EMBA 5403 Managerial WK 2

Cost Classification and Cost
Behavior
EMBA 5403
Fall 2010
Mugan
Types of The opportunity cost is the monetary amount
Costs associated with the next best use of the
resource.
 differential costs- (benefits) – costs or
benefits that change between/among
alternatives
 Irrelevant costs -Costs that don’t change
are irrelevant to the decision
 Choose the alternatives where differential
benefits exceed differential costs
 Opportunity costs
 Sunk costs
 Controllable /avoidable costs/discretionary
costs
Costs
Coststhat thathave
havealready
alreadybeen
beenincurred
incurredand
andcannot
cannotbe
be
changed
changedno
Fall 2010
nomatter
matterwhat
whataction
action is
istaken
Mugan
takenin
inthe
thefuture.
future. 2/82
Problems in Identifying and
Measuring Benefits
How
How dodo II measure
measure
the
thebenefit
benefit ofof
employee
employeetraining?
training?
How
How do
do II What
What is
isthe
the
measure
measure thethe monetary
monetarybenefit
benefit of
of
benefit
benefit of
of aahappy
happy customer?
customer?
improved
improved
quality?
quality? What
Whatis is the
the
monetary
monetary
benefit
benefit of
ofanan
improved
improved
working
working
Fall 2010
environment?
environment?
Mugan 3/82
Problems in Identifying and
Measuring Costs
How
How dodo II measure
measure What
Whatisisthe
thecost
cost of
of
the
thecost
costof ofpoor
poor aadissatisfied
dissatisfied
quality?
quality? customer?
customer?
What How
How do do II
What is isthe
thecost
cost
of measure
measurethe
of postponing
postponing the
this cost
cost of
of setting
thisyear’s
year’s setting
training my
my price
pricetoo
too
training
program? high?
high?
program?
Fall 2010 Mugan 4/82
Classifications of Costs
 Behavior – how costs react to changes in
underlying cost driver
 Variable or Fixed
 Function – related to production or sales
 Product or Period
 Product costs –
 Direct Material
 Direct Labor
 Factory Overhead
 Traceability (cost of tracing cost to a cost
driver directly should be lower than the
benefits.

Non-manufacturing Costs
Marketing or Administrative
Selling Costs Costs
Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.

Product Costs Versus Period
Costs
Product costs include Period costs include

direct materials, direct all marketing or
labor, and selling costs and
manufacturing administrative
Inventory
overhead .
Cost of Good Sold costs.
Expense
Sale
Income Income
Balance
Statement Statement
Sheet

Product Cost Flows
Work
Raw Materials In Process
Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production

Product Cost Flows
Work
Beginning raw Beginning work in

materials inventory process inventory
+ Raw materials Direct materials
purchased + Direct labor
Prime Costs
= Raw materials + Mfg. overhead
available for use = Total manufacturing
in production costs
– Ending raw materials
inventory Conversion Costs
in production

Product Cost Flows
Work

materials inventory process inventory
+ Raw materials
purchased Direct materials
= Raw materials + Direct labor
available for use + Mfg. overhead
in production = Total manufacturing
– Ending raw materials costs
inventory
in production

Product Cost Flows
Work

materials inventory + process inventory
+ Raw materials + + Total manufacturing
purchased = costs
= Raw materials = Total work in
available for use process for the
in production period
– Ending work in
process inventory
= Cost of goods
manufactured

Product Cost Flows

Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
Selling and Period Costs Selling and

FallAdministrative
2010 Mugan Administrative
13/82
Graphical Analysis of Activity Costs and Rate of Output
Curvilinear Total
Total Cost Curve
Dollars
Marginal Costs are the costs to produce one

more additional unit of output=slope.
Output
Start-up Normal Exceeding
Range Operations Capacity
The
Therelevant
relevantrange
Relevant Range
range
isisthe
theportion
portionof
ofthe
the
curvilinear
curvilineartotal
totalcost
cost
Total curve
curvethat
thatappears
appears
Dollars Relevant
Relevant in
inthe
thenormal
normal
Range
Range Total operations
operationsarea.
area.
}
Cost
Output
Start- Normal Exceeding
up Operation Capacity
Range s

The Linearity Assumption and the
Relevant Range
A
A straight
straight line
line
Economist’s
closely
closely
Curvilinear Cost approximates
approximates aa
Function curvilinear
curvilinear
variable
variable cost
cost
line
line within
within the
the
Relevant
Total Cost
relevant
relevant range.
range.
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Fall 2010 Mugan Activity 16/82

Cost Classifications for
Predicting Cost Behavior
By
By reaction
reaction to
to changes
changes in in the
the level
level of
of
activity
activity within
within the
the relevant
relevant range.
range.
 Total
Total variable
variable costs
costs change
change when
when activity
activity
changes.
changes.
 Total
Total fixed
fixed costs
costs remain
remain unchanged
unchanged when
when
activity
activity changes.
changes.

Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)

Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

Extent of Variable Costs
The proportion of variable costs differs across organizations. For
example . . .
A public utility with A manufacturing company

large investments in will often have many
equipment will tend variable costs.
to have fewer
variable costs.
A merchandising company
A service company usually will have a high
will normally have a high proportion of variable costs
proportion of variable costs. like cost of sales.

Examples of Variable Costs
 Merchandising companies – cost of goods
sold.
 Manufacturing companies – direct
materials, direct labor, and variable
overhead.
 Merchandising and manufacturing
companies – commissions, shipping costs,
and clerical costs such as invoicing.
 Service companies – supplies, travel, and
clerical

Types of Fixed Costs
Committed
Committed Discretionary
Discretionary
Long-term,
Long-term, cannot
cannot bebe May
May be
be altered
altered in
in the
the short-
short-
significantly term
term by
by current
current managerial
managerial
significantly reduced
reduced decisions
decisions
in
in the
the short
short term.
term.
Examples Examples
Examples
Depreciation on Advertising
Advertising and
and
Equipment and Research
Research and
and
Real Estate Taxes Development
Development

Mixed Costs
Y
Total Mobile Phone Cost
t
cos
ed
i x
l m
t a
To Fixed Monthly
Phone Charge
X Fixed Monthly
Activity (minutes) Phone Charge

Mixed Costs
Y
Total Mobile Phone Cost
s t
co
d
i xe
l m
t a
To Variable
Cost per minute
X Fixed Monthly
Activity (minutes) Phone Charge

The Scattergraph Method
Plot
Plot the
the data
data points
points on
on aa graph
graph
Y (total
(total cost
cost vs.
vs. activity).
activity).
20
* * * ** *
**
Cost
10 * *
0 X
0 1 2 3 4
Activity - output
Draw
Draw aa line
line through
through the
the data
data points
points with
with about
about anan
Y equal
equal numbers
numbers of of points
points above
above and
and below
below the
the line.
line.
20
* * * ** *
**
Cost
10 * *
0 X
0 1 2 3 4
Activity - output
Use
Useone
onedata
datapoint
point to
to estimate
estimate the
thetotal
total level
level of
of activity
activity and
andthe
thetotal
total
cost.
cost.
Y Total cost = TL11
20
* * * ** *
**
Cost
10 * *
Intercept = Fixed cost: TL 10
0 X
0 1 2 3 4
Activity - output
Activity 0.8 units

Make
Make aa quick
quick estimate
estimate of
of variable
variable cost
cost per
per unit
unit and
and determine
determine the
the cost
cost
equation
equation..
Total Cost at 0.8 units 11 TL
Less: Fixed cost 10 TL
Estimated total variable cost 0.8 units 1 TL
TL1
Variable cost per unit = = TL1.25/ unit of output
0.8
Y = TL10 + TL1.25X
Total cost Number of units

The High-Low Method
Assume the following hours of maintenance work and the total maintenance
costs for six months.
High
level of
activity
Low
level of
activity

Assigning Costs to Cost Objects
Direct costs Indirect costs

 Costs that can be  Costs that cannot be
easily and easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost object. or other cost object.
 Examples: direct  Example:
material and direct manufacturing
labor overhead

Cost Classifications for Decision
Making
 Every decision involves a choice
between at least two alternatives.
 Only those costs and benefits that

differ between alternatives are
relevant in a decision. All other costs
and benefits can and should be
ignored.

