03 Management Cost Strategic Chapter 3 Basic Cost Concepts Ratih Puspa Dewi, SE, MM EKONOMI AKUNTANSI

Cost Drivers, Cost Pools, and Cost Objects A cost driver is any factor that has the effect of changing the level of total cost.

Cost Drivers, Cost Pools, and Cost Objects A cost is incurred when a resource is used for some purpose. Costs may be collected into groups called cost pools. A cost object is any product, service, or unit to which costs are assigned for some meaningful purpose.

Cost Assignment and Cost Allocation: Direct and Indirect Costs A direct cost can be conveniently and economically traced directly to a cost pool or a cost object. Indirect costs can not be conveniently or economically traced to cost pools or cost objects. The assignment of indirect costs to cost pools and cost objects, using cost drivers (allocation bases), is called cost allocation.

Costs, Cost Pools, Cost Objects, and Cost Drivers Cost Drivers and Cost Assignment Cost Pools Cost Objects Electric Motor Assembly Materials Handling Dishwasher Supervision Packing Packing Materials Washing Machine Final Inspection

Direct Materials MILK SUGAR FLOUR = + + Direct materials include the cost of materials in the product, less purchase discounts, plus freight and a reasonable allowance for scrap and defective units.

Indirect Materials Cleaning Material Sweeping Compound Indirect materials are materials used in manufacturing that are not part of the finished product.

Direct Labor Direct labor includes the labor used to manufacture the product or to provide the service.

Indirect Labor Indirect labor includes supervision, quality control, inspection, purchasing and receiving, and other manufacturing support costs.

Other Indirect Costs Factory Overhead Other indirect costs such as building and equipment depreciation, property taxes, insurance, and utilities . . . . . . . . are combined with indirect labor and indirect materials into a single cost pool called . . . . Factory Overhead

Classifications of Costs Manufacturing costs are often combined as follows: Classifications of Costs Direct Materials Direct Labor Factory Overhead Prime Cost Conversion Cost

Types of Cost Drivers Activity-based Identified using activity analysis, a detailed description of specific activities and the relationship between the activity and costs. Activity-based Volume-based Relationship between costs and volume measures such as units produced, direct labor hours, or quantity of materials used. Structural Executional

Types of Cost Drivers Activity-based Involves strategic plans and decisions: Scale Experience Technology Complexity Activity-based Volume-based Short-term operational decisions: Workforce involvement Production process design Supplier relationships Structural Executional

The Linearity Assumption and the Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Economist’s Curvilinear Cost Function Relevant Range Total Cost Accountant’s Straight-Line Approximation (constant unit variable cost) Activity

Fixed and Variable Costs Total Cost Fixed cost is that portion of the total cost that does not change with a change in the quantity of the cost driver, within the relevant range. $6,600 $6,500 $3,000 Total Fixed Cost 3,500 3,600 Units of the Cost Driver

Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk. Total Long Distance Telephone Bill Minutes Talked

Per Minute Telephone Charge Variable Cost Per Unit Example The cost per minute talked is constant. For example, 5 cents per minute. Per Minute Telephone Charge Minutes Talked

Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Total Fixed Cost Example Monthly Basic Telephone Bill Number of Local Calls

Fixed Cost Per Unit Example The fixed cost per local call decreases as more local calls are made. Monthly Basic Telephone Bill per Local Call Number of Local Calls

Fixed and Variable Costs

Total cost remains constant within a narrow range of activity. Step-Costs Total cost remains constant within a narrow range of activity. Cost Activity

Step-Costs Total cost increases to a new higher cost for the next higher range of activity. Cost Activity

Product Costs and Period Costs Direct materials, the materials used in the manufacture of the product, which becomes a physical part of the final product. Direct labor, the labor used in the manufacture of the product, and Factory overhead, the indirect costs for materials, labor, and facilities used to support the manufacturing process, but not used directly in the manufacture of the product. Product Costs and Period Costs Product costs for a manufacturing firm include--

Product Costs and Period Costs All other expenditures for managing the firm and selling the product are expenses as they are incurred and are referred to as PERIOD COSTS.

Cost flows in a Merchandising Firm Merchandise Purchases Product Inventory Cost of Goods Sold

Inventory Cost Flow Formula Beginning Inventory Balance Beginning Inventory Balance Cost Added Cost Transferred Out Ending Inventory Balance + = +

Manufacturing Inventories materials inventory--the store of materials used in the manufacturing process. work-in-process inventory--all costs put into manufacture of products that are not complete at the financial statement date. finished goods inventory--the cost of goods that are ready for sale.

Cost flows in a Manufacturing Firm Materials Purchases Materials Used Labor Overhead Work in Process Finished Goods Cost of Goods Sold

Cost flows in a Manufacturing Firm Raw Materials Wages Payable 75 EI 5 BI 10 Purchased raw materials on account, $70. Credit Accounts Payable. 70 Work in Process Factory Overhead BI 10 Requisitioned direct materials for production, $75. Cost of Goods Sold Finished Goods BI 20

Cost flows in a Manufacturing Firm Raw Materials Wages Payable BI 10 75 80 Accrued direct labor, $80. 70 EI 5 Work in Process Factory Overhead BI 10 100 Applied manufacturing overhead, $100. Cost of Goods Sold Finished Goods BI 20

Cost flows in a Manufacturing Firm Raw Materials Wages Payable BI 10 75 80 Transferred completed goods to finished goods, $215. 70 EI 5 Work in Process Factory Overhead 215 EI 50 BI 10 100 Sold goods that cost $210 to make. Cost of Goods Sold 210 EI 25 Finished Goods BI 20

Cost of Goods Manufactured Statement Direct Materials Beginning inventory $10 Purchases 70 Cost of Materials Available $80 Ending Inventory 5 Direct Materials Used 75 Direct Labor Used 80 Factory Overhead 100 Total Manufacturing Cost $255 ADD: Beginning Work-in-Process Inventory 10 Total Manufacturing Costs to Account For $265 LESS: Ending Work-in-Process Inventory 50 Cost of Goods Manufactured $215

Income Statement Sales $300 Cost of Goods Sold: Beginning Finished Goods Inventory $ 20 Cost of Goods Manufactured 215 Cost of Goods Available for Sale 235 Ending Finished Goods Inventory 25 210 Gross Margin 90 Selling and Administrative Expenses 50 Net Income $ 40

Differential revenue is: Differential Costs Costs that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $500 Differential cost is: $300

The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $18,000 per year. Your opportunity cost of attending college for one year is $18,000. Opportunity Costs

Sunk costs cannot be changed by any decision Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost. Sunk Costs

Attributes of Cost Information for Decision Making Accuracy Timeliness Cost versus Value

Cost Concepts for Management and Operational Control Controllability Management risk preferences

Fixed and Variable Costs Total variable cost is the change in total cost associated with each change in the quantity of the cost driver. Total Cost Total Cost Total Cost $6,600 $6,500 $3,000 Total Variable Cost Total Fixed Cost 3,500 3,600 Units of the Cost Driver

Ratih Puspa Dewi, SE, MM