Introduction to Cost Terms 원가회계 2002 Chapter 2 Introduction to Cost Terms

Examples of Managers’ Decision Making How much should we spend for R&D ? What is the effect of product design changes on manufacturing costs ? Should we replace some production assembly workers with a robots ? Should we spend more of the marketing budget on sales promotion coupons and less on advertising ? Should we distribute from a central warehouse or from a regional warehouse ?

Cost A resource sacrificed or foregone to achieve a specific objective. Monetary amounts that must be paid to acquire goods and services. Inflow vs. Outflow Perspectives

Cost Objects Examples of Cost Objects Anything for which a separate measurement of costs is desired. Examples of Cost Objects Product Service Project Customer Brand Category Activity Department Program

Cost Accumulation and Cost Assignment Cost Tracing Cost Assignment Cost Allocation

Cost Tracing and Cost Allocation Direct Costs Cost Assignment Cost Object Cost Allocation Indirect Costs Cost tracing is the assigning direct costs to the chosen cost object. Cost allocation is the assigning indirect costs to the chosen cost object.

Direct Costs/Indirect Costs 원가회계 2002 Chapter 2 Direct Costs/Indirect Costs Direct Cost Direct Cost Indirect Cost Indirect Cost Cost Tracing Cost Allocation Cost Object A Cost Object B

Factors Affecting Direct/ Indirect Cost Classification The materiality of the cost in question Available information-gathering technology Design of operations Contractual arrangements

The direct/indirect classification depends on the choice of the cost object. 주조부문 선반부문 제품 A B C 특수선반작업 공장장의 급여 주조부문 관리자의 급여 선반부문 특수선반작업자의 임금

Cost Driver A cost driver is any factor that affects total costs Changes in a particular cost driver do not automatically lead to changes in overall costs

Cost Behavior Patterns 원가회계 2002 Chapter 2 Cost Behavior Patterns

원가회계 2002 Chapter 2 Cost behavior, or how costs behave in response to changes in production volume(a cost driver), is a concern for decision makers in almost all industries

Variable Cost, Fixed Cost Cost that changes in total in proportion to changes in a cost driver Fixed Cost Cost that does not changes in total despite changes in a cost driver

Jim & Barry’s Ice Cream Company Quarterly Production (Gallons) Total Gas & Maintenance Costs Cost per Gallon 400,000 500,000 600,000 700,000 800,000 $15,360 19,200 23,040 26,880 30,720 $0.0384 0.0384

Graphic Representation of Variable Costs(Total Cost) $40,000 VC = $0.0384 * Q 30,000 $30,720 Quarterly Variable Costs(VC) $26,880 20,000 $23,040 $19,200 in dollars 10,000 $15,360 Slope = 0.0384 200 400 600 800 1,000 Quarterly Production (Q) in thousands of gallons

Graphic Representation of Variable Costs(Unit Cost) VC/Q = $0.0384 per gallon $0.05 0.04 0.03 Quarterly Variable Costs per Gallon 0.02 (VC/Q) 0.01 0.00 200 400 600 800 1,000 Quarterly Production (Q) in thousands of gallons

Jim & Barry’s Ice Cream Company Quarterly Production (Gallons) Total Rental Costs Cost per Gallon 400,000 500,000 600,000 700,000 800,000 $10,000 10,000 $0.0250 0.0200 0.0167 0.0143 0.0125

Graphic Representation of Fixed Costs(Total Cost) $20,000 15,000 FC = $10,000 10,000 Quarterly Fixed Costs (FC) 5,000 200 400 600 800 1000 Quarterly Production (Q) in thousands of gallons

Graphic Representation of Fixed Costs(Unit Cost) $0.0250 $0.0250 0.0200 0.0200 0.0167 0.0150 0.0143 0.0125 0.0100 Quarterly Fixed Costs per Gallon (FC/Q) 0.0050 200 400 600 800 1000 Quarterly Production (Q) in thousands of gallons

Mixed Cost (Semivariable Cost) Costs comprised of both fixed and variable cost components

Jim & Barry’s Ice Cream Company Quarterly Production (Gallons) Fixed Cost Component Variable Cost Component Cost per Gallon Total Cost 400,000 500,000 600,000 700,000 800,000 $10,000 10,000 $15,360 19,200 23,040 26,880 30,720 $25,360 29,200 33,040 36,880 40,720 $0.0634 0.0584 0.0551 0.0527 0.0509

Graphic Representation of Mixed Costs(Total Cost) $50,000 C = $10,000+($0.0384 * Q) $40,720 40,000 $36,880 $33,040 30,000 $29,200 $25,360 20,000 Quarterly Costs (C) Slope = $0.0384 Variable cost 10,000 Fixed cost 200 400 600 800 1,000 Quarterly Production (Q) in thousands of gallons

Financial Statements and Cost Terminology Capitalized costs are first recorded as an asset(capitalized) when they are incurred. These costs are written off to those periods assumed to benefit from their incurrence. Noncapitalized costs are recorded as expense of the accounting period when they are incurred.

Periods Expensing of Capitalized Costs Costs Expensed as Incurred Service-sector Companies Costs Balance Sheet Income Statement Revenue deduct Capitalized Costs Assets Periods Expensing of Capitalized Costs Noncapitalized Costs Costs Expensed as Incurred equals Operating Income

Merchandising-sector Companies Costs Balance Sheet Income Statement Revenue deduct When sales occur Capitalized Inventoriable Costs Inventory Assets Merchandise Merchandise Purchases Costs of Goods Sold equals Gross Margin Capitalized Costs deduct Periods Expensing of Capitalized Noninventoriable Costs Capitalized Noninventoriable Costs Noninventory Assets Noncapitalized Costs Costs Expensed as Incurred equals Operating Income

Manufacturing-sector Companies Costs Balance Sheet Income Statement Revenue Direct Materials Inventory DMP deduct When sales occur Capitalized Inventoriable Costs Work-in-Process Inventory Finished Goods Inventory ODMC Costs of Goods Sold IMC equals Gross Margin Capitalized Costs deduct Periods Expensing of Capitalized Noninventoriable Costs Capitalized Noninventoriable Costs Noninventory Assets Noncapitalized Costs Costs Expensed as Incurred equals Operating Income

Manufacturing Cost Direct material costs Direct manufacturing labor costs Indirect manufacturing costs

원가계산준칙 (증선위, 2000.7.22) 제4조(제조원가의 범위) ① 제조원가는 제품의 생산과 관련하여 소비된 경제적 자원의 가치만을 포함한다. ② 비정상적으로 발생한 경제적 자원의 소비는 제조원가에 포함하지 아니한다.

원가계산준칙 (증선위, 2000.7.22) 제7조(제조원가요소의 분류) ① 제조원가요소는 재료비, 노무비 및 경비로 분류하거나, 회사가 채택하고 있는 원가계산방법에 따라 직접재료비, 직접노무비 및 제조간접비 등으로 분류할 수 있다.

제조원가의 분류 재료비 직접재료비 노무비 직접노무비 경 비 제조간접비 직접재료비 간접재료비 직접노무비 간접노무비 직접경비 X 간접경비 X 경 비 제조간접비

Prime Costs / Conversion Costs Direct material costs Direct manufacturing labor costs Indirect manufacturing costs Prime Costs Conversion Costs

Different Product Costs for Different Purposes 원가회계 2002 Chapter 2 Different Product Costs for Different Purposes Produc- toin Maket-ing Distri-butoin R&D Design Service Product Costs for F/S Product Costs for Reimbursement under Government Contracts Product Costs for Pricing and Product Emphasis