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8/10/2019 Cost Concepts: Managerial Accounting
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPACopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Managerial Accounting and CostConceptsChapter 2
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Learning Objective 1
Identify and give
examples of each of thethree basic
manufacturing cost
categories.
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The Product
DirectMaterials
DirectLabor
ManufacturingOverhead
Classifications of Manufacturing Costs
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Direct Materials
Raw materials that become an integralpart of the product and that can beconveniently traced directly to it.
Example: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easilytraced to individual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing Overhead
Manufacturing costs that cannotbe easilytraced directly to specific units produced.
Examples: Indirect materials and indirect labor
Wages paid to employeeswho are not directly
involved in productionwork.Examples: maintenance
workers, janitors, andsecurity guards.
Materials used to supportthe production process.
Examples: lubricants andcleaning supplies used in theautomobile assembly plant.
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Nonmanufacturing Costs
SellingCosts
Costs necessary to
secure the order anddeliver the product.
AdministrativeCosts
All executive,
organizational, andclerical costs.
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Learning Objective 2
Distinguish between
product costs and periodcosts and give examples
of each.
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Product Costs Versus Period Costs
Product costs includedirect materials, direct
labor, and
manufacturingoverhead.
Period costsinclude allselling costs and
administrative costs.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
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Quick Check
Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?
A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.E. Sales commissions.
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Quick Check
Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?
A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.E. Sales commissions.
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Classifications of Costs
Manufacturing costs are oftenclassified as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
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Learning Objective 3
Understand cost
behavior patternsincluding variable costs,fixed costs, and mixed
costs.
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Cost Classifications for Predicting Cost
Behavior
Cost behavior refers tohow a cost will react tochanges in the level of
activity. The mostcommonclassifications are:
Variable costs.
Fixed costs
Mixed costs.
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Variable Cost
Your total texting bill is based on howmany texts you send.
Number of Texts Sent
Total
TextingBill
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Variable Cost Per Unit
The cost per text sent is constant at
5 cents per text message.
Number of Texts Sent
CostP
erTextSent
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The Activity Base (Cost Driver)
A measure of whatcauses the
incurrence of avariable cost
Unitsproduced
Milesdriven
Machinehours
Laborhours
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Fixed Cost
Your monthly contract fee for your cell phone isfixed for the number of monthly minutes in yourcontract. The monthly contract fee does notchange based on the number of calls you make.
Number of Minutes UsedWithin Monthl Plan
MonthlyC
ellPhone
ContractFee
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Fixed Cost Per Unit
Within the monthly contract allotment, the averagefixed cost per cell phone call made decreases as
more calls are made.
Number of Minutes Used
Within Monthly Plan
Month
lyCellPhon
e
ContractFee
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RelevantRange
A straight lineclosely
approximates acurvilinear
variable costline within the
relevant range.
Activity
To
talCost
EconomistsCurvilinear Cost
Function
The Linearity Assumption and the Relevant
Range
Accountants Straight-Line
Approximation (constantunit variable cost)
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Fixed Costs and the Relevant Range
Fixed costs would increase
in a step fashion at a rate of
$30,000 for each additional
1,000 square feet.
For example, assume office space is available at
a rental rate of $30,000 per year in increments of
1,000 square feet.
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Rent
CostinTho
usands
ofDollars
0 1,000 2,000 3,000Rented Area (Square Feet)
0
30
60
Fixed Costs and the Relevant Range
90
RelevantRange
The relevant rangeof activity for a fixedcost is the range ofactivity over which
the graph of thecost is flat.
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Cost Classifications for Predicting Cost
Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost Increase Variable cost per unit
and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level rises and
level within the relevant range. increases as the activity level falls.
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Quick Check
Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be more
than one correct answer.)A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
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Quick Check
Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be more
than one correct answer.)A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
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Mixed Costs
The total mixed cost line can be expressedas an equation: Y= a+ bX
Where: Y = The total mixed cost.
a = The total fixed cost (the
vertical intercept of the line).
b = The variable cost per unit of
activity (the slope of the line).
X = The level of activity.
Fixed Monthly
Utility Charge
VariableCost per KW
Activity (Kilowatt Hours)
TotalU
tilityCost
X
Y
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Mixed Costs An Example
If your fixed monthly utility charge is $40, yourvariable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what isthe amount of your utility bill?
Y =a +bX
Y = $40 + ($0.03 2,000)Y = $100
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Analysis of Mixed Costs
In account analysis, each account isclassified as either variable or fixed based
on the analysts knowledge of how
the account behaves.
The engineering approachclassifies
costs based upon an industrialengineers evaluation of production
methods, and material, labor, andoverhead requirements.
Account Analysis and the Engineering Approach
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Learning Objective 4
Analyze a mixed cost
using a scattergraph plotand the high-low
method.
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Scattergraph Plots An Example
Assume the following hours of maintenance workand the total maintenance costs for six months.
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The High-Low Method An Example
The variable costper hourof
maintenance isequal to the changein cost divided by
the change in hours.
= $6.00/hour$2,400
400
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The High-Low Method An Example
Total Fixed Cost = Total CostTotal Variable Cost
Total Fixed Cost = $9,800($6/hour 850 hours)
Total Fixed Cost = $9,800$5,100
Total Fixed Cost = $4,700
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The High-Low Method An Example
Y = $4,700 + $6.00XThe Cost Equation for Maintenance
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Quick Check
Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is thevariableportion of salessalaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unitd. $0.125 per unit
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Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is thevariableportion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unitd. $0.125 per unit
Quick Check
$4,000 40,000 units
= $0.10 per unit
Units Cost
High level 120,000 14,000$
Low level 80,000 10,000
Change 40,000 4,000$
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Quick Check
Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is the fixedportion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000d. $12,000
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Sales salaries and commissions are $10,000when 80,000 units are sold, and $14,000 when120,000 units are sold. Using the high-lowmethod, what is the fixedportion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000d. $12,000
Quick Check
Total cost = Total fixed cost +
Total variable cost
$14,000 = Total fixed cost +($0.10 120,000 units)
Total fixed cost = $14,000 - $12,000
Total fixed cost = $2,000
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Least-Squares Regression Method
A method used to analyze mixed costs if ascattergraph plot reveals an approximately linear
relationship between theXand Yvariables.
This method uses allof thedata points to estimatethe fixed and variablecost components of a
mixed cost. The goal of this method isto fit a straight line to thedata that minimizes the
sum of the squared errors.
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Least-Squares Regression Method
Software can be used to fit aregression line through the datapoints.
The cost analysis objective is thesame: Y= a+ bX
Least-squares regression also provides a statistic,called theR2, which is a measure of the goodness
of fit of the regression line to the data points.
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Comparing Results From
the Two Methods
The two methods just discussed providedifferent estimates of the fixed and variable cost
components of a mixed cost.
This is to be expected because each methoduses differing amounts of the data points to
provide estimates.
Least-squares regression provides the mostaccurate estimatebecause it uses all the data
points.
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Learning Objective 5
Prepare incomestatements for a
merchandising companyusing the traditional and
contribution formats.
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The Traditional and Contribution Formats
Used primarily forexternal reporting.
Used primarily bymanagement.
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Uses of the Contribution Format
The contribution income statement format is usedas an internal planning and decision-making tool.
We will use this approach for:
1.Cost-volume-profit analysis (Chapter 5).
2.Budgeting (Chapter 8).
3.Segmented reporting of profit data (Chapter 6).
4.Special decisions such as pricing and make-or-buy analysis (Chapter 12).
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Learning Objective 6
Understand the differences
between direct and indirectcosts.
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Assigning Costs to Cost Objects
Direct costs Costs that can be
easily and
conveniently tracedto a unit of productor other cost object.
Examples: direct
material and directlabor
Indirect costs Costs that cannot
be easily and
conveniently tracedto a unit of productor other cost object.
Example:
manufacturingoverhead
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Learning Objective 7
Understand costclassifications used in
making decisions:differential costs,
opportunity costs, andsunk costs.
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Every decision involves a choicebetween at least twoalternatives.
Only those costs and benefitsthat differ between alternatives
are relevant in a decision. Allother costs and benefits can andshould be ignored as irrelevant.
Cost Classifications for Decision Making
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Differential Cost and Revenue
Costs and revenues that differamong alternatives.
Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.
Differential revenue is:$2,000 $1,500 = $500
Differential cost is:$300
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Opportunity Cost
The potential benefit that isgiven up when one alternative
is selected over another.
Example: If you werenot attending college,you could be earning
$15,000 per year.Your opportunity costof attending college forone year is $15,000.
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Sunk Costs
Sunk costs have already been incurredand cannot be changed now or in the
future. These costs should be ignoredwhen making decisions.
Example: Suppose you had purchased gold for
$400 an ounce, but now it is selling for $250 anounce. Should you wait for the gold to reach $400 anounce before selling it? You may say, Yes even
though the $400 purchase is a sunk costs.
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Quick Check
Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but
you dont want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
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Quick Check
Suppose that your car could be sold now for$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
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Quick Check
Suppose that your car could be sold now for$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
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Summary of the Types of Cost
Classifications
FinancialReporting
Predicting CostBehavior
Assigning Coststo Cost Objects
Making BusinessDecisions
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Least-Squares Regression
ComputationsAppendix 2A
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Learning Objective 8
Analyze a mixed cost
using a scattergraph plotand the least-squaresregression method.
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Simple Regression Analysis
Matrix, Inc. wants toknow its average
fixed cost andvariable cost permeals served.
Using the data to theright, lets see how to
do a regression usingMicrosoft Excel.
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Simple Regression Using Excel
You will need three pieces ofinformation from yourregression analysis:
1. Estimated Variable Cost PerUnit (line slope)
2. Estimated Fixed Costs (lineintercept)
3. Goodness of fit, or R2
To get these three piecesinformation we will need tousethreeExcel functions.
SLOPE, INTERCEPT, and RSQ
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Simple Regression Using Excel
Place your cursor incell F4 and press the
= key. Click on thepull down menu and
scroll down to MoreFunctions . . .
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Scroll down to theStatistical
functions. Nowscroll down thestatistical
functions until you
highlightSLOPE
Simple Regression Using Excel
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1. In the Known_ys box, enter C4:C19 for the range.2. In the Known_xs box, enter D4:D19 for the range.
Simple Regression Using Excel
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With your cursor incell F5, press the =
key and go to the pulldown menu for
Special Functions.Select Statistical and
scroll down tohighlight the
INTERCEPTfunction.
Simple Regression Using Excel
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1. In the Known_ys box, enter C4:C19 for the range.
2. In the Known_xs box, enter D4:D19 for the range.
Here is theestimate of the
fixed costs.
Simple Regression Using Excel
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Finally, we willdetermine thegoodness of
fit, or R2, byusing the RSQ
function.
Simple Regression Using Excel
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1. In the Known_ys box, enter C4:C19 for the range.
2 In the Known xs box enter D4:D19 for the range
Here is the
estimate of R2.
Simple Regression Using Excel