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Cost Concepts - 1
COST CONCEPTS
AND CLASSIFICATIONSFixed vs Direct vsVariable Indirect
Functional vs Behavioral
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Cost Concepts - 2
COST CLASSIFICATIONS
Functional
Product
ar!etin"
#$D
Ad%in
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Cost Concepts - 3
COST CLASSIFICATIONS
Functional & Product Detail
Product
ar!etin"
#$D
Ad%in
Materials
Labor
Mfg.Overhead
Prime costs = Dir. Materials + Dir. Labor
Conversion costs = Dir. Labor + Total Mfg.
Overea!
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Cost Concepts - "
COST CLASSIFICATIONS
Behavioral
Product
ar!etin"
#$D
Ad%in
Fixed
Variable
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Cost Concepts - #
COST CLASSIFICATIONS
#es'onsibilit(
Product
ar!etin"
#$D
Ad%in
Fixed
Variable
A
BC
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Cost Concepts - $
COST #ELATIONS)IPS* AN+FACT+#IN, COPAN-
Direct at./Be"0
Direct at.Purchases
Direct at./End0
Direct laborincurred
Direct at.
+sed1
2Overhead costs
a''lied
Tot. 3". Costsincurred
Cost o3 ,oods 3".
Cost o3 ,oods Sold
4IP /Be"0
4IP /End0
11
22
Fin ,oods /End0
Fin ,oods /Be"0
1
1
P#IO#PE#IOD
NE5TPE#IOD
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Cost Concepts - %
Inco%e State%entanu3acturin" Co%'an(
Beg. WIP+ Direct Matl
!sed+ Direct Labor + Mfg. Overhead" #$d. WIP
=
Cost of %oods Mfg.Cost of %oods Mfg.
Beg. Fi$. %oods +
&'()**(***Cost of %oods Mfg.
&'()**(***Cost of %oods Mfg.
-#$d. Fi$ished %oods
=&'(**(***
Cost of %oods ,old&'(**(***
Cost of %oods ,old
&)(***(***,ales
&)(***(***,ales
-&'(**(***
Cost of %oods ,old&'(**(***
Cost of %oods ,old
=&-()**(***
%ross Margi$&-()**(***
%ross Margi$
-
• ,elli$g exe$ses
• Ad/i$. exe$ses
• I$co/e taxes
&0**(*** Other Oer.#xe$ses
&0**(*** Other Oer.#xe$ses
=&1**(***
2et I$co/e&1**(***
2et I$co/e
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Cost Concepts - &
• ,elli$g #xe$ses• Ad/i$istrative #xe$ses• I$co/e taxes
• Direct Materials3 ,4lies• Direct Labor • I$direct Costs or Overhead
INCOE STATEENT
Service Or"ani6ation
&'(**(***Cost of ,ervices
&'(**(***Cost of ,ervices
&0**(*** Oerati$g #xe$ses
&0**(*** Oerati$g #xe$ses
&)(***(***,ales
&)(***(***,ales
&1**(***2et I$co/e
&1**(***2et I$co/e
&-()**(***%ross Margi$
&-()**(***%ross Margi$
-
=
-
=
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Cost Concepts - '
Total fi(e! costs do not respond to changes
in unit level cost drivers within a period.
Total fi(e! costs do not respond to changes
in unit level cost drivers within a period.
Total
fixed
costs (Y)
Total activity (X)
0
0
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
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Cost Concepts - 1)
Committe! fi(e! costs are
required to maintain the current
service or production capacity to
fill previous legal commitments.
Committe! fi(e! costs are
required to maintain the current
service or production capacity to
fill previous legal commitments.
Fixed CostsFixed Costs
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Cost Concepts - 11
Discretionar* fi(e! costs are set
at a fixed amount each year at the
discretion of management.
Discretionar* fi(e! costs are set
at a fixed amount each year at the
discretion of management.
Fixed CostsFixed Costs
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Cost Concepts - 12
Total variable costs increase in proportion
to increases in unit level cost drivers.
Total variable costs increase in proportion
to increases in unit level cost drivers.
Total
variable
costs (Y)
Total activity (X)00
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
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Cost Concepts - 13
Total mi(e! costs contain fixed and variable
cost elements. They increase but not in direct
proportion to increases in unit level cost drivers.
Total mi(e! costs contain fixed and variable
cost elements. They increase but not in direct
proportion to increases in unit level cost drivers.
Total
mixed
costs (Y)
Total activity (X)00
!ometimes
calledsemivariable
costs
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
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Cost Concepts - 1"
Total step costs are constant over a range of
activity for a unit level cost driver but moves to
a different amount at different ranges.
Total step costs are constant over a range of
activity for a unit level cost driver but moves to
a different amount at different ranges.
Total
step
costs (Y)
Total activity (X)00
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
C C 1
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Cost Concepts - 1#
Variable costs22 The cost of the
ingredients used to make thepizzas
Fixed costs22Depreciation,
property taxes, and propertyinsurance
ixed costs--Cost of electricity
Ste' costs--Employee wages
Basic Cost Behavior PatternsBasic Cost Behavior Patterns
"i##a $ut
C t C t 1$
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Cost Concepts - 1$
Total
costs
(Y)
%alue of independent variable (X)0
0
&ixed costs (a)
%ariable costs (b)
Total costsY ' a bX
%ariable costs are
layered on top of
fixed costs.
%ariable costs are
layered on top of
fixed costs.
!lope
b '∆Y
∆X
Total Cost Behavior With ASingle Unit Level Cost Driver
Total Cost Behavior With ASingle Unit Level Cost Driver
C t C t 1%
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Cost Concepts - 1%
Y ' a bXtotal costsvertical axis intercept
(an approximation of
fixed costs)
slope (an
approximation ofvariable costs per unit
of X)
value of
independentvariable
Equation for Total CostsEquation for Total Costs
C t C t 1&
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Cost Concepts - 1&
ethods 3or Se'aratin" ixedCost Into Fixed and Variable
Co%'onents
Scatterplot Method
The igh-!ow Method
Speci"c #uantitati$emethods – The Method of !east
S#uares
Cost Concepts 1'
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Cost Concepts - 1'
Mo$th !tilit5 Costs !$it Prod4ced
6a$4ar5 &'(*** '**
Febr4ar5 '(1** )**
March )(1** **
Aril 1(*** 7**
Ma5 8(1** -(***
ixed Costs* An Exa%'le
Cost Concepts 2)
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Cost Concepts - 2)
!$its Prod4ced
!tilit5
Cost
&7(***
(***
)(***
'(***
*'** )** ** 7** -(***
.
Scatter'lot ethod
. .
.
.
A$al5st ca$ fit li$e
based o$ his or her
exerie$ce
I/orta$t9 Cost f4$ctio$ is o$l5
releva$t :ithi$ releva$t ra$ge
Cost Concepts 21
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Cost Concepts - 21
ig activit* perio!
Lo, activit* perio!
mber of Pac/aging0ipments Costs
anuary *000 +,-000
&ebruary 000 /*000arch ,/000 1/000
2pril l0000 /0000
%ariable cost
per unit (b) '
3ifference in total costs
3ifference in activity
b '+1/000 4 +,-000
,/000 4 *000
5ontinued on next
slide
igh!Lo" Cost Esti#ationigh!Lo" Cost Esti#ation
Cost Concepts 22
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Cost Concepts - 22
%ariable cost per unit (b) ' +/.60
anuary
a ' Total costs 4 %ariable costs +,-000 ' a (+/.60 x *000 shipments)
a ' +/000
arch +1/000 ' a (+/.60 x ,/000 shipments)
a ' +/000
!ame answer7
igh!Lo" Cost Esti#ationigh!Lo" Cost Esti#ation
Cost Concepts - 23
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Cost Concepts - 23
Y ' +/000 x +/.60XY ' +/000 x +/.60X
Total pac8ing
department costs
9umber of
shipments
igh!Lo" Cost Esti#ationigh!Lo" Cost Esti#ation
Cost Concepts - 2"
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Cost Concepts - 2"
Direct materials the cost
of primary raw materials
converted into finished
goods. The word :direct;indicates costs that are
easily or directly traced to a
finished product or service.
Direct materials the cost
of primary raw materials
converted into finished
goods. The word :direct;indicates costs that are
easily or directly traced to a
finished product or service.
Direct labor the wages earned by
production employees for the time
they spend converting raw
materials into finished products.
Direct labor the wages earned by
production employees for the time
they spend converting raw
materials into finished products.
Manfactring overea!incl!es all manufacturing costs
other than direct materials and
direct labor.
Manfactring overea!
incl!es all manufacturing costs
other than direct materials and
direct labor.
