Management Cost

Strategic
03
Modul ke:

Chapter 3 Basic Cost Concepts

Fakultas
EKONOMI Ratih Puspa Dewi, SE, MM

Program Studi
AKUNTANSI
Cost Drivers, Cost Pools,
and Cost Objects

A cost driver is
any factor that has the
effect of changing the
level of total cost.
 Cost Drivers, Cost Pools,
and Cost Objects
AAcost
costisis
incurred
incurredwhen
whenaa
resource
resourceisisused
usedfor
for
some
somepurpose.
purpose.

Costs
Costsmay
maybe be
collected
collectedinto
into
groups
groupscalled
called
cost
costpools.
pools.

AAcost
costobject
objectisisany
any
product,
product,service,
service,ororunit
unitto
to
which
whichcosts
costsare
areassigned
assignedforfor
some
somemeaningful
meaningfulpurpose.
purpose.
 Cost Assignment and Cost
Allocation: Direct and Indirect Costs
AAdirect
directcost
costcan
canbebe
conveniently
convenientlyandand
economically
economicallytraced
traced Indirect
Indirectcosts
costscan
can
directly
directlytotoaacost
costpool
pool not
notbe beconveniently
conveniently
or
oraacost
costobject.
object. or
oreconomically
economically
traced
tracedto tocost
costpools
pools
or
orcost
costobjects.
objects.
The
Theassignment
assignmentof ofindirect
indirect
costs
coststo
tocost
costpools
poolsand
andcost
cost
objects,
objects,using
usingcost
costdrivers
drivers
(allocation
(allocationbases),
bases),isiscalled
called
cost
costallocation.
allocation.
 Costs, Cost Pools, Cost
Objects, and Cost Drivers
Costs Cost Drivers and Cost Assignment

Cost Pools Cost Objects

Electric Motor

Materials
Handling Assembly Dishwasher

Supervision

Packing
Materials Washing
Packing
Machine

Final
Inspection
 Direct Materials

MILK + SUGAR
+ FLOUR
=

Direct materials include the cost of materials

in the product, less purchase discounts, plus
freight and a reasonable allowance for scrap
and defective units.
Indirect Materials
an ing ping
Cle terial ee d
Sw poun
Ma Com

Indirect materials are materials used

in manufacturing that are not part of
the finished product.
 Direct Labor

Direct labor includes the labor used to manufacture the product or to

provide the service.
 Indirect Labor

Indirect labor includes supervision, quality control, inspection,

purchasing and receiving, and other manufacturing support costs.
Other Indirect Costs

Other indirect costs such

as building and equipment depreciation,
property taxes, insurance, and utilities . . . .

. . . . are combined with indirect

labor and indirect materials into
a single cost pool called . . . .

Factory
Factory
Overhead
Overhead
 Classifications of Costs

Manufacturing costs are often

combined as follows:
Direct
Direct Direct
Direct Factory
Factory
Materials
Materials Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost
 Types of Cost Drivers

Activity-based
Activity-based Identified using activity analysis,
a detailed description of specific
activities and the relationship
between the activity and costs.
Volume-based
Volume-based

Relationship between costs and

Structural
Structural volume measures such as units
produced, direct labor hours,
or quantity of materials used.

Executional
Executional
 Types of Cost Drivers

Activity-based
Activity-based Involves strategic plans and decisions:
Scale
Experience
Technology
Complexity
Volume-based
Volume-based

Short-term operational decisions:

Structural
Structural Workforce involvement
Production process design
Supplier relationships

Executional
Executional
 The Linearity Assumption
and the Relevant Range
AAstraight
straightline
line
closely
closely
Economist’s approximates
approximatesaa
Curvilinear Cost curvilinear
curvilinear
Function variable
variablecost
costline
line
within
withinthe
therelevant
relevant
range.
range.
Relevant
Range
Total Cost

Accountant’s Straight-Line
Approximation (constant unit variable
cost)

Activity
 Fixed and Variable Costs
Total
Cost
Fixed
Fixedcost
costisisthat
thatportion
portionof
of
the
thetotal
totalcost
costthat
thatdoes
doesnot
not
change
changewith
withaachange
changeininthe
$6,600 quantity
the
quantityofofthethecost
costdriver,
driver,
$6,500 within
withinthe
therelevant
relevantrange.
range.

$3,000

Total Fixed Cost

3,500 3,600
Units of the Cost Driver
 Total Variable Cost Example

Your total long distance telephone bill is based on how many

minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
 Variable Cost Per Unit Example

The cost per minute talked is

constant.
For example, 5 cents per minute.

Telephone Charge
Per Minute

Minutes Talked
 Your monthly
Total basic
Fixed Cost Example
telephone bill is probably
fixed and does not
change when you make
more local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

 Fixed Cost Per Unit Example
The fixed cost per local call
decreases as more local calls
are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
 Fixed and Variable Costs
Summary of Variable and Fixed Cost Behavior
Cost In Total
Variable Total variable cost is
proportional to the activity
level within the relevant range.
Fixed Total fixed cost remains the
same even when the activity
level changes within the
relevant range.
Per Unit
Variable cost per unit remains
the same over wide ranges
of activity.
Fixed cost per unit goes
down as activity level goes up.
 Step-Costs

Total cost remains

constant within a
narrow range of
activity.

Cost
Activity
 Step-Costs

Total cost increases to a

new higher cost for the next
higher range of activity.

