1. Full Costs and Their Uses17
Full Costs and Their Uses

2. Cost & Cost Object
Cost = a measurement, in monetary terms, of amount of resources used for some purpose.
Cost object = cost objective = product, project, organizational unit, or other activity or purpose for which costs are measured.
Can be defined broadly or narrowly, e.g. one pair of jeans or a batch of a single style of jeans.

3. Cost Concepts
Full cost = all resources used for a cost object = direct costs + fair share of indirect costs.
Direct costs of a cost object = items of cost specifically traced to, or caused by, cost object.

4. Indirect Costs
Costs associated with or caused by, 2 or more cost objects jointly but not directly traceable to each of them individually.
Not possible or feasible to trace directly to a cost object.
Terms direct and indirect are only meaningful in context of a specific cost object.

5. GAAP Inventory Costs Applicable accounting principles
Limited guidance.
Any systematic and rational method is allowed.
Absorption cost accounting required.
Full production cost of inventory items.
Direct + Indirect production costs.
Full cost = full production costs +non-production costs.
Non-production costs = all costs other than inventory.
Marketing (order getting), logistics (order filling), R&D, general & administrative.

6. Elements of product cost
Product costing system = the system that accumulates and reports costs of product cost objects.
Direct material = raw materials = quantities of material that can be specifically identified with a cost object in an economically feasible manner, priced at unit price of direct material.
Distinguished from supplies, or indirect materials.

7. Conversion Costs
Direct labor costs of a cost object = labor quantities * unit price of direct labor.
Usually only DM & DL are direct costs.
Overhead costs = all indirect production costs.
Conversion costs = direct labor cost + overhead cost = all production costs needed to convert direct material into finished goods.
Full production cost = DM + conversion cost = inventory cost = product costs.

8. Full Cost = Full production cost
+ Selling cost (marketing & logistics)
+ General and administrative cost

9. Product costing systems
3 sections: acquisition, production, sale.
Acquisition: accounts related to the acquisition of resources.
Materials inventory xxx
Other assets & liability accounts xxx
Cash or account payable xxx

10. Production: accounts related to the production process.
Work-in-process inventory xxx
Materials inventory xxx
Wages payable xxx
Work in process inventory xxx
Overhead Clearing xxx
Finished goods inventory xxx

11. Overhead Clearing Account
Costs are cleared out of this account at the end of each month (i.e. the clearing account is cleared or zeroed out).
Costs accumulated:
Overhead clearing xxx
Wages payable xxx
Materials inventory xxx
Acc. Depr xxx
Cash xxx

12. Sale: accounts related to the sale of products.
Cost of goods sold xxx
Finished goods inventory xxx
Accounts receivable xxx
Sales xxx

13. Non-manufacturing Companies
Merchandising companies: costs of sales is essentially merchant’s invoice cost of goods sold.
Simple system (relative to manufacturing company) .
Cost record kept for each job: auto repair shop, hospital, medical clinic.
Cost record is WIP inventory account.
No cost record for each job: hospital laboratory.
Non-profit: tracks programs not products.

14. Life Cycle Costing
Cost system considers all of a product’s costs from “birth to abandonment.”
Birthing costs: Necessary to develop product and bring it to market.
Research and development, product testing, initial market creation, salesperson training.
Abandonment costs: incurred after product is discontinued and doesn’t produce significant revenues.
Disposal of plant and equipment, severance costs, restoring polluted land.

15. Nonprofit Organizations
Healthcare, educational, performing arts, government.
Similar cost accounting.
Often rather than client specific transactions, determines full costs of programs.
Program:
Goal oriented set of activities.
Lending of books by library, periodical reading room.

16. Uses of full costs Financial reporting: inventory/COGS.
Analysis of profitability: by product. product line, plant, division, sales territory.
Cost plus contracts.
Setting regulated prices: utilities, cable.

17. Product Pricing
Differentiated product: Normal price = direct costs + applicable indirect costs + profit.
Target pricing = price set and then product designed to cover full cost + profit, e.g. apparel industry.
Undifferentiated product = commodities.
Company does not set price, market does.

18. Product Pricing (continued)
Time and material pricing
Automobile/TV repair, service business.
Price material and labor, separately.
Labor rate: wages, fringes, indirect costs, profit.
Material: invoice cost, handling, storage, profit.
Contribution pricing
Price below full, above variable costs.

19. 17
End of Chapter 17