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Chapter 2 - Cost terms - CLC - handout.pptx
Chapter 2 - Cost terms - CLC - handout.pptx
Chapter 2 - Cost terms - CLC - handout.pptx
Purposes
Chapter 2
Learning Objectives
Customer
Production Marketing Distribution R&D Design
service
Value chain
Cost & business functions
Total costs
Production
Selling cost General & Administrative cost
cost
Customer Supporting
Production Marketing Distribution R&D Design
service activities
Value chain
Production cost (Manufacturing cost)
General &
Selling cost Administrative
cost
Text
Basic Cost Terminology
❖ Variable costs
▪ changes in total in
proportion to changes
in the related level of
activity or volume.
▪ are constant on a
per-unit basis.
Cost Behavior, continued
❖ Fixed costs
▪ remain unchanged in
total regardless of
changes in the related
level of activity or
volume.
▪ change inversely with
the level of production
per unit basis.
Cost Behavior Summarized
Total Dollars
Total Dollars Cost per
Per Unit
Unit
Change in
Change in Unchanged in
Variable Costs proportion with
proportion with relation to output
Variable Costs output
output
Moreoutput
More output==More
Morecost
cost
Change
Change inversely
Fixed Costs Unchanged in inversely with
Unchanged in with output
Fixed Costs output
relation to output More output = lower cost
relation to output More output = lower cost
per unit
per unit
Exercise 3
Other Cost Concepts
26
Multiple Classification of Costs, Visualized
A Cost Caveat
31
Classification of Manufacturing Costs
(cont’d)
32
Classification of Manufacturing Costs
(cont’d)
❖ Direct manufacturing labor costs (DL)
▪ Compensation of all manufacturing labor that can
be traced to the cost object (WIP and FG) in an
economically feasible way.
▪ Example: wages paid to automobile assembly
workers at Toyota.
33
Classification of Manufacturing Costs
(cont’d)
❖ Manufacturing overhead (MOH)
▪ All manufacturing costs that are related to the cost
object (WIP and FG), but cannot be traced to that cost
object in an economically feasible way.
▪ Includes all manufacturing costs except direct
materials and direct labor.
▪ Example: indirect materials, indirect labor, depreciation
and insurance on manufacturing facilities.
▪ Also called factory overhead, indirect manufacturing
costs, or burden.
34
Accounting Distinction Between Costs
37
Cost flows in a manufacturer
expense
Direct materials
Inventoriable costs
Direct labor Indirect materials
All costs
(Manufacturing costs)
40
Exercise 9
41
Cost flow visualized
Beginning
Cost of Goods Ending Finished Cost of Goods
Finished Goods
Manufactured Goods Inventory Sold
Inventory
42
Cost Flows Visualized (Cont’d)
Cost Flows Visualized (Cont’d)
Cost Flows Visualized (Cont’d)
Cost Flows Visualized (Cont’d)
Cost Flows Visualized (Cont’d)
Cost Flows Visualized (Cont’d)
Cost of Goods Manufactured
Multiple-Step Income Statement
Exercise 10
Black Company has the following cost data. Compute cost of goods manufactured:
Manufacturing overhead:
Property taxes, factory $3,000
Utilities, factory 5,000
Indirect labor 10,000
Depreciation, factory 24,000
Insurance, factory 8,000
Total MOH $50,000
Other costs:
Purchase of raw materials $32,000
Direct labor cost 40,000
Inventories:
Raw materials, beginning $8,000
Raw materials, ending 7,000
Work in process, beginning 6,000
Work in process, ending 7,500
51
Prime cost and Conversion cost
Manufacturing
Direct materials Direct labor
overhead
Prime cost
Example – Prime cost & Conversion cost
Other Cost Considerations
❖ Overtime premium
▪ wages paid in excess of straight-time rates for
overtime work
❖ Idle time
▪ wages paid for unproductive time caused by lack
of orders, machine breakdowns, delays, poor
scheduling
❖ are considered part of overhead due to the
inability to precisely know the true cause of these
costs
Example – Overtime Premium & Idle time