Cost
Activity
 Direct materials, the materials used in the
Product Costs and Period
manufacture of the product, which becomes a
Costs
physical part of the final product.
 Direct labor,
Product the for
costs labor used in the manufacture
a manufacturing firm include--
of the product, and
 Factory overhead, the indirect costs for
materials, labor, and facilities used to support
the manufacturing process, but not used
directly in the manufacture of the product.
Product Costs and Period Costs

All other expenditures for managing the

firm and selling the product are expenses
as they are incurred and are referred to as

PERIOD COSTS.
 Cost flows in a
Merchandising Firm
Merchandise
Merchandise
Purchases
Purchases

Product
Product
Inventory
Inventory

Cost
Costof
of
Goods
GoodsSold
Sold
 Inventory Cost Flow Formula

Beginning Cost Ending

Cost
Inventory
Balance
+ Added = Transferred
Out
+ Inventory
Balance
 Manufacturing Inventories

materials
 materials inventory--the
inventory--the store
store of
of
materials
materials used
used in
in the
the manufacturing
manufacturing
process.
process.
work-in-process
 work-in-process inventory--all
inventory--all
costs
costs put
put into
into manufacture
manufacture of of
products
products that
that are
are not
not complete
complete at at
the
the financial
financial statement
statement date.
date.
finished
 finished goods
goods inventory--the
inventory--the cost
cost
of
of goods
goods that
that are
are ready
ready for
for sale.
sale.
 Cost flows in a
Manufacturing Firm
Materials Purchases

Materials Used

Labor Overhead

Work in Process

Finished Goods Cost of Goods Sold

 Cost flows in a
Manufacturing Firm
Raw Materials Wages Payable
BI 10 75
70
Purchased
Purchasedrawraw
EI 5
materials
materialsonon
account,
account,$70.
$70.
Work in Process Factory Overhead Credit
CreditAccounts
Accounts
BI 10 Payable.
Payable.
75

Cost of Goods Sold Requisitioned

Requisitioned
direct
directmaterials
materials
Finished Goods for production,
for production,
BI 20 $75.
$75.
 Cost flows in a
Manufacturing Firm
Raw Materials Wages Payable
BI 10 75 80
70
Accrued
Accrueddirect
direct
EI 5
labor,
labor,$80.
$80.
Work in Process Factory Overhead
BI 10 100
75 Applied
Applied
80 manufacturing
manufacturing
overhead,
overhead,$100.
$100.
100
Cost of Goods Sold
Finished Goods
BI 20
 Cost flows in a
Manufacturing Firm
Raw Materials Wages Payable
BI 10 75 80
70 Transferred
Transferred
EI 5 completed
completedgoods
goods
to
tofinished
finishedgoods,
goods,
Work in Process Factory Overhead $215.
$215.
BI 10 215 100
75
80
100
EI 50 Cost of Goods Sold Sold
Soldgoods
goods
that
thatcost
cost$210
$210
Finished Goods 210 to
tomake.
make.
BI 20 210
215
EI 25
 Cost of Goods
Manufactured Statement
Direct Materials
Beginning inventory $10
Purchases 70
Cost of Materials Available $80
Ending Inventory 5
Direct Materials Used 75
Direct Labor Used 80
Factory Overhead 100
Total Manufacturing Cost $255
ADD: Beginning Work-in-Process Inventory 10
Total Manufacturing Costs to Account For $265
LESS: Ending Work-in-Process Inventory 50
Cost of Goods Manufactured $215
 Income Statement
Sales $300
Cost of Goods Sold:
Beginning Finished Goods Inventory $ 20
Cost of Goods Manufactured 215
Cost of Goods Available for Sale 235
Ending Finished Goods Inventory 25 210
Gross Margin 90
Selling and Administrative Expenses 50
Net Income $ 40
 Differential Costs
Costs that differ among alternatives.

Example:
Example: You
Youhave
haveaajob
jobpaying
paying$1,500
$1,500per
permonth
monthin
inyour
yourhometown.
hometown. You
You
have
haveaajob
joboffer
offerin
inaaneighboring
neighboringcity
citythat
thatpays
pays$2,000
$2,000per
permonth.
month. The
The
commuting
commutingcost
costtotothe
thecity
cityisis$300
$300per
permonth.
month.

Differential
Differentialrevenue
revenueis:
is:
$500
$500

Differential
Differentialcost
costis:
is:
$300
$300
 Opportunity Costs
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
$18,000 per year.
Your opportunity cost
of attending college for
one year is $18,000.
 Sunk Costs
Sunk costs cannot be changed by any decision. They
are not differential costs and should be ignored
when making decisions.

Example: You bought an automobile that

cost $10,000 two years ago. The $10,000
cost is sunk because whether you drive it,
park it, trade it, or sell it, you cannot change
the $10,000 cost.
 Attributes of Cost Information
for Decision Making

Accuracy
Accuracy Timeliness
Timeliness

Cost
Cost
versus
versus
Value
Value
Cost Concepts for Management
and Operational Control

Controllability

Management
risk
preferences
 Fixed and Variable Costs
Total Cost
Total
Totalvariable
variablecost
costisisthe
thechange
change
Total
in total cost associated with
Total
Costin total cost associated with
each
eachchange
Cost changeininthe
thequantity
quantity
of
ofthe
thecost
costdriver.
driver.
$6,600
$6,500
Total Variable Cost

$3,000

Total Fixed Cost

3,500 3,600
Units of the Cost Driver
Terima Kasih
Ratih Puspa Dewi, SE, MM