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CONCEPTS,
CLASSIFICATIONS AND
COST BEHAVIOR
Group 2
Joel Pre II
Tacy Gonzalez
Cost Elements in
Manufacturing
Cost Classifications in
Decision Making
Schedule of Costs
Manufacturing Costs
Direct
Direct
Materials
Materials
Direct
Direct
Labour
Labour
The Product
Manufacturing
Manufacturing
Overhead
Overhead
Direct Materials
Raw materials that become an integral part of the product and that can
be conveniently traced directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labour
Those labour costs that can be easily traced to individual units of
product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific units
produced.
Examples:
Examples: Indirect
Indirect labour
labour and
and indirect
indirect materials
materials
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Direct
Material
Material
Direct
Direct
Labour
Labour
Prime
Cost
Manufacturing
Manufacturing
Overhead
Overhead
Conversion
Cost
Idle Time
Machine
Breakdowns
Material
Shortages
Power
Failures
Overtime
Employee Benefits
Employee benefits include employment
taxes, medical plans, and pension costs.
Some companies
include all of these
costs in
manufacturing
overhead.
Non-manufacturing Costs
Selling
Costs
Administrative
Costs
All executive,
organizational, and
clerical costs.
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement
Quick Check
Quick Check
Manufacturers . . .
MegaLoMart
Balance Sheet
Merchandiser
Current assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser
Manufacturer
Current Assets
Current assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Materials waiting to be
processed.
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.
+ Cost of goods
manufactured
Goods available
for sale
- Ending
finished goods
inventory
= Cost of goods
sold
$ 14,200
234,150
$248,350
(12,100)
$236,250
Beginning
balance
Additions
to inventory
Ending
balance
Withdrawals
from
inventory
Quick Check
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
Quick Check
As
As items
items are
are removed
removed from
from raw
raw
materials
materialsinventory
inventoryand
andplaced
placedinto
into
the
the production
production process,
process,they
theyare
are
called
calleddirect
direct materials.
materials.
All
Allmanufacturing
manufacturingcosts
costsincurred
incurred
during
during the
theperiod
periodare
areadded
addedto
tothe
the
beginning
beginning balance
balanceof
of work
workin
in
process.
process.
Costs
Costsassociated
associated with
with the
the goods
goods that
that
are
are completed
completed during
during the
theperiod
periodare
are
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
+
=
Beginning work in
process inventory
Manufacturing costs
for the period
Total work in process
for the period
Ending work in
process inventory
Cost of goods
manufactured
Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labour
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Quick Check
A.
B.
C.
D.
$276,000
$272,000
$280,000
$ 2,000
Quick Check
A.
B.
C.
D.
$276,000
$272,000
$280,000
$ 2,000
+
=
32,000
276,000
$ 308,000
28,000
$ 280,000
Quick Check
A.
B.
C.
D.
$555,000
$835,000
$655,000
Cannot be determined.
Quick Check
A.
B.
C.
D.
$555,000
$835,000
$655,000
Cannot be determined.
Quick Check
A.
B.
C.
D.
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
Quick Check
A.
B.
C.
D.
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
+
=
Beginning work in
process inventory
Mfg. costs incurred
for the period
Total work in process
during the period
Ending work in
process inventory
Cost of goods
manufactured
$ 125,000
835,000
$ 960,000
200,000
$ 760,000
Quick Check
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Quick Check
B. $740,000.
C. $780,000.
D. $760,000.
Fixed
Mixed
True Variable
Commited
Variable
Step-Variable
Discretionary
Fixed
Cost per
Kilo of
Flour
1
7
200.00
200.00
15
200.00
Total
Variable
Cost Flour
200.00
1,400.00
3,000.00
Service company
Any
Chevy Volt
Price starts at $40,140.00
Fully electric = 154 km /
gallon-e
Volt battery (direct material)
Number
of Volts
Cost per
Battery
1
50
$7,000
$7,000
75
$7,000
Total
Variable
Cost Battery
$7,000
$350,00
0
$525,00
0
Mabuhay Travel
Island day trips
Package starts at PhP 2,500/person
Catered meals
Number of Tourists
50
650.00
150
650.00
97,500.00
700
650.00
455,000.00
PhP0.00
Miles Travelled
PhP30,000.00
PhP25,000.00
PhP20,000.00
PhP15,000.00
PhP10,000.00
Cost of Fuel
PhP5,000.00
PhP0.00
Miles Travelled
Mayo Clinic
Rents a machine to test blood
samples for the presence of
leukemia cells
Fixed Cost = $8,000/month
Monthly Rental
Number of Tests
Average Cost
per Test
$ 8,000.00
10
$800
$ 8,000.00
500
$16
$ 8,000.00
2,000
$4
Intel
Each new plant can produce
1.25 million chips per day
375 million chips a year
Volume output = 2.5x faster in
new plants
350
300
250
200
150
100
Call Minutes in
Thousands
50
0
2
1
0
Volume of Calls
Industry Study:
2003
7,629
companies
20-year period
Committed Cost:
Equipment
a company buys a
machine for $40,000
maintenance contract for
$2,000 in each of the
next three years
Committed Cost :
Property
A multi-year property lease
agreement is also a
committed cost for the full
term of the lease, since it is
extremely difficult to
terminate a lease
agreement.
Discretionary
Advertising
Research
Management Development
Programs
6
5
4
3
2
1
0
Volume of Calls
Type of
Industry
Ease of
Change in
Response
Historical
Accounting
Practice
Per Unit
Cost
Fixed
Variable
Regulatory Training:
PCI Training from the
Payment Card
Industry Security
Standards Council
Other Skills Training
Initiatives
$45,000.00
$40,000.00
$35,000.00
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
Up-Skill Training
$0.00
Fixed
Mixed
True Variable
Commited
Variable
Step-Variable
Discretionary
Fixed
LINEARITY
ASSUMPTION:
increases, cost increases.
as
activity
Month
January
February
March
April
May
June
Cost
$1,000
$1,250
$2,250
$2500
$3750
?
Hours
100
200
300
400
500
350
High-Low Method
Month
January
February
March
April
May
June
Cost
$1,000
$1,250
$2,250
$2500
$3750
?
Hours
100
200
300
400
500
350
High-Low Method
Variable rate = (3750 1000) / (500 100)
= 2750/400
= 6.875
Fixed cost
= 3750 (6.875 x 500)
= 312.50
June cost = 312.50 + (6.875 x 350)
= 2718.75
Month
January
February
March
April
May
June
Cost
$1,000
$1,250
$2,250
$2500
$3750
?
Hours
100
200
300
400
500
350
taking into
and plotting
Month
January
February
March
April
May
June
Cost
$1,000
$1,250
$2,250
$2500
$3750
?
Hours
100
200
300
400
500
350
100 150 200 250 300 350 400 450 500 550
Scattergraph Plot
Variable rate = (2250 1000) / (300 100)
= 1250/200
= 6.25
Fixed cost
= 2250 (6.25x 300)
= 375
June cost = 375 + (6.25 x 350)
= 2562.50
Month
January
February
March
April
May
June
Cost
$1,000
$1,250
$2,250
$2500
$3750
?
Hours
100
200
300
400
500
350
METHOD:
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
50
100
150
200
250
300
350
400
450
500
550
Comparing Approaches
Y = a + bx
Total Cost = Fixed Cost + (Variable
Rate*Activity Level)
McDonalds
Natures Way
Incremental revenue = $100,000
Incremental cost = $85,000
Net Income difference = $15,000
ITEMS
REVENUE
Cost of Goods Sold (V)
Advertising (F)
Commission (V)
Warehouse
depreciation (F)
Other Expenses (F)
TOTAL EXPENSES
NET OPERATING
INCOME
RETAILER
SALES REP
$700,000
350,000
80,000
0
50,000
$800,000
400,000
45,000
40,000
80,000
DIFF
COST/REV
$100,000
50,000
(35,000)
40,000
30,000
60,000
540,000
$160,000
60,000
625,000
$175,000
0
85,000
$15,000
Corporate Angel
Network
Cancer patients with specialized
treatment
Corporate Jets flying with empty
seats
No tax breaks for participating
companies
ZERO INCREMENTAL COSTS
New
Store
New
Realty
Project
Choosing one over the other means that the other option is a
lost opportunity
Team
Building
Continue
Work
Choosing one over the other means that the other option is a
lost opportunity
SUNK COST:
costs that stay the same
regardless of the available alternatives or
the decision made
$100
Ticke
t
$50
Ticke
t