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Basic Cost Management Concepts: Mcgraw-Hill/Irwin
Basic Cost Management Concepts: Mcgraw-Hill/Irwin
Basic Cost
Management Concepts
McGraw-Hill/Irwin Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective1
2-2
Process of Management
Strategy Planning
Formulation
Control Directing
Decision
Making
2-3
What Do We Mean By a Cost?
A cost
is the measure of
resources given
up to achieve a
particular purpose.
2-4
Learning Objective 2
2-5
Product Costs, Period Costs, and Expenses
2-6
Learning Objective 3
2-7
Cost Classifications on Financial
Statements – Income Statement
2-8
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses Prepaid Expenses
Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods
2-9
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
Cash Cash materials
Those
Receivables waiting to be
Receivables
processed.
Prepaid Expenses
Prepaid Expenses
Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods
2-10
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
PartiallyAssets
Current completed
Current Assets products – material to
Cash
Cash which some labor
Receivables
and/or overhead has
Receivables
been added.
Prepaid Expenses
Prepaid Expenses
Inventories
Merchandise Inventory
Raw Materials
Work in Process
Finished Goods
2-11
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
Cash Cash
Receivables
Completed products
Receivables
awaiting sale.
Prepaid Expenses
Prepaid Expenses
Inventories
Merchandise Inventory
Raw Materials
Work in Process
Finished Goods
2-12
Learning Objective 4
2-13
Types of Production Processes
Type of Production Description of Example of
Process Process Manufacturer
2-14
Learning Objective 5
2-15
Manufacturing Costs
The
Product
2-16
Direct Material
Cost of raw material that is used to
make, and can be conveniently
traced, to the finished product.
Example:
Steel used to
manufacture
the automobile.
2-17
Direct Labor
Cost of salaries, wages, and fringe
benefits for personnel who work
directly on manufactured products.
Example:
Wages paid to an
automobile assembly
worker.
2-18
Manufacturing Overhead
All other manufacturing costs
2-19
Manufacturing Overhead
All other manufacturing costs
Examples: depreciation
on plant and equipment,
property taxes,
insurance, utilities,
overtime premium, and
unavoidable idle time.
2-21
Classifications of Costs in Manufacturing
Companies
Manufacturing costs are often
combined as follows:
Prime Conversion
Cost Cost
2-22
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
2-23
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory
2-24
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold
2-25
Learning Objective 6
2-26
Schedule of Cost of Goods
Manufactured
2-27
Schedule Computation
of Costofof Cost Goods
of Raw Material Used
Manufactured
Raw-material inventory, January 1 $ 6,000
Add: Purchases of raw materials 134,000
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used $ 134,980
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
2-28
Schedule of Cost of Goods
Manufactured
Include all direct labor
costs incurred during the
Cometcurrent period.
Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
2-29
Computation of Total Manufacturing Overhead
Indirect material $ 10,000
Indirect labor 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Comet Computer Corporation
Utilities 15,000
Insuranceof Cost of Goods Manufactured
Schedule 5,000
Total manufacturing overhead $ 230,000
Raw material used $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
2-30
Schedule of Cost of Goods
Manufactured
Beginning work-in-
process inventory is
carried over from the
Comet Computer Corporation
prior period.
Schedule of Cost of Goods Manufactured
2-31
Income Statement for a Manufacturer
2-32
Comet Computer Corporation
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1 $ 200
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Comet Computer Corporation
Deduct Finished-goods inventory, Dec. 31 190
Income Statement
Cost of goods sold $ 415,010
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
2-33
Learning Objective7
2-34
Activities that cause costs to be incurred
are called COST DRIVERS:
2-35
Learning Objective 8
2-36
Cost Classifications
2-37
Total Variable Cost Example
Your total cable pay-per-view bill is based on how many movies you
watch.
Total Pay-Per-View
Bill
Pay-Per-View
Movies Watched 2-38
Variable Cost Per Unit Example
The cost per movie watched is constant. For example, $4.00 per
movie.
Movies Watched
2-39
Total Fixed Cost Example
Your monthly cable bill probably does not change when you
watch movies on channels that you have elected to be paid on a
monthly basis (HBO).
Monthly Charge for
HBO Bill
Number of HBO
Movies Watched 2-41
Cost Classifications
2-42
Learning Objective 9
2-43
Direct and Indirect Costs
Direct costs Indirect costs
Costs that can be Costs that must be allocated
easily and conveniently traced in order to be assigned to a
to a product or department. product or department.
Example: cost of paint in the Example: cost of national
paint department of an advertising for an airline is
automobile assembly plant. indirect to a particular flight.
2-44
Controllable and
Uncontrollable Costs
2-46
Opportunity Cost
The potential benefit that is given
up when one alternative is
selected over another.
Example: If you were
not attending college,
you could be earning
$30,000 per year.
Your opportunity cost
of attending college for one year is
$30,000.
2-47
Sunk Costs
All costs incurred in the past that cannot be changed by any
decision made now or in the future are sunk costs. Sunk
costs should not be considered in decisions.
Example: You bought an automobile that cost $22,000 two years ago.
The $22,000 cost is sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $22,000 cost.
2-48
Differential Costs
Costs that differ between alternatives.
2-49
Marginal Costs and Average Costs
Costs Benefits
2-51
End of Chapter 2
2-52