COST AND COST BEHAVIOR – Lecture Notes Less: Raw materials invty.

end xx
Raw materials used xx
Cost Classifications as to Purposes: Direct labor xx
1. Preparing SFP and SCI Manufacturing overhead:
 Product costs (manufacturing costs) Indirect materials xx
 Direct materials Indirect labor xx
 Direct labor Utilities (factory) xx
 Manufacturing overhead Property taxes (factory) xx
 Period costs (non-mfg. costs) Insurance (factory) xx
 Marketing/selling costs Equipment rental xx
 Administrative/general costs Depreciation (factory) xx
2. Predicting changes in cost due to changes in activity
Total overhead costs xx
 Variable costs Total manufacturing costs xx
 Fixed costs Add: Work in process invty. beg. xx
3. Assigning costs
Total goods placed in production xx
 Direct costs – easily and conveniently traced to a
Less: Work in process invty. end xx
particular cost object
Cost of goods manufactured xx
 Indirect costs – cannot be easily and conveniently traced
Add: Finished goods invty. beg. xx
to a particular cost object
Total goods available for sale xx
4. Making decisions
Less: Finished goods invty. end xx
 Differential cost – any cost that differs between
Cost of Goods Sold xx
alternatives (relevant in making a decision)
 Sunk cost – a cost already incurred and cannot be
Accounting for Labor Costs:
changed by any decision made now or in the future
Categories:
(irrelevant and should be ignored in decisions)
1. direct labor
 Opportunity cost – a potential benefit given up when
2. indirect labor
selecting one course of action over another
 janitors
Prime costs = direct materials and direct labor  supervisors
Conversion costs – direct labor and mfg.  materials handlers
Overhead  engineers
 night security guards
Basic Equations for Inventory Accounts:  maintenance workers
Beg. Balance + Additions to inventory =
Ending balance + withdrawals from inventory 3. other labor costs
OR  idle time – cost of direct labor workers who are unable to
Withdrawals from inventory = perform their assignments due to factors such as machine
Beginning balance + additions to inventory – breakdowns, material shortages, power failure, etc. (cost
Ending balance is often added to manufacturing overhead)
 overtime premium – if paid to factory workers (direct or
Variable cost behavior: indirect labor) is usually considered as part of
 In total = increases and decreases in proportion to changes in manufacturing overhead
activity  labor fringe benefits – employment related costs paid by
 per unit = remains constant the employer
Fixed cost behavior:  handled in two different ways:
 in total = not affected by changes in activity a. all such costs are treated as indirect labor and
 per unit = decreases as the activity level rises and decreases as added to mfg. overhead
the activity level falls (varies inversely) b. the portion of fringe benefits that relates to
direct labor is treated as additional direct labor
Types of Fixed Costs: cost
 committed – relate to investment in plant, equipment and basic
administrative structure (e.g. depreciation on plant facilities,
taxes on real estate, insurance and salaries of key operating
personnel)
 discretionary – arise from annual decisions by management to
spend in certain areas (e.g. advertising, research, public
relations, management development programs)

STATEMENT OF COST OF GOODS MANUFACTURED AND

SOLD (Traditional Format)

Direct materials:
Raw materials invty. beg. xx
Add: Purchases xx
Raw materials available for use xx

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