Differential Costs and Revenues
Costs and revenues that differ

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

TL2,000 – TL1,500 = TL500
Differential cost is:

Fall 2010 TL 300
Mugan 32/82
Opportunity Costs
The potential benefit that is given up when one alternative

is selected over another.
Example: If you were not attending this

program, you could save TL 10,000 per year.
Your opportunity cost?

Sunk Costs
Sunk costs have already been incurred and cannot

be changed now or in the future. They should be
ignored when making decisions.
Example: You bought an automobile that

cost TL10,000 two years ago. The TL10,000
cost is sunk because whether you drive it,
park it, trade it, or sell it, you cannot change
the TL10,000 cost.

Summary of the Types of Cost
Classifications
 Financial reporting
 Predicting cost behavior
 Assigning costs to cost objects-
products- determining unit costs
 Decision making

Income Statement Presentation
Comparison of the Contribution Income Statement
with the Traditional Income Statement
Traditional Approach-Financial Contribution Approach-Decision Making

(costs organized by function) (costs organized by behavior)
Sales 100,000 TL Sales 100,000 TL

Less cost of goods sold 70,000 TL Less variable expenses 60,000 TL
Gross margin 30,000 TL Contribution margin 40,000 TL
Less operating expenses 20,000 TL Less fixed expenses 30,000 TL
Net operating income 10,000 TL Net operating income 10,000 TL
Used primarily for Used primarily by

external reporting. management.
Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
The labor costs incurred

during idle time are ordinarily
treated as manufacturing
overhead.
Overtime
The overtime premiums for all factory
workers are usually considered to be part
of manufacturing overhead.

Unit Costs
 Direct Material- determined as actual usage
of materials or by engineering estimates
(standard costs)
 Direct Labor- determined as actual usage of
materials or by engineering estimates
(standard costs)
 MOVH – common production costs assigned
to each unit
 Traditional
 ABC
 Unit cost = DM + DL + MOVH per unit

Labor Fringe Benefits
Fringe benefits include employer paid costs for

insurance programs, retirement plans,
supplemental unemployment programs, Social
Security, Medicare, workers’ compensation and
unemployment taxes.
Some companies Other companies treat

include all of these fringe benefit
costs in expenses of direct
manufacturing laborers as additional
overhead.
Fall 2010 Mugan
direct labor costs.
40/82
How to allocate indirect costs to
products MOVH
 Depends on the nature of products and
production system
 Traditional- direct labor hours (DLH);
number of units produced;
 Automation and computer technology have
increased the indirect costs in many
organizations
 Activity-Based Costing (ABC)- a procedure
that attempts to provide a more precise
indirect cost allocation
Numerical Example- Unit Cost
 THD Company produces 4,000 units of Product A
and 20,000 units of Product B each year.
 Direct Material for Product A is TL 10; Product B 15
 Total indirect product costs are TL 900,000, and
total direct labor hours(DLH) are 50,000.
 Product A requires 2.5 DLH and Product B requires
2.0 DLH to produce.
 Direct labor cost per hour TL 30
Continue
Numerical Example
Management at THD believes that indirect costs
are actually caused by the following five activities:
Estimated
Activity Costs
Machine setups 255,000 TL
Quality inspections 160,000 TL
Production orders 81,000 TL
Machine-hours worked 314,000 TL
Material receipts 90,000 TL
Total 900,000 TL

Unit Cost - Traditional
THD uses DLH as the basis
1.determine the allocation of MOVH per
unit = predetermined overhead
rate(PDOR) PDOR= Total Overhead/
Total DLH
2. determine MOVH per unit = PDOR x
DL Cost per hour
3. add DM,DL and MOVH per unit

PDOR and MOVH
Total Overhead
Direct Labor Ho
Product A - 2.5
Unit Costs – Traditional
UNIT COST
Direct Mater
Numerical Example-MOVH by ABC
The following activity data was supplied by
the management of THD
Activity Total Product A Product B

Machine setups 5,000 3,000 2,000
Quality inspections 8,000 5,000 3,000
Production orders 600 200 400
Machine-hours worked 40,000 12,000 28,000
Material receipts 750 150 600

Numerical Example-MOVH by
ABC
This activity data can be used to develop application
rates for each of the five activities.
T o ta l R a te p e r
A c ti v i ty C o sts T r a n sa c ti o n s T r a n sa c ti o n
M a c h i n e se tu p s 2 5 5 , 0 0 0 T÷L 5,000 = 51 TL
Q u a l i ty i n sp e c ti o n s 1 6 0 , 0 0 0÷ 8,000 ?

