Cost Terms, Concepts, and Classifications

1. Cost Terms, Concepts, and Classifications UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter

2. Specify “Tag” the Cost • We need to place an adjective (tag) on the cost to identify what it is. Direct Cost

3. Cost Flows in a Manufacturing Firm Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead

4. Cost Flows in a Manufacturing Firm Manufacturing Costs Costs incurred in the manufacture of goods being produced. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold • Known as product (inventoriable) costs. • They are expensed when the product is sold. Mfg. Overhead

5. Cost Flows in a Manufacturing Firm • Those materials that become an integral part of the finished product and can be physically traced to the product. Direct Materials • Those factory labor costs that can be physically traced to the production of the finished product. Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead • All costs associated with the manufacture of a product except direct materials and direct labor.

6. Direct Materials Nonmanufacturing Costs Costs incurred for other than production activities. • Known as Period costs. • They are expensed in the period in which they are incurred. Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses = Net Income

7. General & Administrative Expenses All executive, organizational, and clerical costs associated with the general management of the firm. • Selling & Distribution Expenses All costs necessary to secure customer orders and get the products/services to the customer. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses = Net Income

8. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Product Costs Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses Period Costs = Net Income

9. Direct Materials Direct Labor Manufacturing Costs Manufacturing Overhead

10. Direct Materials Manufacturing Costs Materials that are directly traceable to the goods or services being produced (physical observation). Steel in cars, wood in furniture, etc.

11. Direct Materials • DM in Theory • Every component • DM in Reality • Must apply cost-benefit rule

12. DM – What is Cost? • The invoice price of the raw materials, • Shipping costs, • Import duties, and • A reduction for any allowable discounts for prompt payment.

13. Direct Labor Manufacturing Costs Labor that is directly traceable to the goods being produced. Assembly line workers, chefs, pilots

14. Manufacturing Costs Manufacturing Overhead All production costs other than direct materials and direct labor. Utilities, security, janitorial, etc.

15. MOH – Other Names • Overhead • Burden • Indirect Manufacturing Costs • Factory Expenses

16. MOH – A Few Examples • Factory Supervision, • Factory Telephone, heat, light, power, • Factory bookkeeping salaries, • Insurance • Depreciation/factory equipment • Indirect materials, labor.

17. Nonmanufacturing Costs • All costs not associated with the production of goods. • Selling Costs • Administrative Costs

18. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Sales - Sold COGS = Income Statement Gross Margin - Period Costs S&A = Net Income

19. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Inventory Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Sales Product Costs: Costs assigned to products (i.e., Work in Process Inventory. They “attach” themselves to units of product and remain with the product until it is sold. - Sold COGS = Income Statement Gross Margin Expense - S&A = Net Income

20. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Inventory Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Expense Sales - Sold COGS = Income Statement Gross Margin - S&A = Net Income

21. Cost Flows in a Manufacturing Firm Period Costs: Expired non product costs. Always charged to expense in the period in which they occur. Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Applied Finished MOH FG Inv. Sales - Sold COGS = Income Statement Gross Margin - Period Costs S&A = Net Income

22. Work-in-Process Product Costs Finished Goods Period Costs Sale DM ,DL MOH Cost of Goods Sold Product Costs Vs. Period Costs DM, DL, MOH, S&A Costs DM, DL MOH DM, DL MOH DM, DL MOH S&A S&A S&A Selling and Administrative Costs Expensed in the current period.

23. Balance Sheet Presentation

28. Variable Costs • Total costs that vary in direct proportion to changes in the level of activity within the relevant range.

29. $ Volume (Activity Base) Total Variable Costs

30. $ Volume (Activity Base) Per Unit Variable Cost

31. Fixed Costs • Costs that remain constant in total, regardless of the changes in activity within the relevant range.

32. $ Volume (Activity Base) Total Fixed Costs

33. $ Volume (Activity Base) Per Unit Fixed Costs

34. Relevant Range Curvilinear Costs and the Relevant Range Economist’s Curvilinear Cost Function $ Accountant’s Straight-Line Approximation Volume (Activity Base)

35. Anything for which a separate measurement of costs is desired (products, customers, departments, etc.) Direct Costs Cost Object Indirect Costs

36. Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor) Cost Object Direct Costs Costs that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead) Indirect Costs

37. Different Costs for Different Purposes

38. Value-Chain Operating Traditional Product Costs Product Costs Product Costs Product Costing Definitions Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting

39. Value-Chain Product Costs Research and Development Production Marketing Customer Service If making any of these types of decisions, I need to look at all costs. Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis

40. Operating Product Costs Production Marketing Customer Service Strategic Design Decisions Tactical Profitability Analysis On the other hand, for these decisions, we might be able to ignore some of the costs.

41. For external financial reporting, we need only these costs – because that is what GAAP says we need. Value-Chain Operating Traditional Product Costs Product Costs Product Costs Product Costing Definitions Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting