Cost Concepts (1).pptx

7/24/2019 Cost Concepts (1).pptx

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Cost Concepts - 1

COST CONCEPTS

AND CLASSIFICATIONSFixed vs Direct vsVariable Indirect

Functional vs Behavioral



Cost Concepts - 2

COST CLASSIFICATIONS

Functional

Product

ar!etin"

#$D

Ad%in



Cost Concepts - 3


Functional & Product Detail

Product

ar!etin"

#$D

Ad%in

Materials

Labor

Mfg.Overhead

Prime costs = Dir. Materials + Dir. Labor

Conversion costs = Dir. Labor + Total Mfg.

Overea!



Cost Concepts - "


Behavioral

Product

ar!etin"

#$D

Ad%in

Fixed

Variable



Cost Concepts - #


#es'onsibilit(

Product

ar!etin"

#$D

Ad%in

Fixed

Variable

A

BC



Cost Concepts - $

COST #ELATIONS)IPS* AN+FACT+#IN, COPAN-

Direct at./Be"0

Direct at.Purchases

Direct at./End0

Direct laborincurred

Direct at.

+sed1

2Overhead costs

a''lied

Tot. 3". Costsincurred

Cost o3 ,oods 3".

Cost o3 ,oods Sold

4IP /Be"0

4IP /End0

11

22

Fin ,oods /End0

Fin ,oods /Be"0

1

1

P#IO#PE#IOD

NE5TPE#IOD



Cost Concepts - %

Inco%e State%entanu3acturin" Co%'an(

Beg. WIP+ Direct Matl

!sed+ Direct Labor + Mfg. Overhead" #$d. WIP

=

Cost of %oods Mfg.Cost of %oods Mfg.

Beg. Fi$. %oods +

&'()**(***Cost of %oods Mfg.

&'()**(***Cost of %oods Mfg.

-#$d. Fi$ished %oods

=&'(**(***

Cost of %oods ,old&'(**(***

Cost of %oods ,old

&)(***(***,ales

&)(***(***,ales

-&'(**(***

Cost of %oods ,old&'(**(***

Cost of %oods ,old

=&-()**(***

%ross Margi$&-()**(***

%ross Margi$

-

• ,elli$g exe$ses

• Ad/i$. exe$ses

• I$co/e taxes

&0**(*** Other Oer.#xe$ses

&0**(*** Other Oer.#xe$ses

=&1**(***

2et I$co/e&1**(***

2et I$co/e



Cost Concepts - &

• ,elli$g #xe$ses• Ad/i$istrative #xe$ses• I$co/e taxes

• Direct Materials3 ,4lies• Direct Labor • I$direct Costs or Overhead

INCOE STATEENT

Service Or"ani6ation

&'(**(***Cost of ,ervices

&'(**(***Cost of ,ervices

&0**(*** Oerati$g #xe$ses

&0**(*** Oerati$g #xe$ses

&)(***(***,ales

&)(***(***,ales

&1**(***2et I$co/e

&1**(***2et I$co/e

&-()**(***%ross Margi$

&-()**(***%ross Margi$

-

=

-

=



Cost Concepts - '

Total fi(e! costs do not respond to changes

in unit level cost drivers within a period.

Total fi(e! costs do not respond to changes

in unit level cost drivers within a period.

Total

fixed

costs (Y)

Total activity (X)

0

0

Basic Cost Behavior PatternsBasic Cost Behavior Patterns



Cost Concepts - 1)

Committe! fi(e! costs are

required to maintain the current

service or production capacity to

fill previous legal commitments.

Committe! fi(e! costs are

required to maintain the current

service or production capacity to

fill previous legal commitments.

Fixed CostsFixed Costs



Cost Concepts - 11

Discretionar* fi(e! costs are set

at a fixed amount each year at the

discretion of management.

Discretionar* fi(e! costs are set

at a fixed amount each year at the

discretion of management.

Fixed CostsFixed Costs



Cost Concepts - 12

Total variable costs increase in proportion

to increases in unit level cost drivers.

Total variable costs increase in proportion

to increases in unit level cost drivers.

Total

variable

costs (Y)

Total activity (X)00




Cost Concepts - 13

Total mi(e! costs contain fixed and variable

cost elements. They increase but not in direct

proportion to increases in unit level cost drivers.

Total mi(e! costs contain fixed and variable

cost elements. They increase but not in direct

proportion to increases in unit level cost drivers.

Total

mixed

costs (Y)


!ometimes

calledsemivariable

costs




Cost Concepts - 1"

Total step costs are constant over a range of

activity for a unit level cost driver but moves to

a different amount at different ranges.

Total step costs are constant over a range of

activity for a unit level cost driver but moves to

a different amount at different ranges.

Total

step

costs (Y)



C C 1



Cost Concepts - 1#

Variable costs22 The cost of the

ingredients used to make thepizzas

Fixed costs22Depreciation,

property taxes, and propertyinsurance

ixed costs--Cost of electricity

Ste' costs--Employee wages


"i##a $ut

C t C t 1$



Cost Concepts - 1$

Total

costs

(Y)

%alue of independent variable (X)0

0

&ixed costs (a)

%ariable costs (b)

Total costsY ' a bX

%ariable costs are

layered on top of

fixed costs.

%ariable costs are

layered on top of

fixed costs.

!lope

b '∆Y

∆X

Total Cost Behavior With ASingle Unit Level Cost Driver

Total Cost Behavior With ASingle Unit Level Cost Driver

C t C t 1%



Cost Concepts - 1%

Y ' a bXtotal costsvertical axis intercept

(an approximation of

fixed costs)

slope (an

approximation ofvariable costs per unit

of X)

value of

independentvariable

Equation for Total CostsEquation for Total Costs

C t C t 1&



Cost Concepts - 1&

ethods 3or Se'aratin" ixedCost Into Fixed and Variable

Co%'onents

Scatterplot Method

The igh-!ow Method

Speci"c #uantitati$emethods – The Method of !east

S#uares

Cost Concepts 1'



Cost Concepts - 1'

Mo$th !tilit5 Costs !$it Prod4ced

6a$4ar5 &'(*** '**

Febr4ar5 '(1** )**

March )(1** **

Aril 1(*** 7**

Ma5 8(1** -(***

ixed Costs* An Exa%'le

Cost Concepts 2)



Cost Concepts - 2)

!$its Prod4ced

!tilit5

Cost

&7(***

(***

)(***

'(***

*'** )** ** 7** -(***

.

Scatter'lot ethod

. .

.

.

A$al5st ca$ fit li$e

based o$ his or her

exerie$ce

I/orta$t9 Cost f4$ctio$ is o$l5

releva$t :ithi$ releva$t ra$ge

Cost Concepts 21



Cost Concepts - 21

ig activit* perio!

Lo, activit* perio!

mber of Pac/aging0ipments Costs

anuary *000 +,-000

&ebruary 000 /*000arch ,/000 1/000

2pril l0000 /0000

%ariable cost

per unit (b) '

3ifference in total costs

3ifference in activity

b '+1/000 4 +,-000

,/000 4 *000

5ontinued on next

slide

igh!Lo" Cost Esti#ationigh!Lo" Cost Esti#ation

Cost Concepts 22



Cost Concepts - 22

%ariable cost per unit (b) ' +/.60

anuary

a ' Total costs 4 %ariable costs +,-000 ' a (+/.60 x *000 shipments)

a ' +/000

arch +1/000 ' a (+/.60 x ,/000 shipments)

a ' +/000

!ame answer7


Cost Concepts - 23



Cost Concepts - 23

Y ' +/000 x +/.60XY ' +/000 x +/.60X

Total pac8ing

department costs

9umber of

shipments


Cost Concepts - 2"



Cost Concepts - 2"

Direct materials the cost

of primary raw materials

converted into finished

goods. The word :direct;indicates costs that are

easily or directly traced to a

finished product or service.

Direct materials the cost

of primary raw materials

converted into finished

goods. The word :direct;indicates costs that are

easily or directly traced to a

finished product or service.

Direct labor the wages earned by

production employees for the time

they spend converting raw

materials into finished products.

Direct labor the wages earned by

production employees for the time

they spend converting raw

materials into finished products.

Manfactring overea!incl!es all manufacturing costs

other than direct materials and

direct labor.

Manfactring overea!

incl!es all manufacturing costs

other than direct materials and

direct labor.

Co#$osition of%anufacturing Costs

Co#$osition of%anufacturing Costs

Cost Concepts - 2#



Cost Concepts 2#

Directaterials

DirectLabor

Overhead tobe Assi"ned

Finished,oods

Conventional Product Costin"

Wor; i$

Process

Traceable

I$direct

Cost Concepts - 2$



Cost Concepts 2$

%rime costs & Direct materials '

Direct la(or

Con$ersion costs & Direct la(or '

Manufacturingo$erhead

)"xed * $aria(le+

Co#$osition of

%anufacturing Costs

Co#$osition of

%anufacturing Costs

Cost Concepts - 2%



Cost Concepts 2%

"ercent of Total

anufacturing

5osts

0

,00

,00 ,60 /000

Year

Totalmanfactring

costs

3irect materials has increased

3irect labor has decreased

anufacturing overhead has

increased

Changing Co#$osition ofTotal %anufacturing Costs

Changing Co#$osition ofTotal %anufacturing Costs

Cost Concepts - 2&



Cost Concepts 2&

The Basic Conce't o3

Overhead A''licationA''lied overhead 7 Overhead rate x Actualactivit(

A''lied overhead is the basis 3or co%'utin"'er2unit overhead cost

A''lied overhead is rarel( e8ual to a 'eriod9sactual overhead costs.

:e( considerations

Cost Concepts - 2'



p

CONVENTIONAL P#OD+CTCOSTIN,

Overhead A''lication

Predeter/i$ed <otal b4dgeted overheadOverhead =ate > #xected level of activit5 ?

• Co$ve$tio$al costi$g t5icall5 4sed vol4/e @or as4rrogate for vol4/e s4ch as DL

• Proble/s " B4dgeted overhead co$tai$s both fixed a$d

variable costs

" ,electio$ of exected level of activit5

Cost Concepts - 3)



p

Select An A''ro'riate Activit(Base

Criterion*Cause and E;ect#elationshi'

Possible easureso3

Production Activit(

<. +nits 'roduced=. Direct labor hours>. Direct labor dollars?. achine hours@. Direct %aterials

Choice o3 Activit(Base to be +sed3or Co%'utin" thePredeter%inedOverhead #ate

Cost Concepts - 31



p

Co%'arison o3 Traditional andConte%'orar( Cost ana"e%entS(ste%s

CostI$for/atio$

,5ste/

<raditio$al Co$te/orar5

-. !$it"based drivers'. Allocatio$ i$te$sive. 2arro: vie: of

rod4ct costs). Foc4s o$ cost /gt.1. Little activit5 i$for/atio$. Maxi/ies 4$it

rod4ctio$8. !ses fi$a$cial /eas4res of erfor/a$ce

-. !ses of $o$4$it drivers'. <raci$g i$te$sive. #xa$ded rod4ct costi$g). Ma$agi$g activities1. Detailed activit5

i$for/atio$. ,5ste/":ide erfor/a$ce araisals8. !se of $o$fi$a$cial

/eas4res of erfor/a$ce

Cost Concepts - 32



p

&#$act of Co#$uters on

%anufacturing

&#$act of Co#$uters on%anufacturing

tomatic

i!entification s*stems

405 allow inventory

and production

information to be

entered into acomputer without

writing or 8eying.

Cost Concepts - 33



p


%anufacturing


Compter-ai!e!

!esign CD5 involves the use of

computers to

design products.

Cost Concepts - 3"



Compter-ai!e! manfactring

CM5 involves the use of computers

to control machine operations.


%anufacturing


Cost Concepts - 3#




%anufacturing


6le(ible manfactring

s*stems 6M05 are an extensionof computer4aided

manufacturing techniques

through a series of

manufacturing operations.

6le(ible manfactring

s*stems 6M05 are an extensionof computer4aided

manufacturing techniques

through a series of

manufacturing operations.

Compter-integrate!

manfactring C4M5 is the

ultimate extension of 523 52

and &! concepts to a completed

automated and computer4

controlled factory.

Compter-integrate!

manfactring C4M5 is the

ultimate extension of 523 52

and &! concepts to a completed

automated and computer4controlled factory.

<n their advanced stages factories

utili#ing flexible manufacturing

systems and computer4integrated

manufacturing are sometimes referredto as :lights4out factories;because they

can be operated in the dark .

<n their advanced stages factories

utili#ing flexible manufacturing

systems and computer4integrated

manufacturing are sometimes referredto as :lights4out factories;because they

can be operated in the dark .

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