ABC
T o ta l R a te p e r
A c ti v i ty C o sts T r a n sa c ti o n sT r a n sa c ti o n
M a c h i n e se tu p s 2 5 5 , 0 0 0 T÷ L 5,0 00 = 51 TL
Q u a l i ty i n sp e c ti o n s 1 6 0 , 0 0 0÷ 8,0 00 = 20 .00
P r o d u c ti o n o r d e r s 8 1 , 0 0 0÷ 600 = 1 3 5 .0 0
M a c h i n e -h o u r s w o r 3k 1e 4d, 0 0 0÷ 4 0 , 0 0 0= 7.8 5
M a te r i a l r e c e i p ts 9 0 , 0 0 0÷ 750 = 1 2 0 .0 0

ABC
Now that we have calculated the application rates, we
use the rates to assign indirect costs to Product A.
A ctivity A B C R a te U sa g e Am ount
M a c h in e se tu p s 5 1 T L× 3 ,0 00 = 15 3,00 0 T L
Q u a lity in sp e ctio n s 2 0.00 × 5 ,0 00 ?

ABC
Now that we have calculated the application rates, we
use the rates to assign indirect costs to Product A.
A c ti v i ty A B C R a te U s a g e Am ount
M a c h i n e se tu p s 5 1 T L× 3 ,0 0 0= 153,000 T L
Q u a l i ty i n s p e c ti o n s 2 0 . 0 0× 5 ,0 0 0= 100,000
P r o d u c ti o n o r d e r s 1 3 5 . 0 0× 200 = 27,000
M a c h i n e -h o u r s w o r k e d7 . 8 5 × 1 2 , 0 0 0= 94,200
M a te r i a l r e c e i p ts 1 2 0 . 0 0× 150 = 18,000
T o ta l i n d i r e c t c o s ts a ssi g n e d 392,200 T L
N u m b e r o f u n i ts p r o d u c e d ÷ 4 ,0 0 0
I n d i r e c t p r o d u c t c o sts p e r u n i t-M O V H 98 TL

ABC
MOVH costs for a unit of Product B
A c tiv ity A B C R a te U sa g e Am ount
M a c h in e se tu p s 5 1 T L× 2 ,0 0 0 = 1 0 2 ,0 0 0 T L
Q u a lity in sp e c tio n s 2 0 .0 0 × 3 ,0 0 0 = 6 0 ,0 0 0
P ro d u c tio n o rd e rs 1 3 5 .0 0× 400 = 5 4 ,0 0 0
M a c h in e -h o u rs w o rk e d 7 .8 5 × 2 8 ,0 0 0 = 2 1 9 ,8 0 0
M a te ri a l re c e ip ts 1 2 0 .0 0× 600 = 7 2 ,0 0 0
T o ta l in d ire c t c o sts a ssig n e d 5 0 7 ,8 0 0 T L
N u m b e r o f u n its p ro d u c e d ÷ 2 0 ,0 0 0
In d ire c t p ro d u c t c o sts p e r u n it-M O V H 25 T L

Reconciliation check
Reconciliation Amount
Indirect costs assigned to Product A $ 392,200
Indirect costs assigned to Product B 507,800
Total indirect costs assigned $ 900,000

Unit Costs – Using ABC
UNIT COSTS Product A Product B

Direct Material 10 15
Direct Labor ( DLH x 30 TL / DLH) 75 60
Manufacturing Overhead 98.05 25.39
Unit Cost 183.05 100.39

Comparison of Unit Costs

Advantages of ABC
Activity-based costing is very useful in firms . . .
With multiple
products and
services.
That have products
and services that use
indirect activities
in different ways.
That have a high
percentage of indirect
product costs.
Problems With ABC
Proper identification
of cost drivers is
difficult.
ABC ignores the
difference between
the fixed and variable
costs of an activity.
ABC is more costly
because additional
measurements and
observations must
be made.
Quality of Conformance
When the overwhelming majority of

products produced conform to
design specifications and are free
from defects.

