Chapter 02 - Basic Cost Management Concepts
CHAPTER 2 BASIC COST MANAGEMENT CONCEPTS Learning Objectives 1.
Exp Explain lain wh what at is mean antt by the word ord cost.
2.
Distin Distingui guish sh am among ong produ product ct costs, costs, perio period d costs costs,, and expen expenses ses..
3.
Desc Descri ribe be the the role role of of cos costs ts in pub publi lish shed ed fin finan anci cial al sta state teme ment nts. s.
4.
List List fi fie e type typess of ma manuf nufact acturi uring ng opera operatio tions ns and and descr describe ibe mass mass custo customi! mi!ati ation. on.
".
#ie #ie exam exampl ples es of thre threee typ types es of ma manu nufa fact ctur urin ing g cost costs. s.
$. %repare %repare a schedule schedule of cost of of goods manufa manufactur ctured, ed, a schedule schedule of cost of goods goods sold, sold, and an income statement for a manufacturer. manufacturer. &. 'nderstand 'nderstand the the importan importance ce of identifying identifying an organi!atio organi!ation(s n(s cost cost driers. driers. ). Describe Describe the behai behaior or of ariable ariable and fixed fixed costs, costs, in total and and on a per*unit per*unit basis. basis. +. Distingui Distinguish sh among among direct, indirect, indirect, controlla controllable, ble, and uncontro uncontrollable llable costs. costs. 1. Define Define and gie examples examples of an opport opportunit unity y cost, an out*of out*of*poc *poc-et -et cost, cost, a suncost, a differential cost, a marginal cost, and an aerage cost.
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Chapter 02 - Basic Cost Management Concepts
Chapter Overvie .
/hat Do /e 0ean by a ost . %roduct costs, period costs, and expenses
.
osts on inancial 5tatements . ncome statement 1. 5elling and administratie costs 2. osts of manufactured inentory 6. 6alance sheet 1. 7aw*materials inentory 2. /or-*in*process inentory 3. inished*goods inentory
.
0anufacturing 8perations and 0anufacturing osts . 9ob shop, batch, assembly line, continuous flow 6. ssembly manufacturing . 0anufacturing costs 1. Direct material 2. Direct labor 3. 0anufacturing oerhead 4. ndirect material ". ndirect labor $. 8ther manufacturing costs &. onersion cost, prime cost
:.
0anufacturing ost lows . ost of goods manufactured 6. %roduction costs in serice industry firms and nonprofit organi!ations
:.
6asic ost 0anagement oncepts; Different osts for Different %urposes .
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Chapter 02 - Basic Cost Management Concepts
D. :.
". 0arginal and aerage costs osts and benefits of information
osts in the 5erice ndustry . %roduct and period costs 6. :ariable and fixed costs . ontrollable and uncontrollable costs D. 8pportunity, out*of*poc-et, and sun- costs E. Differential, marginal, and aerage costs
!e" Lect#re C$ncepts I%
&hat '$ &e Mean b" a C$st(
c$st is the sacrifice made to achiee a particular purpose. . n e)pense is defined as the cost incurred when an asset is used up or sold for the purpose of generating reenue.
Pr$*#ct c$sts are the costs of goods manufactured or the cost of goods purchased for resale.
Peri$* c$sts are all other non*product costs in an organi!ation =e.g., selling and administratie>. 5uch costs are not inentoried but are expensed as time passes.
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Chapter 02 - Basic Cost Management Concepts
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C$sts $n +inancia, State-ents
%roduct costs are shown as cost of goods sold on the income statement when goods are sold. ncome statements of serice enterprises lac- a cost* of*goods*sold section and instead reeal a firm(s operating expenses. %roduct costs, housed on the balance sheet until sale, are found in three inentory accounts;
III%
Ra -ateria,s.materials that await production &$r/ in pr$cess.partially completed production +inishe* g$$*s.completed production that awaits sale
Man#0act#ring Operati$ns an* Man#0act#ring C$sts
Job shop—low production olume, little standardi!ation@ one*of*a* -ind products Batch—multiple products@ low olume Assembly line—a few maAor products@ higher olume Continuous flow—high olume@ highly standardi!ed commodity products
'irect -ateria,s.materials easily traced to a finished product =e.g., the seat on a bicycle> 'irect ,ab$r.the wages of anyone who wor-s directly on the product =e.g., the assembly*line wages of the bicycle manufacturer> Man#0act#ring $verhea*.all other manufacturing costs such as;
In*irect -ateria,s.materials and supplies other than those classified as direct materials,
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Chapter 02 - Basic Cost Management Concepts
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In*irect ,ab$r.personnel who do not wor- directly on the product =e.g., manufacturing superisors>, and
8ther manufacturing costs not easily traceable to a finished good =insurance, property taxes, depreciation, utilities, and sericeBsupport department costs>. 8ertime premiums and the cost of idle time are also accounted for as oerhead.
I*,e ti-e 1 time that is not spent productiely by an employee due to such eents as eCuipment brea-downs or new setups of production runs.
C$nversi$n c$st =the cost to conert direct materials into finished product>; direct labor manufacturing oerhead Pri-e c$st direct material direct labor
Man#0act#ring C$st +,$s
0anufacturing costs =direct materials, direct labor, and manufacturing oerhead> are ?put in process? and attached to wor-*in*process inentory. , and the costs are then passed along to cost of goods sold upon sale. C$st $0 g$$*s -an#0act#re* Direct materials used direct labor manufacturing oerhead beginning wor-*in*process inentory * ending wor-*in*process inentory
%roduct costs and cost of goods sold for a manufacturer;
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Chapter 02 - Basic Cost Management Concepts
6eginning nentory, inished #oods
:.
ost of #oods 0anufactured to ompletion
*
Ending nentory, inished #oods
ost of #oods 5old
Beginning +inishe* G$$*s
C$st $0 G$$*s Man#%
En*ing +inishe* G$$*s
C$st $0 G$$*s S$,*
5upported by the prior year(s balance sheet
schedule of production costs
urrent balance sheet
ncome statement
%roduction*cost concepts are applicable to serice businesses and nonprofit organi!ations. or example, the direct*materials concept can be applied to the food consumed in a restaurant or the Aet fuel used by an airline. 5imilarly, direct labor would be eCuialent to the coo-s in a restaurant and the flight crews of an airline.
