2-Int To Cost

An Introduction to Cost
Terms and Purposes

Chapter 2
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
2-1
Learning Objective 1
Define and illustrate
a cost object.
2-2
Cost and Cost Terminology

Cost Object
Cost
Accumulation
Cost Object
Cost Object
Cost
Assignment
Tracing
Allocating
2-3
Distinguish between direct costs
and indirect costs.
2-4
Cost and Cost Terminology

Cost is a resource sacrificed or forgone to achieve
a specific objective.
An actual cost is the cost incurred (a historical cost)
as distinguished from budgeted costs.
A cost object is anything for which a separate
measurement of costs is desired.
2-5
Direct and Indirect Costs

Direct Costs
Example: Paper on which
Sports Illustrated magazine
is printed
COST
COSTOBJECT
OBJECT
Example:
Example:Sports
Sports
Illustrated
Illustratedmagazine
magazine
Indirect Costs
Example: Lease cost for
Time-Warner building
housing the senior editors
of its magazine
2-6

Example
Direct Costs:
Maintenance Department
$40,000
Personnel Department
$20,600
Assembly Department
$75,000
Finishing Department
$55,000
Assume that Maintenance Department costs are
allocated equally among the production departments.
How much is allocated to each department?
2-7

Example
Maintenance
$40,000
Assembly
Direct Costs
$75,000
Finishing
Direct Costs
$55,000
$20,000
$20,000
Allocated
2-8
Explain variable costs
and fixed costs.
2-9
Cost Behavior Patterns Example

Bicycles by the Sea buys a handlebar
at $52 for each of its bicycles.
What is the total handlebar cost when
1,000 bicycles are assembled?
2 - 10

Bicycles by the Sea incurred $94,500 in
a given year for the leasing of its plant.
This is an example of fixed costs with
respect to the number of bicycles assembled.
2 - 11

1,000 units $52 = $52,000
What is the total handlebar cost
when 3,500 bicycles are assembled?
3,500 units $52 = $182,000
2 - 12

What is the leasing (fixed) cost per bicycle
when Bicycles assembles 1,000 bicycles?
$94,500 1,000 = $94.50
What is the leasing (fixed) cost per bicycle
$94,500 3,500 = $27
2 - 13
Cost Drivers
The cost driver of variable costs is the level
of activity or volume whose change causes
the (variable) costs to change proportionately.
The number of bicycles assembled is a
cost driver of the cost of handlebars.
2 - 14
Relevant Range Example

Assume that fixed (leasing) costs are $94,500
for a year and that they remain the same for a
certain volume range (1,000 to 5,000 bicycles).
1,000 to 5,000 bicycles is the relevant range.
2 - 15
Fixed Costs
Relevant Range Example

120000
100000
80000
60000
40000
20000
0
$94,500
1000
2000
3000
4000
5000
6000
Volume
2 - 16
Relationships of Types of Costs

Direct
Variable
Fixed
Indirect
2 - 17
Interpret unit costs cautiously.
2 - 18
Total Costs and Unit Costs

Example
What is the unit cost (leasing and handlebars)
Total fixed cost $94,500
+ Total variable cost $52,000 = $146,500
$146,500 1,000 = $146.50
2 - 19
Total Costs and Unit Costs

Example
$146,500
Total Costs
200000
52
$
+
0
0
$94,5
150000
$94,500
100000
50000
0
0
500
1000
Volume
1500
2 - 20
Use Unit Costs Cautiously

Assume that Bicycles management uses a
unit cost of $146.50 (leasing and wheels).
Management is budgeting costs for
different levels of production.
What is their budgeted cost for an
estimated production of 600 bicycles?
600 $146.50 = $87,900
2 - 21

What is their budgeted cost for an estimated
production of 3,500 bicycles?
3,500 $146.50 = $512,750
What should the budgeted cost be for an
estimated production of 600 bicycles?
2 - 22

Total fixed cost
$ 94,500
Total variable cost ($52 600)
31,200
Total
$125,700
$125,700 600 = $209.50
Using a cost of $146.50 per unit would
underestimate actual total costs if output
is below 1,000 units.
2 - 23

What should the budgeted cost be for an
estimated production of 3,500 bicycles?
Total fixed cost
$ 94,500
Total variable cost (52 3,500) 182,000
Total
$276,500
$276,500 3,500 = $79.00
2 - 24
Distinguish among
manufacturing companies,
merchandising companies, and
service-sector companies.
2 - 25
Manufacturing
Manufacturing
Manufacturing companies
companies
purchase
purchase materials
materials and
and components
components and
and
convert
convert them
them into
into finished
finished goods.
goods.
A
Amanufacturing
manufacturing company
company must
must also
also develop,
develop,
design,
design, market,
market, and
and distribute
distribute its
its products.
products.
2 - 26
Merchandising
Merchandising
Merchandising companies
companies
purchase
purchase and
and then
then sell
sell tangible
tangible products
products
without
without changing
changing their
their basic
basic form.
form.
2 - 27
Merchandising
Service
Service companies
companies
provide
provide services
services or
or intangible
intangible
products
products to
to their
their customers.
customers.
Labor
Labor isis the
the most
most significant
significant cost
cost category.
category.
2 - 28
Differentiate between
inventoriable costs
and period costs.
2 - 29
Types of Inventory
Manufacturing-sector companies
typically have one or more of the
following three types of inventories:
1. Direct materials inventory
2. Work in process inventory (work
in progress)
3. Finished goods inventory
2 - 30
Types of Inventory
Merchandising-sector companies hold
only one type of inventory the
product in its original purchased form.
Service-sector companies do not
hold inventories of tangible products.
2 - 31
Classification of
Manufacturing Costs
Direct materials costs
Direct manufacturing labor costs
Indirect manufacturing costs
2 - 32
Describe the three categories of
inventories commonly found
in manufacturing companies.
2 - 33
Inventoriable Costs
Inventoriable costs (assets)
become cost of goods sold
after a sale takes place.
2 - 34
Period Costs
Period costs are all costs in the income
statement other than cost of goods sold.
Period costs are recorded as expenses of the
accounting period in which they are incurred.
2 - 35
Flow of Costs Example

