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Basic CostManagement Conceptsand Accounting for Mass
Customization Operations
Basic CostManagement Conceptsand Accounting for MassCustomization Operations
Chapter 2
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LearningObjective
1
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Process of ManagementProcess of Management
DecisionMaking
DirectingControl
PlanningStrategyFormulation
Managers need cost information toperform each of these functions.
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What o We Mean B! a Cost"What o We Mean B! a Cost"
A cost
is the measure ofresources givenup to achieve a
particular purpose.
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LearningObjective
2
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Product Costs# Period Costs and $%pensesProduct Costs# Period Costs and $%penses
Product costs are costs associated &ith goods forsa'e unti' the time period during &hich the productsare so'd# at &hich time the costs become e%penses(
Period costs are costs that are e%pensed during thetime period in &hich the! are incurred(
$%penses are the consumption of assets for thepurpose of generating revenue(
8/9/2019 Chap 002 Basic Cost Management Concepts and Accounting for Mass Customization Operations
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LearningObjective
)
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Product CostsProduct Costs
Cost of goods so'd
Period CostsPeriod Costs
Operating e%penses
Cost C'assifications on *inancia'Cost C'assifications on *inancia'
+tatements , -ncome +tatement+tatements , -ncome +tatement
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MerchandiserMerchandiser
Current Assets, Cash
, .eceivab'es
, Prepaid $%penses
, MerchandiseMerchandiseInventoryInventory
ManufacturerManufacturer
Current Assets CashCash
.eceivab'es.eceivab'es
Prepaid $%pensesPrepaid $%penses
InventoriesInventoriesRa MaterialsRa Materials
!ork in Process!ork in Process
Finished "oodsFinished "oods
Cost C'assifications on *inancia'Cost C'assifications on *inancia'
+tatements , Ba'ance +heet+tatements , Ba'ance +heet
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MerchandiserMerchandiser
Current Assets, Cash
, .eceivab'es
, Prepaid $%penses
, MerchandiseMerchandiseInventoryInventory
ManufacturerManufacturer
Current Assets CashCash
.eceivab'es.eceivab'es
Prepaid $%pensesPrepaid $%penses
InventoriesInventoriesRa MaterialsRa Materials
!ork in Process!ork in Process
Finished "oodsFinished "oods
Cost C'assifications on *inancia'Cost C'assifications on *inancia'
+tatements , Ba'ance +heet+tatements , Ba'ance +heet
#hose materialsaiting to $eprocessed.
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MerchandiserMerchandiser
Current Assets, Cash
, .eceivab'es
, Prepaid $%penses
, MerchandiseMerchandiseInventoryInventory
ManufacturerManufacturer
Current Assets CashCash
.eceivab'es.eceivab'es
Prepaid $%pensesPrepaid $%penses
InventoriesInventoriesRa MaterialsRa Materials
!ork in Process!ork in Process
Finished "oodsFinished "oods
Cost C'assifications on *inancia'Cost C'assifications on *inancia'
+tatements , Ba'ance +heet+tatements , Ba'ance +heet
Partially complete
products % material tohich some la$or
and&or overhead has$een added.
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MerchandiserMerchandiser
Current Assets, Cash
, .eceivab'es
, Prepaid $%penses
, MerchandiseMerchandiseInventoryInventory
ManufacturerManufacturer
Current Assets CashCash
.eceivab'es.eceivab'es
Prepaid $%pensesPrepaid $%penses
InventoriesInventoriesRa MaterialsRa Materials
!ork in Process!ork in Process
Finished "oodsFinished "oods
Cost C'assifications on *inancia'Cost C'assifications on *inancia'
+tatements , Ba'ance +heet+tatements , Ba'ance +heet
Completed productsaaiting sale.
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LearningObjective
/
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0!pes of Production Processes0!pes of Production Processes
#ype of Production Description of '(ample of Process Process Manufacturer
)o$ Shop *o volume Disney
*ittle standardi+ation
,ni-ue products
.atch Multiple products Caterpillar
*o volume
Assem$ly *ine A fe ma/or products Ford
0igher volume
Mass Customi+ation 0igh volume Dell
Many standardi+ed components
Customi+ed com$ination of components
Continuous Flo 0igh volume '((on
0ighly standardi+ed commodity products
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LearningObjective
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Manufacturing CostsManufacturing Costs
0heProduct
irectLabor
ManufacturingOverhead
irectMateria'
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irect Materia'irect Materia'
'(ample1Steel used tomanufacture
the automo$ile.
'(ample1Steel used tomanufacture
the automo$ile.
Cost of ra material that is used tomake2 and can $e conveniently
traced2 to the finished product.
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Cost of salaries2 ages2 and fringe$enefits for personnel ho ork
directly on manufactured products.
irect Laborirect Labor
'(ample1
!ages paid to anautomo$ile assem$lyorker.
'(ample1!ages paid to an
automo$ile assem$lyorker.
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All other manufacturing costs
Manufacturing OverheadManufacturing Overhead
Materials used to support
the production process.'(amples1 lu$ricants andcleaning supplies used in anautomo$ile assem$ly plant.
-ndirect
Labor
-ndirect
Materia'
Other
Costs
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All other manufacturing costs
Manufacturing OverheadManufacturing Overhead
Cost of personnel ho
do not ork directly onthe product. '(amples1maintenance orkers2/anitors and security
guards.
-ndirect
Labor
-ndirect
Materia'
Other
Costs
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All other manufacturing costs
Manufacturing OverheadManufacturing Overhead
'(amples1 depreciation
on plant and e-uipment2property ta(es2insurance2 utilities2
overtime premium2 andunavoida$le idle time.
-ndirect
Labor
-ndirect
Materia'
Other
Costs
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C'assifications of Costs inC'assifications of Costs in
Manufacturing CompaniesManufacturing Companies
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as fo''o&s
DirectMaterial
Direct*a$or
Manufacturing3verhead
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Manufacturing Cost *'o&sManufacturing Cost *'o&s
Manufacturing3verhead
Direct Material
Direct *a$or
!ork inProcessInventory
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Manufacturing Cost *'o&sManufacturing Cost *'o&s
Manufacturing3verhead
Direct Material
Direct *a$or
Finished"oods
Inventory
!ork inProcessInventory
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Manufacturing Cost *'o&sManufacturing Cost *'o&s
Manufacturing3verhead
Direct Material
Direct *a$or
Finished"oods
Inventory
Cost of"oods
Sold
!ork inProcessInventory
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Learning
Objective3
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Comet Computer Corporation
Schedule of Cost of "oods Manufactured
Ra material used 4562789:
Direct la$or ;92999
#otal manufacturing overhead
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Comet Computer Corporation
Schedule of Cost of "oods Manufactured
Ra material used 4562789:
Direct la$or ;92999
#otal manufacturing overhead
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Comet Computer Corporation
Schedule of Cost of "oods Manufactured
Ra material used 4562789:
Direct la$or ;92999
#otal manufacturing overhead
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Comet Computer Corporation
Schedule of Cost of "oods Manufactured
Ra material used 4562789:
Direct la$or ;92999
#otal manufacturing overhead
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+chedu'e of Cost of 4oods+chedu'e of Cost of 4oodsManufacturedManufactured
eginning ork=in=process inventory iscarried over from the
prior period.
'nding ork=in=process
inventory contains the cost ofunfinished goods2 and isreported in the current assetssection of the $alance sheet.
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-ncome +tatement for a-ncome +tatement for aManufacturerManufacturer
Comet Computer Corporation
Income StatementFor the @ear 'nded Decem$er 542
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Comet Computer Corporation
Income StatementFor the @ear 'nded Decem$er 542
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Learning
Objective5
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Activities that cause costs to beActivities that cause costs to be
incurred are ca''edincurred are ca''ed C3S# DRI'RSC3S# DRI'RS
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Learning
Objective6
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Cost C'assificationsCost C'assifications
Cost behavior meansho& a cost &i'' reactto changes in the 'eve'
of business activit!(, 0ota'variab'e costs
change &hen activit!changes(
, 0ota'fi%ed costsremainunchanged &hen activit!changes(
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0ota' 7ariab'e Cost $%amp'e0ota' 7ariab'e Cost $%amp'e
8our tota' cab'e pa!9per9vie& bi'' is based onho& man! movies !ou &atch(
Pa!9Per97ie&
Movies Watched
0ota'P
a!9Per97ie&
Bi''
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7ariab'e Cost Per :nit $%amp'e7ariab'e Cost Per :nit $%amp'e
Movies Watched
PerM
ovieCharge
0he cost per movie &atched is constant( *ore%amp'e# ;/(
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0ota' *i%ed Cost $%amp'e0ota' *i%ed Cost $%amp'e 8our month'! cab'e bi'' probab'! does not change&hen !ou &atch movies on channe's that !ou have
e'ected to be paid on a month'! basis =>BO?(
@umberof >BO Movies
Watched
Month
'!Chargefor
>
BOBi''
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*i%ed Cost Per :nit $%amp'e*i%ed Cost Per :nit $%amp'e
@umber of >BO
Movies Watched
Month'!>
BOBi''p
erM
ovie
Watched
0he average cost per >BO movie decreasesas more >BO movies are &atched(
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Cost C'assificationsCost C'assifications
Summary of aria$le and Fi(ed Cost ehavior
Cost In #otal Per ,nit
#otal varia$le cost changes aria$le cost per unit
aria$le as activity level changes. remains the same over
ide ranges of activity.
#otal fi(ed cost remains Fi(ed cost per unit
Fi(ed the same even hen the goes don as activity
activity level changes. level goes up.
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Learning
Objective
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irect and -ndirect Costsirect and -ndirect Costs
irect costs Costs that can be
easi'! andconvenient'! traced to
a product ordepartment(
$%amp'e cost ofpaint in the paintdepartment of anautomobi'e assemb'!p'ant(
-ndirect costs Costs that must be
a''ocated in order tobe assigned to a
product ordepartment(
$%amp'e cost ofnationa' advertisingfor an air'ine isindirect to a particu'arf'ight(
C t '' b' dContro''ab'e and
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A cost that can be significant'! inf'uencedb! a manager is a contro''ab'e cost(
Contro''ab'e andContro''ab'e and
:ncontro''ab'e Costs:ncontro''ab'e Costs
Cost item Manager Classificaton
Cost of food used Restaurant Controlla$le
in a restaurant manager
Cost of national Restaurant ,ncontrolla$le
advertising $y a manager
restaurant chain
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Learning
Objective1