6asic ost 0anagement oncepts; Different osts for Different %urposes
c$st *river is any eent or actiity that causes costs to be incurred. ost drier examples include labor hours in manual assembly wor- and machine hours in automated production settings.
:ariable and fixed costs
3ariab,e c$sts moe in direct proportion to a change in actiity. or example, in the manufacture of bicycles, the total cost of bicycle seats goes up in proportion to the number of bicycles produced. Foweer, the cost per unit =i.e., per seat> remains constant. 2-(
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Chapter 02 - Basic Cost Management Concepts
+i)e* c$sts remain constant in total as the leel of actiity changes. or instance, straight*line depreciation of a bicycle plant remains the same whether 1 bicycles or 1, bicycles are produced. Foweer, the depreciation cost per unit fluctuates because this constant total is spread oer a smaller or greater olume.
Direct and indirect costs
n entity =e.g., a specific product, serice, or department> to which a cost is assigned is commonly -nown as a c$st $bject%
*irect c$st is one that can be easily traced to a cost obAect.
n in*irect c$st is a cost that cannot be easily traced to a cost obAect.
f a college department has been defined as the cost obAect, professors( salaries and administratie assistants( salaries are direct costs of the department =Aust as assembly wor-ers( wages are direct costs of a manufacturing department>.
or example, the costs of a uniersity(s controller, president, campus security, and grounds-eeper cannot be directly traceable to a specific department, as these indiiduals serice the entire uniersity. =5imilarly, a factory guard(s salary is not traceable to only one department and is, thus, considered indirect to all departments.>
cost management system stries to trace costs to the obAects that caused them so that managers can isolate responsibility for spending and obAectiely ealuate operations.
Teaching Tip: /hen discussing indirect costs, you may want to cite a hospital(s medical and surgical supplies as an example. 5uch items do not appear to be a primary target for trimming@ howeer, these indirect costs often account for a si!able portion of a hospital(s operating costs. 'nderstanding indirect costs has become more aluable in a managed* care enironment because it helps hospitals negotiate fixed*fee contracts.
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Chapter 02 - Basic Cost Management Concepts
ontrollable and uncontrollable costs
C$ntr$,,ab,e c$sts.costs oer which a manager has influence =e.g., direct materials>
4nc$ntr$,,ab,e c$sts.costs oer which a manager has no influence =e.g., the salary of a firm(s E8 from the production manager(s iewpoint>
Opp$rt#nit" c$st.the benefit forgone by choosing an alternatie course of action =e.g., the wages forgone when a student decides to attend college full*time rather than be employed> O#t5$05p$c/et c$st.a cost that reCuires a cash outlay S#n/ c$st.a cost incurred in the past that cannot be changed by future action =e.g., the cost of existing inentory or eCuipment>
'i00erentia, c$st.the net difference in cost between two alternatie courses of action
5uch costs are not releant for decision ma-ing.
Incre-enta, c$st.the increase in cost from one alternatie to another
Margina, c$st.the extra cost incurred when one additional unit is produced Average c$st per #nit.total cost diided by the units of actiity
ccountants must weigh the benefits of proiding information against the costs of generating, communicating, and using that information.
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Chapter 02 - Basic Cost Management Concepts
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C$sts in the Service In*#str"
Teaching Overvie for an entire organi!ation. /hile this is useful information to an outside creditor or inestor, it is insufficient with respect to helping internal managers do their Aobs effectiely. 0anagers must also consider cost behaior, controllability, costs incurred by smaller segments, and so on. n initial reminder of these facts generally opens a discussion of additional ways of iewing financial information. t is worthwhile to spend a few extra minutes in the area of cost behaior since it is so fundamental to later topics. 6efore discussing manufacturing costs, as- for a show of hands from students who hae actually isited a manufacturing plant. and Exercise 2*2) =financial schedules and statements> as lecture demonstration problems.
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Chapter 02 - Basic Cost Management Concepts
Lin/s t$ the Te)t Homework Grid
Item No. Exercises; 2*24 2*2" 2*2$ 2*2& 2*2) 2*2+ 2*3 2*31 2*32 2*33 2*34 2*3" 2*3$ %roblems; 2*3& 2*3) 2*3+ 2*4 2*41 2*42 2*43 2*44 2*4" 2*4$ 2*4& 2*4) 2*4+ 2*" 2*"1 2*"2 2*"3 2*"4
Learning Objective s
Completion Time (min.)
2, ", ) 1, 3, $ " " 1, 3, $ 4 1, ) 1, 1 1, ), 1 1, +, 1 1, 1 1, 1 1, 1
2 1 1 1 2" 3 1" " 1" " 1 1 1"
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2" 1" 2 1 1 2 3" 3 4 2" 2" 2" 1" 2 4 2" 1" 2
pecial !eat"res#
5 5
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Chapter 02 - Basic Cost Management Concepts
2*"" &, 1 1 2*"$ 4, 1 2" 2*"& ), 1 1" 2*") &, ) 2" ases; 2*"+ &, ), 1 3 /, # 2*$ 1 " /, E J / /ritten response E Ethical issue # #roup wor nternational nternet use 5 5preadsheet
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