Bicycles by the Sea had $50,000 of direct
materials inventory at the beginning of the period.
Purchases during the period amounted to
$180,000 and ending inventory was $30,000.
How much direct materials were used?
$50,000 + $180,000 $30,000 = $200,000
2 - 36

Direct labor costs incurred were $105,500.
Indirect manufacturing costs were $194,500.
What are the total manufacturing costs incurred?
Direct materials used
Direct labor
Indirect manufacturing costs
Total manufacturing costs
$200,000
105,500
194,500
$500,000
2 - 37

Assume that the work in process inventory
at the beginning of the period was $30,000,
and $35,000 at the end of the period.
What is the cost of goods manufactured?
Beginning work in process
Total manufacturing costs
Ending work in process
Cost of goods manufactured
$ 30,000
500,000
35,000
$495,000
2 - 38

Assume that the finished goods inventory
at the beginning of the period was $10,000,
and $15,000 at the end of the period.
What is the cost of goods sold?
Beginning finished goods
Cost of goods manufactured
Ending finished goods
Cost of goods sold
$ 10,000
495,000
15,000
$490,000
2 - 39

Beg. Balance
Direct mtls. used
Direct labor
Indirect mfg. costs
Ending Balance
Work in Process
30,000 495,000
200,000
105,500
194,500
35,000
2 - 40

Work in Process
495,000
Finished Goods
10,000 490,000
495,000
15,000
Cost of Goods Sold
490,000
2 - 41
Manufacturing Company
BALANCE SHEET
Inventoriable
Costs
Materials
Inventory
Work in
Process
Inventory
INCOME STATEMENT
Revenues
Finished
Goods
Inventory
when
sales
occur
deduct
Cost of
Goods Sold
Equals Gross Margin

deduct
Period
Costs
Equals Operating Income

2 - 42
Merchandising Company
BALANCE SHEET
Inventoriable
Costs
Merchandise
Purchases
INCOME STATEMENT
Revenues
Inventory
when
sales
occur
deduct
Cost of
Goods Sold
Equals Gross Margin

deduct
Period
Costs
Equals Operating Income
2 - 43
Prime Costs
Direct
Materials
Direct
Labor
Prime
Costs
2 - 44
Prime Costs
What are the prime costs for Bicycles by the Sea?
Direct materials used
+ Direct labor
=
$200,000
105,500
$305,000
2 - 45
Conversion Costs
Direct
Labor
Manufacturing
Overhead
Indirect
Labor
Indirect
Materials
Conversion
Costs
Other
2 - 46
Conversion Costs
What are the conversion costs for
Bicycles by the Sea?
Direct labor
$105,500
+ Indirect manufacturing costs
194,500
=
$300,000
2 - 47
Measuring Costs
Requires Judgment
Manufacturing labor-cost classifications
vary among companies.
The following distinctions are generally found:
Direct manufacturing labor
Manufacturing overhead
2 - 48
Measuring Costs
Requires Judgment
Manufacturing overhead
Indirect labor Managers salaries Payroll fringe costs
Forklift truck operators (internal handling of materials)
Janitors
Rework labor
Overtime premium
Idle time
2 - 49
Measuring Costs
Requires Judgment
Overtime premium is usually
considered part of overhead.
Assume that a worker gets $18/hour
for straight time and gets
time and one-half for overtime.
2 - 50
Measuring Costs
Requires Judgment
How much is the overtime premium?
$18 50% = $9 per overtime hour
If this worker works 44 hours on a given
week, how much are his gross earnings?
Direct labor
44 hours $18 = $792
Overtime premium
4 hours $ 9 = 36
Total gross earnings
$828
2 - 51
Explain why product costs are
computed in different ways
for different purposes.
2 - 52
Many Meanings of Product Cost

A product cost is the sum of the costs
assigned to a product for a specific purpose.
1. Pricing and product emphasis decisions
2. Contracting with government agencies
3. Preparing financial statements for external
reporting under generally accepted
accounting principles
2 - 53
Present key features of
cost accounting and
cost management.
2 - 54
A Framework for Cost

Management
Three features of cost accounting
and cost management:
1. Calculating the costs of products
2. Obtaining information
3. Analyzing information
2 - 55
End of Chapter 2
2 - 56

2-Int To Cost

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2-Int To Cost

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An Introduction to Cost

Terms and Purposes

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost and Cost Terminology

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost and Cost Terminology

Direct and Indirect Costs

Direct and Indirect Costs

Direct and Indirect Costs

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Behavior Patterns Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Behavior Patterns Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Behavior Patterns Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Behavior Patterns Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Relevant Range Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Relevant Range Example

Relationships of Types of Costs

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Total Costs and Unit Costs

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Total Costs and Unit Costs

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Use Unit Costs Cautiously

Use Unit Costs Cautiously

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Use Unit Costs Cautiously

Use Unit Costs Cautiously

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flow of Costs Example

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Equals Gross Margin

Equals Operating Income

Equals Gross Margin

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster