Basic Cost Management Concepts and Accounting for Mass Customization Operations

1. 2 Chapter Two Basic Cost Management Concepts and Accounting for Mass Customization Operations

2. Planning Control DecisionMaking Directing Process of Management Managers need cost information toperform each of these functions.

3. What Do We Mean By a Cost? A Costis the measure ofresources givenup to achieve aparticular purpose.

4. DirectLabor DirectMaterial Manufacturing Overhead TheProduct Manufacturing Costs

5. Example: Steel used tomanufacturethe automobile. Direct Material Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.

6. Direct Labor Cost of salaries, wages, and fringebenefits for personnel who workdirectly on manufactured products. Example: Wages paid to anautomobile assemblyworker.

7. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.

8. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards.

9. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

10. Classifications of Costs in Manufacturing Companies Manufacturing costs are oftencombined as follows: DirectMaterial DirectLabor ManufacturingOverhead PrimeCost ConversionCost

11. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory

12. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory Those materials waiting to be processed.

13. Cost Classifications on Financial Statements – Balance Sheet • Merchandiser • Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Partially complete products – material to which some labor and/or overhead has been added.

14. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory Completed products awaiting sale.

15. Income StatementExpenses Work in Process Cost of GoodsSold FinishedGoods Selling andAdministrative Period Expenses Manufacturing Cost Flows Balance SheetCosts Inventories Material Purchases Raw Material Direct Labor ManufacturingOverhead Selling andAdministrative

16. Material, labor andmanufacturingoverhead costsremain in inventoryuntil the product issold, so they aresometimes calledinventoriable costs. Manufacturing Cost Flows Income StatementExpenses Balance SheetCosts Inventories Material Purchases Raw Material Direct Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Selling andAdministrative Selling andAdministrative Period Expenses

17. Manufacturing Cost Flows Income StatementExpenses Balance SheetCosts Inventories Material Purchases Raw Material Direct Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Period expenses are not associated with manufacturing the product and are expensed in the period incurred. Selling andAdministrative Selling andAdministrative Period Expenses

18. Manufacturing Cost Flows Income StatementExpenses Balance SheetCosts Inventories Material Purchases Raw Material Direct Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Selling andAdministrative Selling andAdministrative Period Expenses

19. Types of Production Processes

20. Let’s look at aSchedule of Cost ofGoods Manufactured forComet Computer Corporation. Schedule of Cost of Goods Manufactured

21. Schedule of Cost of Goods Manufactured

22. Schedule of Cost of Goods Manufactured

23. Schedule of Cost of Goods Manufactured Include all direct labor costs incurred during the current period.

24. Schedule of Cost of Goods Manufactured

25. Schedule of Cost of Goods Manufactured Beginning work-in-process inventory is carried over from the prior period.

26. Schedule of Cost of Goods Manufactured Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.

27. Now let’s look at an income statement for Comet Computer Corporation. Income Statement for a Manufacturer

28. Income Statement for a Manufacturer

29. Income Statement for a Manufacturer

30. Cost Classifications Cost behavior means how a cost will react to changes in the level of business activity. • Total variable costs change when activity changes. • Total fixed costs remain unchanged when activity changes.

31. Cost Classifications Activities thatcause costs to be incurred are calledcost drivers. Cost behavior means how a cost will react to changes in the level of business activity. • Total variable costs change when activity changes. • Totalfixed costs remain unchanged when activity changes.

32. Identifying Cost Drivers

33. Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk. Total Long DistanceTelephone Bill Minutes Talked

34. Variable Cost Per Unit Example The cost per long distance minute talked is constant. For example, 5 cents per minute. Per MinuteTelephone Charge Minutes Talked

35. Total Fixed Cost Example Your monthly basic telephone bill probably does not change when you make more local calls. Monthly Basic Telephone Bill Number of Local Calls

36. Fixed Cost Per Unit Example The average cost per local call decreases as more local calls are made. Monthly Basic Telephone Bill per Local Call Number of Local Calls

37. Cost Classifications

38. Cost Behavior Question Fixed costs are usually characterized by: a. Unit costs that remain constant. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

39. Cost Behavior Question Fixed costs are usually characterized by: a. Unit costs that remain constant. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

40. Cost Behavior Question Variable costs are usually characterized by: a. Unit costs that decrease as activity increases. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

41. Cost Behavior Question Variable costs are usually characterized by: a. Unit costs that decrease as activity increases. b. Total costs that increase as activity decreases. c. Total costs that increase as activity increases. d. Total costs that remain constant.

42. Direct costs Costs that can beeasily and conveniently traced to a product or department. Example: cost of paint in the paint department of an automobile assembly plant. Indirect costs Costs that must be allocated in order to be assigned to a product or department. Example: cost of national advertising for an airline is indirect to a particular flight. Direct and Indirect Costs

43. Direct and Indirect Costs • A cost can be direct to the department, but indirect to units of product produced in the department. • Example: department manager’s salary. • Tracing costs directly to departments or products facilitates responsibility accounting.

44. Controllable andUncontrollable Costs A cost that can be significantly influencedby a manager is a controllable cost.

45. Opportunity Cost The potential benefit that is given up when one alternative is selected over another. • Example: If you werenot attending college,you could be earning$20,000 per year. Your opportunity costof attending college for one year is $20,000.

46. Sunk Costs All costs incurred in the past that cannot be changed by any decision made now or in the future. Sunk costs should not be considered in decisions. • Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.

47. Differential Costs Costs that differ between alternatives. Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.Your commuting costs are $50 per month in yourhometown and $300 per month to the city. What is your differential cost?

48. Differential Costs Costs that differ between alternatives. Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.Your commuting costs are $50 per month in yourhometown and $300 per month to the city. What is your differential cost? $300 - $50 = $250

49. Marginal Costs and Average Costs The extra costincurred to produceone additional unit. The total cost toproduce a quantitydivided by thequantity produced. Marginal and average costs arelargely a function of cost behavior -- variable and fixed costs.

50. Benefits Costs Costs and Benefits of Information More information does not mean more benefits if information overload results.