Cost Terms Concepts and Classifications UAA ACCT 202

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

Specify “Tag” the Cost l We C ct ire st o D need to place an adjective (tag) on the cost to identify what it is.

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

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

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

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

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

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

Manufacturing Costs

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

Direct Materials l DM in Theory l Every l DM component in Reality l Must apply cost-benefit rule

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

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

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

MOH – Other Names l Overhead l Burden l Indirect Manufacturing Costs l Factory Expenses

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

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

Cost Flows in a Manufacturing Firm Product Costs Manufacturing Costs DM DL MOH Balance Sheet Unused Used d e i l App WIP DM Inv. Unfinished Fini she WIP Inv. d Sales - Income Statement COGS = Gross Margin - S&A = Net Income Sold Period Costs FG Inv.

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

Cost Flows in a Manufacturing Firm Pro duct Costs Manufacturing Costs DM DL MOH Balance Sheet Unused Used d e i l App WIP DM Inv. Unfinished Fini she d Sales - Income Statement COGS = Gross Margin - S&A = Net Income Sold WIP Inv. FG Inv.

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

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

Balance Sheet Presentation

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

Total Variable Costs $ Volume (Activity Base)

Per Unit Variable Cost $ Volume (Activity Base)

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

Total Fixed Costs $ Volume (Activity Base)

Per Unit Fixed Costs $ Volume (Activity Base)

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

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

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

Different Costs for Different Purposes

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

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

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.

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