102B: Section 2

Kimmie George
September 6, 2019
Overview
• Lecture Review
• Homework
• Additional Problems

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About Me
• Second year PhD student in the Accounting
Department
• BA Economics, BBA Accounting from the University of
Texas (hook em!)
• I love being a GSI!
• OH: Thursdays 1:00 – 2:30 in F621 or by appointment
• Email: kimberlyn@berkeley.edu
• Please include “102B” in subject line of all e-mails
• Please give me feedback on how I can make section
more useful for you!

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Cost Object

Any item or entity that we are trying to determine

the cost of

• Most commonly – one unit or one batch of product

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Cost Classifications
Purpose
Assigning costs to cost objects
Reporting under US GAAP
Predicting cost behavior as volume
increases
Making decisions on short and long
time frames
Cost Classification
Direct vs. indirect
Product vs. period
Variable vs. Fixed
Differential cost analysis
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Direct vs. Indirect Costs
Purpose: assigning costs to cost objects

• Direct cost – costs that can be easily and conveniently

traced to the cost object

• Indirect cost – costs that are the part of a cost object

which is not direct; costs that cannot be directly traced
to the cost object

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Product vs. Period
Purpose: reporting under US GAAP

• Product cost – costs assigned to inventory

• Also called “inventoriable costs”
• Prime costs (direct material and direct labor) and conversion
costs (direct labor and manufacturing overhead)
• Period cost- costs of resources used during the
accounting period
• Also called “noninventoriable costs”
• Selling and administrative costs

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Product vs. Period
• Financial Reporting:
• Product costs are expensed on the income statement when
goods are sold; before goods are sold, they appear on the
balance sheet as inventory
• Period costs are expensed on the income statement when
incurred as operating expenses

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Variable vs. Fixed
Purpose: predicting cost behavior as volume increases

• Variable cost – vary with volume or operating activity

• Fixed cost- remain fixed as volume changes
• Mixed cost – exhibit characteristics of both fixed and
variable costs
• Analyze to break out fixed and variable portions

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Variable vs. Fixed – Approximating
Nonlinear Costs

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Variable vs. Fixed – Contribution
Income Statement

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Differential Cost Analysis
• Looks only at the differential or relevant effects of a
decision between action A or action B
• Focus only on costs and revenues that will change
• Sunk costs- costs that were incurred because of a
previous decision and cannot be recovered through the
current decision
• Irrelevant to the differential cost analysis
• Opportunity costs – benefits that are lost from forfeited
or lost from forgoing the next best alternative use
• Must be included in differential cost analysis

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Homework Review

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Q1-1

The three major types of product costs in a

manufacturing company are direct materials, direct
labor, and manufacturing overhead.

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Q1-3

A product cost is any cost involved in purchasing or

manufacturing goods. In the case of manufactured
goods, these costs consist of direct materials, direct
labor, and manufacturing overhead. A period cost is a
cost that is taken directly to the income statement as
an expense in the period in which it is incurred.

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Q1-7

An activity base is a measure of whatever causes the

incurrence of a variable cost. Examples of activity
bases include units produced, units sold, letters
typed, beds in a hospital, meals served in a cafe,
service calls made, etc.

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Q1-8

The linear assumption is reasonably valid providing

that the cost formula is used only within the relevant
range.

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E1-3 Product
Cost
Period
Cost
1. Depreciation on salespersons’ cars X
2. Rent on equipment used in the factory X
3. Lubricants used for machine maintenance X
4. Salaries of personnel who work in the finished goods
warehouse X
5. Soap and paper towels used by factory workers at the
end of a shift X
6. Factory supervisors’ salaries X
7. Heat, water, and power consumed in the factory X
8. Materials used for boxing products for shipment
overseas (units are not normally boxed) X
9. Advertising costs X
10. Workers’ compensation insurance for factory
employees X
11. Depreciation on chairs and tables in the factory
lunchroom X
12. The wages of the receptionist in the administrative
offices X
13. Cost of leasing the corporate jet used by the company's
executives X
14. The cost of renting rooms at a Florida resort for the
annual sales conference X
15. The cost of packaging the company’s product X

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E1-4

1. Cups of Coffee Served

in a Week
2,000 2,100 2,200
Fixed cost $1,200 $1,200 $1,200
Variable cost 440 462 484
Total cost $1,640 $1,662 $1,684
Average cost per cup served * $0.820 $0.791 $0.765

2. The average cost of a cup of coffee decreases as the

number of cups of coffee served increases because the fixed
cost is spread over more cups of coffee.
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E1-5

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E1-5
Differential Sunk Opportunity
Item Cost Cost Cost
1. Cost of the old X-ray machine X
2. The salary of the head of the
Radiology Department
3. The salary of the head of the
Laboratory Department
4. Cost of the new color laser printer X
5. Rent on the space occupied by
Radiology
6. The cost of maintaining the old
machine X
7. Benefits from a new DNA analyzer X
8. Cost of electricity to run the X-ray
machines X
Note: The costs of the salaries of the head of the Radiology Department and Laboratory
Department and the rent on the space occupied by Radiology are neither differential costs, nor
opportunity costs, nor sunk costs. These costs do not differ between the alternatives and therefore
are irrelevant in the decision, but they are not sunk costs because they occur in the future.

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Practice Problems

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Problem 1

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Problem 2

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Questions?

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