Nature and Scope of Cost

Accounting
Unit 1 – Part B

Cost Concepts and Classifications
Cost are associated with all types of
organizations – business, nonbusiness,
service, retail and manufacturing. Generally,
the kinds of costs that are incurred and the
way in which costs are classified will depend
on the type of organization involved.

Basic Cost Terminology
• Cost—sacrificed resource to achieve a

specific objective
• Actual cost—a cost that has occurred
• Budgeted cost—a predicted cost
• Cost object—anything of interest for
which a cost is desired (product, customer
order, contract, product line and others).

Basic Cost Terminology • 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 .

Learning Objective 1 Cost classified in relation to a product .

Manufacturing Costs/Product Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Prime Cost Manufacturing Overhead Conversio n Cost .A.

Manufacturing Costs Direct Direct Materials Materials Direct Direct Labor Labor The Product Manufacturing Manufacturing Overhead Overhead .

Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: Example: A A radio radio installed installed in in an an automobile automobile .

Example: Example: Wages Wages paid paid to to automobile automobile assembly assembly workers workers .Direct Labor Those labor costs that can be easily traced to individual units of product.

Examples: Examples: Indirect Indirect materials materials and and indirect indirect labor labor Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.Manufacturing Overhead Manufacturing costs that cannot be traced directly to specific units produced. Wages paid to employees who are not directly involved in production work. janitors and security guards. Examples: maintenance workers. .

and clerical costs. organizational. .B. All executive. Nonmanufacturing Costs/Period Costs Selling Costs Administrati ve Costs Costs necessary to secure the order and deliver the product.

and manufacturing overhead. Expense Sale Balance Sheet Income Statement Income Statement . direct labor.Product Costs Versus Period Costs Product costs include direct materials. Inventory Cost of Good Sold Period costs include all selling costs and administrative costs.

Learning Objective 2 Cost classified as to variability .

 Total fixed costs Total fixed costs remain remain unchanged unchanged when when activity activity changes. changes. changes. range.  Total variable costs Total variable costs change change when when activity activity changes.Cost Classifications for Predicting Cost Behavior How How aa cost cost will will react react to to changes changes in in the the level level of of activity activity within within the the relevant relevant range. .

fixed costs are considered fixed only within the relevant range.Fixed Cost and the Relevant Range • Cost driver—a variable that 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. .

The Activity Base (also called a cost driver) Machine hours Units produced A measure of what causes the incurrence of a variable cost Miles driven Labor hours .

assume office space is available at a rental rate of $30.Fixed Costs and the Relevant Range For example.000 square feet.000 per year in increments of 1. .000 for each additional 1. Fixed costs would increase in a step fashion at a rate of $30.000 square feet.

Average fixed cost per unit goes down as activity level goes up.Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost changes as activity level changes. . Variable cost per unit remains the same over wide ranges of activity. Fixed Total fixed cost remains the same even when the activity level changes.

Learning Objective 3 Assigning Costs to Costs Objects .

Examples: direct material and direct labor McGraw-Hill/Irwin Indirect costs   Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead .Direct costs   Costs that can be easily and conveniently traced to a unit of product or other cost object.

Learning Objective 4 Cost Flow of Manufacturing Firm .

Manufacturing Cost Flows Balance Sheet MaterialCosts Purchases Inventories Direct Labor Manufacturing Overhead Selling and Administrative Raw Materials Income Statement Expenses Work in Process Finished Goods Period Costs Cost of Goods Sold Selling and Administrativ e .

they theyare are called calleddirect direct materials. process.Product Cost Flows Raw Materials + = – = Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Work In Process Direct materials As As items items are are removed removed from from raw raw materials materialsinventory inventoryand andplaced placedinto into the the production production process. materials. .

product. .Product Cost Flows Raw Materials + = – = Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs Work In Process Conversion Conversion costs costs are are costs costs incurred incurred to to convert convert the the direct direct material material into into aafinished finished product.

.Product Cost Flows Raw Materials + = – = Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. process. overhead = Total manufacturing costs Work In Process Beginning work in process inventory + Total manufacturing costs = Total work in process for the period All Allmanufacturing manufacturingcosts costsincurred incurred during during the theperiod periodare areadded addedto tothe the beginning beginning balance balanceof of work workin in process.

inventory.Product Cost Flows Raw Materials Manufacturing Costs Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. Work In Process + = – = Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured . overhead purchased = Total manufacturing = Raw materials costs available for use in production – Ending raw materials inventory Costs associated with associated with the the goods goods that that =Costs Raw materials used are areincompleted completed during the theperiod periodare are production during transferred transferredto tofinished finished goods goods inventory.

Ending finished goods inventory Cost of goods sold .Product Cost Flows Work In Process + = – = Beginning work in process inventory Manufacturing costs for the period Total work in process for the period Ending work in process inventory Cost of goods manufactured Finished Goods Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale .

Learning Objective 5 Manufacturing and Merchandising Statement .

 Buy raw materials.  Produce and sell finished goods.  Buy finished goods..  Sell finished goods. . .Comparing Merchandising and Manufacturing Companies Merchandisers . MegaLoMart McGraw-Hill/Irwin Manufacturers . . .

Balance Sheet Merchandiser Current assets  Cash  Receivables  Merchandise Inventory Manufacturer Current Assets  Cash  Receivables  Inventories • Raw Materials • Work in Process • Finished Goods .

or overhead has been added. .Balance Sheet Merchandiser Current assets  Cash  Receivables  Merchandise Inventory Partially complete products – some material. labor.  Receivables  Inventories • Raw Materials • Work in Process • Finished Goods Completed products awaiting sale. Manufacturer Current Assets Materials waiting to  Cash be processed.

merchandise inventory + Purchases Goods available for sale .100) $ 236.150 $ 248.Ending merchandise inventory = Cost of goods sold $ 14.350 (12.200 234. Merchandising Company Cost of goods sold: Beg.The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.250 .

End of the chapter .