McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Chapter 18 Managerial Accounting Concepts and Principles

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior And Classification 1.Plastic board used to mount the chip,$3.50 each. 2.Assembly worker pay of $15 per hour to attach chips to plastic board. 3.Salary for factory maintenance workers to maintain factory equipment. 4.Factory supervisor pay of $55,000 per year to supervise employees. 5.Real estate taxes paid on the factory $14, Real estate taxes paid on the company office, $6, Depreciation costs on machinery used by workers, $30, Salary paid to the chief financial officer, $95,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification (continued) 9.Advertising costs of $7,800 paid to promote products. 10.Salespersons’ commissions of $0.50 for each assembled chip sold. 11.Management has the option to rent the manufacturing plant to six local hospitals to store medical records instead of producing and assembling chips. We will be classifying each of these costs so take a careful look at them.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Period costs are expenses not attached to the product. Classification by Function: Period Costs Administrative Costs Non-manufacturing costs of staff support and administrative functions – accounting, data processing, personnel, research and development. Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers – advertising and shipping.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 The Product Classification by Function: Product Costs Direct Labor Direct Material Manufacturing Overhead

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Direct costs Costs traceable to a single cost object. Examples: material and labor cost for a product. Indirect costs Costs that cannot be traced to a single cost object. Example: maintenance expenditures benefiting two or more departments. Classification by Traceability

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Classification by Relevance: Sunk Costs Opportunity Costs The potential benefit lost by choosing a specific action from two or more alternatives

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 1. Plastic board used to mount the chip, $3.50 each.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 2. Assembly worker pay of $15 per hour to attach chips to the plastic board.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 3. Salary for factory maintenance workers who maintain factory equipment.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 4. Factory supervisor pay of $55,000 per year to supervise employees

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 5. Real estate taxes paid on the factory, $14,500.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 6. Real estate taxes paid on the company office $6,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 7. Depreciation costs on machinery used by workers, $30,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 8. Salary paid to the chief financial officer, $95,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 9. Advertising costs of $7,800 paid to promote products.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 10. Salespersons’ commissions of $0.50 for each assembled chip sold.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Cost Behavior and Classification 11. Management has the option to rent the manufacturing plant to six local hospitals to store medical records instead of producing and assembling chips.