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Chapter Three: Basic Cost Management Concepts
Chapter Three: Basic Cost Management Concepts
3-2
Basic Definitions
• A cost is incurred when a resource is used for
some purpose
3-3
More Basic Definitions
• Any factor that has the effect of changing the level
of total cost is called a cost driver
3-4
Cost Assignment
3-5
Cost Assignment: General Principles
Materials
Handling Assembly Dishwasher
Supervision
Packing
Materials Washing
Packing
Machine
Final
Inspection
3-6
Direct and Indirect Product
Costs for a Manufacturer
• Direct material costs = cost of materials that can
be readily traced to outputs = purchase price of
materials + freight – purchase discounts +
reasonable allowance for scrap and defective units
• Indirect material costs = cost of materials that
cannot readily be traced to outputs (e.g., rags,
lubricants, and small tools)
3-7
Direct and Indirect Product Costs:
(continued)
• Direct labor costs = labor that can be readily
traced to outputs = wages paid plus a reasonable
allowance for nonproductive time
• Indirect labor costs = labor costs that cannot be
readily traced to outputs (i.e., they are
manufacturing support costs). Examples include
supervision, quality control, and inspection
3-8
Direct and Indirect Product Costs:
(continued)
• All indirect costs for the manufacturer, including
indirect materials, indirect labor, and other indirect
items are often combined in a cost pool referred to as
overhead (or factory overhead, or indirect
manufacturing costs)
3-9
Cost Drivers
3-10
Cost Drivers (continued)
3-11
Volume Based Cost Drivers:
Classification by Behavior
• Variable cost is the change in total cost
associated with each change in quantity of the
cost driver
• Fixed cost is the portion of total cost that does
not change with changes in output
• Mixed cost is used to refer to a total cost figure
that includes both a fixed and variable
component
• Step costs vary with the cost driver but do so in
steps
3-12
Linear Approximation and Relevant
Range
Total
Cost
3,500 3,600
Units of the Cost Driver
3-13
Fixed Costs – Exhibit 3.8
Total
Cost
$6,600
Total Fixed Cost
$6,500
$3,000
3,500 3,600
Units of the Cost Driver
3-14
Total Costs – Exhibit 3.8
Total
Total Cost
Cost
$6,600
$6,500
Total Variable Cost
$3,000
Total Fixed Cost
3,500 3,600
Units of the Cost Driver
3-15
Total Cost and Unit Cost
3-17
Product and Service Costing
Concepts
• Product costs include only the costs necessary to
complete the product at the manufacturing step in
the value chain (manufacturing) or to purchase
and transport the product to the location of sale
(merchandising)
3-18
Manufacturing vs. Merchandising
Exhibit 3.13
3-19
Inventory and Related Expense Accounts
Exhibit 3.14
3-20
Qualitative Characteristics of
Cost Information
– Accuracy (and the need to monitor
internal accounting controls)
– Timeliness (often involves sacrificing in
the other two areas)
– Cost and value of information (the cost of
information should be monitored by the
management accountant to ensure that
costs do not outweigh the associated
benefits)
3-21
Chapter Summary
• Cost assignment: the tracing of direct or allocation
of indirect costs to cost pools using cost drivers
3-22
Chapter Summary (continued)
• Product and service costing focuses on
differentiating product costs from period costs
3-23