Co#$osition of%anufacturing Costs
Co#$osition of%anufacturing Costs
Cost Concepts - 2#
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Cost Concepts 2#
Directaterials
DirectLabor
Overhead tobe Assi"ned
Finished,oods
Conventional Product Costin"
Wor; i$
Process
Traceable
I$direct
Cost Concepts - 2$
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Cost Concepts 2$
%rime costs & Direct materials '
Direct la(or
Con$ersion costs & Direct la(or '
Manufacturingo$erhead
)"xed * $aria(le+
Co#$osition of
%anufacturing Costs
Co#$osition of
%anufacturing Costs
Cost Concepts - 2%
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Cost Concepts 2%
"ercent of Total
anufacturing
5osts
0
,00
,00 ,60 /000
Year
Totalmanfactring
costs
3irect materials has increased
3irect labor has decreased
anufacturing overhead has
increased
Changing Co#$osition ofTotal %anufacturing Costs
Changing Co#$osition ofTotal %anufacturing Costs
Cost Concepts - 2&
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Cost Concepts 2&
The Basic Conce't o3
Overhead A''licationA''lied overhead 7 Overhead rate x Actualactivit(
A''lied overhead is the basis 3or co%'utin"'er2unit overhead cost
A''lied overhead is rarel( e8ual to a 'eriod9sactual overhead costs.
:e( considerations
Cost Concepts - 2'
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p
CONVENTIONAL P#OD+CTCOSTIN,
Overhead A''lication
Predeter/i$ed <otal b4dgeted overheadOverhead =ate > #xected level of activit5 ?
• Co$ve$tio$al costi$g t5icall5 4sed vol4/e @or as4rrogate for vol4/e s4ch as DL
• Proble/s " B4dgeted overhead co$tai$s both fixed a$d
variable costs
" ,electio$ of exected level of activit5
Cost Concepts - 3)
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p
Select An A''ro'riate Activit(Base
Criterion*Cause and E;ect#elationshi'
Possible easureso3
Production Activit(
<. +nits 'roduced=. Direct labor hours>. Direct labor dollars?. achine hours@. Direct %aterials
Choice o3 Activit(Base to be +sed3or Co%'utin" thePredeter%inedOverhead #ate
Cost Concepts - 31
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p
Co%'arison o3 Traditional andConte%'orar( Cost ana"e%entS(ste%s
CostI$for/atio$
,5ste/
<raditio$al Co$te/orar5
-. !$it"based drivers'. Allocatio$ i$te$sive. 2arro: vie: of
rod4ct costs). Foc4s o$ cost /gt.1. Little activit5 i$for/atio$. Maxi/ies 4$it
rod4ctio$8. !ses fi$a$cial /eas4res of erfor/a$ce
-. !ses of $o$4$it drivers'. <raci$g i$te$sive. #xa$ded rod4ct costi$g). Ma$agi$g activities1. Detailed activit5
i$for/atio$. ,5ste/":ide erfor/a$ce araisals8. !se of $o$fi$a$cial
/eas4res of erfor/a$ce
Cost Concepts - 32
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p
&#$act of Co#$uters on
%anufacturing
&#$act of Co#$uters on%anufacturing
tomatic
i!entification s*stems
405 allow inventory
and production
information to be
entered into acomputer without
writing or 8eying.
Cost Concepts - 33
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p
&#$act of Co#$uters on
%anufacturing
&#$act of Co#$uters on%anufacturing
Compter-ai!e!
!esign CD5 involves the use of
computers to
design products.
Cost Concepts - 3"
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Compter-ai!e! manfactring
CM5 involves the use of computers
to control machine operations.
&#$act of Co#$uters on
%anufacturing
&#$act of Co#$uters on%anufacturing
Cost Concepts - 3#
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&#$act of Co#$uters on
%anufacturing
&#$act of Co#$uters on%anufacturing
6le(ible manfactring
s*stems 6M05 are an extensionof computer4aided
manufacturing techniques
through a series of
manufacturing operations.
6le(ible manfactring
s*stems 6M05 are an extensionof computer4aided
manufacturing techniques
through a series of
manufacturing operations.
Compter-integrate!
manfactring C4M5 is the
ultimate extension of 523 52
and &! concepts to a completed
automated and computer4
controlled factory.
Compter-integrate!
manfactring C4M5 is the
ultimate extension of 523 52
and &! concepts to a completed
automated and computer4controlled factory.
<n their advanced stages factories
utili#ing flexible manufacturing
systems and computer4integrated
manufacturing are sometimes referredto as :lights4out factories;because they
can be operated in the dark .
<n their advanced stages factories
utili#ing flexible manufacturing
systems and computer4integrated
manufacturing are sometimes referredto as :lights4out factories;because they
can be operated in the dark .