred in the manufacture of goods being produced.
Work-inProcess

Direct Materials
Direct Labor Mfg. Overhead

Known as product (inventoriable) costs.

They are expensed when the product is sold.

Finished Goods

Cost-of Goods Sold

Those Manufacturing Firm Cost Flows in a materials that become an

integral part of the finished product and can be physically traced to the product.

Direct Materials
Direct Labor Mfg. Overhead

Those

factory labor costs that can be Work-in- physically traced to the Finished Cost-of Process Goods Sold production ofGoods finished the product.

All

costs associated with the manufacture of a product except direct materials and direct labor.

Known as Period Direct Work-incosts.

Labor Process

Direct Materials

Nonmanufacturing Costs Cost-of Finished

Goods Goods Sold

Costs incurred for They are Mfg. other than production expensed in Overhead activities. the period in which theySales are Cost of Goods Sold incurred. Income = Gross Margin Statement

Nonmanufacturing Expenses

Net Income

Materials

Direct General

& Administrative Expenses

All executive, organizational, and clerical costs associated with the general management Direct Work-inFinished Cost-of Labor Goods Goods Sold of the firm. Process

Mfg. Selling
Overhead

& Distribution Expenses

All costs necessary to secure customer orders andSalesthe products/services to the get customer. Cost of Goods Sold

Income Statement

Gross Margin
Nonmanufacturing Expenses

Net Income

Direct Materials Direct Labor Mfg. Overhead Work-inProcess Finished Goods Cost-of Goods Sold

Sales

Income Statement

Cost of Goods Sold

Gross Margin
Nonmanufacturing Expenses

Period Costs

Net Income

Manufacturing Costs

Manufacturing Costs

Materials that are directly traceable to the goods or services being produced (physical observation).
Steel in cars, wood in furniture, etc.

Direct Materials
DM

in Theory
component

Every

DM

in Reality
apply cost-benefit rule

Must

DM What is Cost?
The

invoice price of the raw materials, costs,

Shipping

Import
A

duties, and

reduction for any allowable discounts for prompt payment.

Manufacturing Costs

Labor that is directly traceable to the goods being produced.

Assembly line workers, chefs, pilots

Manufacturing Costs

All production costs other than direct materials and direct labor.
Utilities, security, janitorial, etc.

MOH Other Names

Overhead Burden Indirect Factory

Manufacturing Costs Expenses

MOH A Few Examples

Factory Supervision,

Factory Telephone, heat, light, power,

Factory bookkeeping salaries, Insurance Depreciation/factory equipment Indirect materials, labor.

Nonmanufacturing Costs
All

costs not associated with the production of goods.

Selling

Costs

Administrative

Costs

Cost Flows in a Manufacturing Firm

Manufacturing Costs Balance Sheet

DM DL MOH Sales Used

Unused WIP
Unfinished

DM Inv. WIP Inv. FG Inv.

COGS Gross Margin S&A Net Income Period Costs

Income Statement

=
=

Cost Flows in a Manufacturing Firm

Manufacturing Costs Balance Sheet

DM DL MOH Sales Used

Unused WIP
Unfinished

DM Inv. WIP Inv. FG Inv.

Product Costs: Costs assigned to products (i.e., COGS - in Process Inventory. Work They attach themselves to units of product and S&A remain with the product until it is sold.
Income Statement

=
=

Gross Margin

Net Income

Cost Flows in a Manufacturing Firm

Manufacturing Costs Balance Sheet

DM DL MOH Sales Used

Unused WIP
Unfinished

DM Inv. WIP Inv. FG Inv.

COGS Gross Margin S&A Net Income

Income Statement

=
=

Cost Flows in a Manufacturing Firm

Manufacturing Costs Balance Sheet Period Costs: Expired non product costs. Unused DM DM in Always charged to expense in the period Inv. which they occur. Unfinished Used

DL

WIP

WIP Inv. FG Inv.

MOH Sales

COGS Gross Margin S&A Net Income Period Costs

Income Statement

=
=

Product Costs Vs. Period Costs DM, DL, MOH, S&A Costs

Product Costs

DM, DL MOH S & A

DM, DL MOH S & A

DM, DL MOH S & A

Work-inProcess

Finished Goods

Period Costs

Selling and Administrative Costs

DM ,DL MOH

Sale

Expensed in the current period.

Cost of Goods Sold

Balance Sheet Presentation

Variable Costs

Total costs that vary in direct proportion to changes in the level of activity within the relevant range.

Total Variable Costs

$

Volume (Activity Base)

Per Unit Variable Cost

$

Volume (Activity Base)

Fixed Costs

Costs that remain constant in total, regardless of the changes in activity within the relevant range.

Total Fixed Costs

$

Volume (Activity Base)

Per Unit Fixed Costs

Volume (Activity Base)

Curvilinear Costs and the Relevant Range

Economists Curvilinear Cost Function

Accountants Straight-Line Approximation

Relevant Range

Volume (Activity Base)

Anything for which a separate measurement of costs is desired Direct (products, customers, Costs departments, etc.)

Cost Object

Indirect Costs

Direct Costs

Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor)

Indirect Costs

Costs that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead)

Cost Object

Different Costs for Different Purposes

Product Costing Definitions

Value-Chain Product Costs Operating Product Costs Traditional Product Costs

Research and Development

Production Marketing
Customer Service

Production Marketing
Customer Service

Production

Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis

Strategic Design Decisions Tactical Profitability Analysis

External Financial Reporting

Value-Chain Product Costs

Research and Development Production Marketing Customer Service

Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis

If making any of these types of decisions, I need to look at all costs.

Operating Product Costs

Production Marketing Customer Service

On the other hand, for these decisions, we might be able to ignore some of the costs.

Strategic Design Decisions Tactical Profitability Analysis

Product Costing Definitions

For external Research and financial reporting, Development Production Production we need only these Marketing Marketing costs because Customer Service Customer Service that is what GAAP Pricing Decisions we need. Strategic Design says Product-Mix Decisions Decisions
Strategic Profitability Analysis Tactical Profitability Analysis

Value-Chain Product Costs

Operating Product Costs

Traditional Product Costs

Production

External Financial Reporting