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

Specify “Tag” the Cost We need to place an adjective (tag) on the cost to identify what it is. Direct Cost

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

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

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

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

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

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

Manufacturing Costs Direct Materials Direct Labor

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

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Direct Materials DM in Theory Every component DM in Reality Must apply cost-benefit rule Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 DM – What is Cost? The invoice price of the raw materials, Shipping costs, Import duties, and A reduction for any allowable discounts for prompt payment. Dr. Fred Barbee

Manufacturing Costs Direct Labor 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.

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 MOH – Other Names Overhead Burden Indirect Manufacturing Costs Factory Expenses Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 MOH – A Few Examples Factory Supervision, Factory Telephone, heat, light, power, Factory bookkeeping salaries, Insurance Depreciation/factory equipment Indirect materials, labor. Dr. Fred Barbee

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

Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied MOH Finished FG Inv. Sales - COGS Sold = Income Statement Gross Margin - S&A Period Costs = Net Income

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

Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Inventory Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied MOH Finished FG Inv. Expense Sales - COGS Sold = Income Statement Gross Margin - S&A = Net Income

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

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

Balance Sheet Presentation

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

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Total Variable Costs $ Volume (Activity Base) Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Per Unit Variable Cost $ Volume (Activity Base) Dr. Fred Barbee

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

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Total Fixed Costs $ Volume (Activity Base) Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Per Unit Fixed Costs $ Per Unit Fixed Costs Within the limits of the activity range, per-unit fixed costs decrease with increased output. It is important to recognize that a fixed cost remains fixed only for a particular range of production. For example, if the size of a factory building permits 400,000 units to be produced on any given day, its fixed cost has a range of 0 to 400,000 units each day. Whether 100,000 or 400,000 units are produced, the cost for factory rent remains the same. Volume (Activity Base) Dr. Fred Barbee

Curvilinear Costs and the Relevant Range Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Curvilinear Costs and the Relevant Range Economist’s Curvilinear Cost Function Relevant Range $ Accountant’s Straight-Line Approximation The behavior of a curvilinear cost is illustrated on the following slide. Notice that a strictly linear relationship between cost and volume does not exist either at very high or at very low levels of activity. Thus, we see that a linear pattern may be a poor approximation of the economists’ curvilinear pattern over the entire range of possible activity. Volume (Activity Base) Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Anything for which a separate measurement of costs is desired (products, customers, departments, etc.) Direct Costs Cost Object Indirect Costs Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Costs that are related to and directly traceable to the identified cost objective. (Direct Material, Direct Labor) Direct Costs Cost Object Costs that are related to, but not traceable to, the identified cost objective. (Manufacturing overhead) Indirect Costs Dr. Fred Barbee

Different Costs for Different Purposes

Product Costing Definitions Manufacturing Costs and Job-Order Costing Systems Product Costing Definitions March 31, 2017 Value-Chain Operating Traditional Product Costs Product Costs Product Costs Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Value-Chain Product Costs Research and Development Production Marketing Customer Service If making any of these types of decisions, I need to look at all costs. Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Dr. Fred Barbee

Manufacturing Costs and Job-Order Costing Systems March 31, 2017 Production Marketing Strategic Design Decisions Tactical Profitability Analysis Operating Product Costs Customer Service On the other hand, for these decisions, we might be able to ignore some of the costs. Dr. Fred Barbee

Product Costing Definitions Manufacturing Costs and Job-Order Costing Systems March 31, 2017 For external financial reporting, we need only these costs – because that is what GAAP says we need. Value-Chain Operating Traditional Product Costs Product Costs Product Costs Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Dr. Fred Barbee