Prevention and Appraisal Costs
Support activities
Prevention whose purpose is to
Costs reduce the number of
defects
Incurred to identify
defective products
Appraisal Costs before the products are
shipped

Internal and External Failure
Costs
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers

Examples of Quality Costs
Appraisal Costs
Prevention Costs • Testing & inspecting
• Quality training
incoming materials
• Quality circles
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment
External Failure Costs

Internal Failure Costs • Cost of field servicing &
• Scrap
handling complaints
• Spoilage
• Warranty repairs
• Rework
• Lost sales

Distribution of Quality Costs
When quality of conformance is low,

total quality cost is high and consists
mostly of internal and external failure.
Companies can reduce their total

quality cost by focusing on
prevention and appraisal. The cost
savings from reduced defects usually
swamps the costs of the additional
prevention and appraisal efforts.

Ventura Company
Quality Cost Report
For Years 1 and 2
Year 2 Year 1
Amount Percent* Amount Percent*
Prevention costs:
Systems development $ 400,000 0.80% $ 270,000 0.54%
Quality training 210,000 0.42% 130,000 0.26%
Supervision of prevention activities 70,000 0.14% 40,000 0.08%
Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs:
Inspection
Reliability testing
600,000
580,000
1.20%
1.16%
560,000
420,000
1.12%
0.84%
Quality cost
Supervision of testing and inspection
Depreciation of test equipment
120,000
200,000
0.24%
0.40%
80,000
140,000
0.16%
0.28%
reports provide
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
an estimate of
Internal failure costs:
Net cost of scrap 900,000 1.80% 750,000 1.50% the financial
Rework labor and overhead 1,430,000 2.86% 810,000 1.62%
Downtime due to defects in quality 170,000 0.34% 100,000 0.20% consequences
Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00% of the
External failure costs:
Warranty repairs 400,000 0.80% 900,000 1.80%
company’s
Warranty replacements
Allowances
870,000
130,000
1.74% 2,300,000
0.26% 630,000
4.60%
1.26%
current defect
Cost of field servicing
Total external failure cost
600,000
2,000,000
1.20% 1,320,000
4.00% 5,150,000
2.64%
10.30%
rate.
Total quality cost $ 7,500,000 15.00% $ 9,000,000 18.00%
* As a percentage of total sales. In each year sales totaled $50,000,000.

Quality Cost Reports: Graphic
Form
$10 20
9
Quality 18
reports
Quality Cost as a Percentage of Sales

8 16
can also
Quality Cost (in millions)
7 14
External External External External
6 Failure Failure
be 12 Failure Failure
5
prepared 10
4 Internal 8 Internal
3 Internal
Failure in 6 Internal
Failure
2
Failure
Appraisal
graphic 4
Failure
Appraisal
1
Appraisal
form. 2
Appraisal
Prevention Prevention Prevention Prevention

0 0
1 2 1 2
Year Year

Uses of Quality Cost
Information
Help managers see the
financial significance of
defects.
Help managers identify the

relative importance of the
quality problems.
Help managers see

whether their quality costs
are poorly distributed.
ISO 9000 Standards
ISO 9000 standards have become an international
measure of quality. To become ISO 9000 certified, a
company must demonstrate:
1. A quality control system is in use, and the

system clearly defines an expected level of
quality.
2. The system is fully operational and is
backed up with detailed documentation of
quality control procedures.
3. The intended level of quality is being
achieved on a sustained basis.
Product Life Cycle

http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
Introduction Growth Maturity Decline

http://www.ee.unb.ca/powereng/courses/E
E2703/EE2703_DetailedDesign2.pdf

http://www.ee.unb.ca/powereng/courses/E
E2703/EE2703_DetailedDesign2.pdf

Appendix
Least-Squares
Regression Using
Microsoft Excel.

