COST TERMS AND PURPOSES © 2012 Pearson Prentice Hall. All rights reserved.

Class Announcement  See SCC for information on accounting recruitment information sessions  Assignment #1 due September 19 th  Business Society Golf Tournament (Daily Schwartz on Facebook)  Date: Saturday Sept 21 st ( Colin MacInnis, at x2010qbn)  Time: tee off times begin at 12:00pm  Location: Antigonish Golf & Country Club (87 Cloverville road)  Team size: 4  Fee: $50/team member  Invest-X Initial Meeting on Monday September 16 th in SCHW 152 2

© 2012 Pearson Prentice Hall. All rights reserved. Class Objectives 1. Different costs for different decisions 2. Various cost classification approaches 3. Match information need with cost classification approach

© 2012 Pearson Prentice Hall. All rights reserved. Cost Accounting and Cost Management 1. Calculating the cost of products, services, and other cost objects 2. Obtaining information for planning and control, and performance evaluation 3. Analyzing the relevant information for making decisions

© 2012 Pearson Prentice Hall. All rights reserved. Basic Cost Terminology  Cost – is a resource sacrificed or forgone to achieve a specific objective  Cost object - a cost object is anything for which a separate measurement of costs is desired; examples include a product, a service, a project, a customer, a brand category, an activity, and a department.  Cost accumulation—a collection of cost data in an organized manner  Cost assignment—a general term that includes gathering accumulated costs to a cost object. This includes:  Tracing accumulated costs with a direct relationship to the cost object and  Allocating accumulated costs with an indirect relationship to a cost object

© 2012 Pearson Prentice Hall. All rights reserved. Cost Classification  Costs assignment can vary in relationship to many different cost drivers.  Cost Classification is dependent on decision being made  Cost Classifications:  1) Direct and Indirect  2) Variable and Fixed  3) Manufacturing Cost Type  4) Period and Product Costs  5) Controllable and Uncontrollable  6) Other Classifications

© 2012 Pearson Prentice Hall. All rights reserved. Cost Classification

© 2012 Pearson Prentice Hall. All rights reserved. 1) Direct and Indirect Costs  Direct costs can be conveniently and economically traced (tracked) to a cost object. See  Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner.  Factors Affecting Direct/Indirect Cost Classification  Cost materiality  Availability of information-gathering technology  Operational design

© 2012 Pearson Prentice Hall. All rights reserved. 1) Direct and Indirect Costs

© 2012 Pearson Prentice Hall. All rights reserved. 2) Fixed and Variable Costs  Variable costs—changes in total in proportion to changes in the related level of activity or volume.  Fixed costs—remain unchanged in total regardless of changes in the related level of activity or volume.  Costs are fixed or variable only with respect to a specific activity or a given time period.

© 2012 Pearson Prentice Hall. All rights reserved. 2) Fixed and Variable Costs

© 2012 Pearson Prentice Hall. All rights reserved. 2) Fixed and Variable Costs Total DollarsCost per Unit Variable Costs Change in proportion with output More output = More cost Fixed Costs Unchanged in relation to output Change inversely with output More output = lower cost per unit Total DollarsCost Per Unit Variable Costs Change in proportion with output More output = More cost Unchanged in relation to output Fixed CostsUnchanged in relation to output Change inversely with output More output = lower cost per unit

© 2012 Pearson Prentice Hall. All rights reserved. 2) Fixed and Variable Costs  Unit costs should be used cautiously. Because unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis.  Unit costs that include fixed costs should always reference a given level of output or activity.  Unit costs are also called average costs.  Managers should think in terms of total costs rather than unit costs.

© 2012 Pearson Prentice Hall. All rights reserved. 2) Fixed and Variable Costs  Cost driver—a variable that causally affects costs over a given time span  Relevant range—the band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost  For example, fixed costs are considered fixed only within the relevant range.

© 2012 Pearson Prentice Hall. All rights reserved. 3) Manufacturing Costs  Direct materials—acquisition costs of all materials that will become part of the cost object.  Direct labor—compensation of all manufacturing labor that can be traced to the cost object.  Indirect manufacturing—factory costs that are not traceable to the product in an economically feasible way. Examples include lubricants, indirect manufacturing labor, utilities, and supplies.  Includes indirect labour  Office, security, and management salaries  Payroll fringe benefits  Rework labour  Idle time – wages related to unproductive time  Overtime premium - – wages paid in excess of regular wage rate

© 2012 Pearson Prentice Hall. All rights reserved. 4) Product and Period Costs  Product (Inventoriable) costs—product manufacturing costs. These costs are capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold.  Period costs—have no future value and are expensed in the period incurred(i.e., all costs other than Cost of Goods Sold).  Inventories:  Raw materials—resources in-stock and available for use  Work-in-process (or progress)—products started but not yet completed, often abbreviated as WIP  Finished goods—products completed and ready for sale

© 2012 Pearson Prentice Hall. All rights reserved. 4) Product and Period Costs

© 2012 Pearson Prentice Hall. All rights reserved. 5) Controllable and Uncontrollable Costs (chpt 16)  Assessing controllability of costs assists in performance measurement and evaluation  Controllable costs  costs over which a manger has influence  Uncontrollable costs  costs over which a manger has no influence

© 2012 Pearson Prentice Hall. All rights reserved. 6) Prevention and Appraisal Costs (chpt 19) Prevention Costs Support activities whose purpose is to reduce the number of defects Appraisal Costs Incurred to identify defective products before the products are shipped Internal Failure Costs Incurred as a result of identifying defects before they are shipped External Failure Costs Incurred as a result of defective products being delivered to customers

© 2012 Pearson Prentice Hall. All rights reserved. 7) Other Cost Classifications (chpt 11)  Opportunity cost - benefit foregone  Sunk cost - cannot be changed by future decisions  Differential cost- difference between two decisions  Marginal cost - cost of one additional unit  Committed costs - long-term obligations, difficult to change in the short term.  Discretionary costs – costs that can be changed in the short term

© 2012 Pearson Prentice Hall. All rights reserved. Multiple Classification of Costs