2009 foster business school cost accounting l.ducharme a review of cost terms and purposes chapter 2
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22009 Foster Business School Cost Accounting L.DuCharme
Outline
• Cost terminology– Cost object– Assignment– Direct vs. Indirect– Variable vs. Fixed– Drivers– Relevant range– Average cost
32009 Foster Business School Cost Accounting L.DuCharme
Outline (continued)
• Manufacturing companies vs. others
• Inventory vs. period costs
• Flow of Costs: T-accounts
• Prime & conversion costs
• Different costs for different purposes
42009 Foster Business School Cost Accounting L.DuCharme
Cost and Cost Terminology
Cost is a resource sacrificed or forgone to achievea specific objective.
An actual cost is the cost incurred (a historical cost)as distinguished from budgeted costs.
A cost object is anything for which a separatemeasurement of costs is desired.
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Cost and Cost Terminology
CostAssignment is both:
Cost ObjectTracing
Direct Costs
AllocatingIndirect Costs
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Direct vs. Indirect costs
Distinguish between direct costsand indirect costs.
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Direct and Indirect Costs
Direct CostsExample: Oak wood used to Mfg. of chairs.
Indirect CostsExample: salary of thePlant night watchperson.
COST OBJECT
Example: 50 Oak Chairs produced inMay.
82009 Foster Business School Cost Accounting L.DuCharme
Direct and Indirect CostsExample
Direct Costs:Maintenance Department $40,000Personnel Department $20,600Assembly Department $75,000Finishing Department $55,000
Assume that Maintenance Department costs areallocated equally among the production departments.
How much is allocated to each department?
92009 Foster Business School Cost Accounting L.DuCharme
Direct and Indirect Costs Example
Allocated$20,000
Maintenance$40,000
AssemblyDirect Costs
$75,000
FinishingDirect Costs
$55,000
$20,000
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Cost Behavior Patterns Example
Bicycles by the Sea buys a handlebarat $52 for each of its bicycles.
What is the total handlebar cost when1,000 bicycles are assembled?
Variable vs. Fixed costs
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Cost Behavior Patterns Example
1,000 units × $52 = $52,000
What is the total handlebar costwhen 3,500 bicycles are assembled?
3,500 units × $52 = $182,000
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Cost Behavior Patterns Example
Bicycles by the Sea incurred $94,500 ina given year for the leasing of its plant.
This is an example of fixed costs withrespect to the number of bicycles assembled.
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Cost Behavior Patterns Example
What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 1,000 bicycles?
$94,500 ÷ 1,000 = $94.50
What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 3,500 bicycles?
$94,500 ÷ 3,500 = $27
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Cost Drivers
The cost driver of variable costs is the levelof activity or volume whose change causes
the (variable) costs to change proportionately.
The number of bicycles assembled is acost driver of the cost of handlebars.
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Relevant Range Example
Assume that fixed (leasing) costs are $94,500for a year and that they remain the same for a
certain volume range (1,000 to 5,000 bicycles).
1,000 to 5,000 bicycles is the relevant range.
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Relevant Range Example
020000400006000080000
100000120000
0 1000 2000 3000 4000 5000 6000
Volume
Fix
ed C
osts
$94,500
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Relationships of Types of Costs
Direct
Indirect
Variable Fixed
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“Average Costs”
Interpret unit costs cautiously.
192009 Foster Business School Cost Accounting L.DuCharme
Total Costs and Unit Costs Example
What is the unit cost (leasing and handlebars)when Bicycles assembles 1,000 bicycles?
Total fixed cost $94,500+ Total variable cost $52,000 = $146,500
$146,500 ÷ 1,000 = $146.50
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Total Costs and Unit CostsExample
0
50000
100000
150000
200000
0 500 1000 1500
Volume
Tot
al C
osts
$94,500
$94,500 + $52x$146,500
212009 Foster Business School Cost Accounting L.DuCharme
Use Unit Costs Cautiously
Assume that Bicycles management uses aunit cost of $146.50 (leasing and wheels).
Management is budgeting costs fordifferent levels of production.
What is their budgeted cost for anestimated production of 600 bicycles?
600 × $146.50 = $87,900
222009 Foster Business School Cost Accounting L.DuCharme
Use Unit Costs Cautiously
What is their budgeted cost for an estimatedproduction of 3,500 bicycles?
3,500 × $146.50 = $512,750
What should the budgeted cost be for anestimated production of 600 bicycles?
232009 Foster Business School Cost Accounting L.DuCharme
Use Unit Costs Cautiously
Total fixed cost $ 94,500Total variable cost ($52 × 600) 31,200Total $125,700
$125,700 ÷ 600 = $209.50
Using a cost of $146.50 per unit wouldunderestimate actual total costs if output
is below 1,000 units.
242009 Foster Business School Cost Accounting L.DuCharme
Use Unit Costs Cautiously
What should the budgeted cost be for anestimated production of 3,500 bicycles?
Total fixed cost $ 94,500Total variable cost (52 × 3,500) 182,000Total $276,500
$276,500 ÷ 3,500 = $79.00
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Manufacturing vs. others
Distinguish among
manufacturing companies,
merchandising companies, and
service-sector companies.
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Manufacturing
Manufacturing companiespurchase materials and components and
convert them into finished goods.
A manufacturing company must also develop,design, market, and distribute its products.
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Merchandising
Merchandising companiespurchase and then sell tangible products
without changing their basic form.
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Service
Service companiesprovide services or intangibleproducts to their customers.
Labor is the most significant cost category.
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Inventoriable Costs
Differentiate between
inventoriable costs
and period costs.
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Types of Inventory
Manufacturing-sector companiestypically have one or more of the
following three types of inventories:
1. Direct materials inventory
2. Work in process inventory (work in progress)
3. Finished goods inventory
312009 Foster Business School Cost Accounting L.DuCharme
Types of Inventory
Merchandising-sector companies holdonly one type of inventory – the
product in its original purchased form.
Service-sector companies do nothold inventories of tangible products.
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Classification ofManufacturing Costs
Direct materials costs
Direct manufacturing labor costs
Indirect manufacturing costs
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Inventoriable Costs
Inventoriable costs (assets)…
become cost of goods sold…
after a sale takes place.
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Period Costs
Period costs are all costs in the incomestatement other than cost of goods sold.
Period costs are recorded as expenses of theaccounting period in which they are incurred.
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Flow of Costs
• T-account diagram (in class)
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Prime Costs(all direct mfg. costs)
DirectMaterials
DirectLabor
PrimeCosts+ =
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Conversion Costs(all mfg. cost except DM)
DirectLabor
ManufacturingOverhead+ =
ConversionCosts
IndirectLabor
IndirectMaterials Other
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Different Costs?
Product costs are
computed in different ways
for different purposes/uses.
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Many Meanings of Product Cost
A product cost is the sum of the costsassigned to a product for a specific purpose.
1. Pricing and product emphasis decisions
2. Contracting with government agencies
3. Preparing financial statements for external reporting under generally accepted accounting principles
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