Simple Regression Analysis
Example
Matrix,
Matrix, Inc.
Inc. wants
wants to
to
know
know itsits average
average
fixed
fixed cost
cost and
and
variable
variable cost
cost per
per unit.
unit.
Using
Using the
the data
data to
to the
the
right,
right, let’s
let’s see
see how
how toto
do
do aa regression
regression using
using
Microsoft
Microsoft Excel.
Excel.
Simple Regression Using Excel
You
You will
will need
need three
three pieces
pieces of
of
information
information fromfrom youryour
regression
regression analysis:
analysis:
1.
1. Estimated
Estimated Variable
Variable CostCost per
per
Unit
Unit (line
(line slope)
slope)
2.
2. Estimated
Estimated FixedFixed Costs
Costs (line
(line
intercept)
intercept)
3.
3. Goodness
Goodness of of fit,
fit, or
or R
R22
To
To get
get these
these three
three pieces
pieces
information
information wewe will
will need
need to
to
use
use three
three different
different Excel
Excel
functions.
functions.
LINEST,
LINEST, INTERCEPT,
INTERCEPT, && RSQ
RSQ
Place
Place your
your cursor
cursor in in
cell
cell F4
F4 and
and press
press the the
== key.
key. Click
Click on
on the the
pull
pull down
down menu
menu and and
scroll
scroll down
down toto “More
“More
Functions
Functions .. .. .”.”

Scroll
Scroll down
down to
to the
the
““Statistical
Statistical”,”,
functions.
functions. Now
Now
scroll
scroll down
down the
the
statistical
statistical
functions
functions until
until you
you
highlight
highlight
““LINEST
LINEST””

1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

Here is the
estimate of the
slope of the line.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

With
With you
you cursor
cursor in in cell
cell
F5,
F5, press
press the
the == key
key
and
and go
go to
to the
the pull
pull
down
down menu
menu forfor
special
special functions.
functions.
Select
Select Statistical
Statistical and
and
scroll
scroll down
down to to
highlight
highlight the
the
INTERCEPT
INTERCEPT function.
function.

Here is the
estimate of the
fixed costs.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.
Finally,
Finally, we we will
will
determine
determine the the
““goodness
goodness of of
fit
fit”, or R ,, by
”, or R22
by
using
using the the RSQ
RSQ
function.
function.

Here is the
estimate of R2.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

EMBA 5403 Managerial WK 2

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Cost Classification and Cost

Fall 2010 Mugan 5/82

Costs necessary to get All executive,

Fall 2010 Mugan 6/82

Product costs include Period costs include

Fall 2010 Mugan 7/82

Beginning raw Direct materials

Fall 2010 Mugan 8/82

Beginning raw Beginning work in

Fall 2010 Mugan 9/82

Beginning raw Beginning work in

Fall 2010 Mugan 10/82

Beginning raw Beginning work in

Fall 2010 Mugan 11/82

Fall 2010 Mugan 12/82

Direct Labor Work in

Selling and Period Costs Selling and

Marginal Costs are the costs to produce one

Fall 2010 Mugan 15/82

Fall 2010 Mugan Activity 16/82

Fall 2010 Mugan 17/82

Behavior of Cost (within the relevant range)

Fall 2010 Mugan 19/82

A public utility with A manufacturing company

Fall 2010 Mugan 20/82

Fall 2010 Mugan 21/82

Fall 2010 Mugan 22/82

Fall 2010 Mugan 23/82

Fall 2010 Mugan 24/82

Activity 0.8 units

Total cost Number of units

Fall 2010 Mugan 29/82

Direct costs Indirect costs

Fall 2010 Mugan 30/82

 Only those costs and benefits that

Fall 2010 Mugan 31/82

Costs and revenues that differ

Differential revenue is:

Differential cost is:

The potential benefit that is given up when one alternative

Example: If you were not attending this

Your opportunity cost?

Fall 2010 Mugan 33/82

Sunk costs have already been incurred and cannot

Example: You bought an automobile that

Fall 2010 Mugan 34/82

Fall 2010 Mugan 35/82

Traditional Approach-Financial Contribution Approach-Decision Making

Sales 100,000 TL Sales 100,000 TL

Used primarily for Used primarily by

The labor costs incurred

Fall 2010 Mugan 38/82

Fall 2010 Mugan 39/82

Fringe benefits include employer paid costs for

Some companies Other companies treat

Fall 2010 Mugan 43/82

Fall 2010 Mugan 44/82

Activity Total Product A Product B

Fall 2010 Mugan 47/82

Fall 2010 Mugan 48/82

Fall 2010 Mugan 49/82

Fall 2010 Mugan 50/82