Managerial Accounting and Cost

Concepts

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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Topic
Cost concept, classification and behavior

Product costing

ABC and service costs

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Learning Objective

Identify and give examples

of each of the three basic
manufacturing cost
categories.
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Learning Objective

Distinguish between
product costs and period
costs and give examples of
each.
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Learning Objective

Understand cost behavior

patterns including variable
costs, fixed costs, and mixed
costs.
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Classifications of Manufacturing
Costs
Direct Direct Manufacturing
Materials Labor Overhead

The Product
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Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.

Example: The flour in the dough.

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Direct Labor

Those labor costs that can be easily traced to

individual units of product.

Example: Wages paid to bakers.

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Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.

Examples: Indirect materials and indirect labor

Materials used to support

the production process.
Examples: lubricants and
cleaning supplies to
maintain the bakery
equipment.
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Classification of
Nonmanufacturing Costs
Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.
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Product Costs Versus Period Costs

Product costs include Period costs include all
direct materials, direct selling costs and
labor, and administrative costs.
manufacturing
overhead.
Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
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Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
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Quick Check 
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
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Classifications of Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
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Variable costing
Product cost Period cost
-direct material -fixed manufacturing overhead

-direct labor -variable selling and

administrative expense
-variable manufacturing
overhead - Fixed selling and
administrative expense
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Absorption costing
Product cost Period cost
-direct material
-variable selling and
-direct labor administrative expense

-variable manufacturing - Fixed selling and

overhead administrative expense

-fixed manufacturing overhead

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Cost Classifications for

Predicting Cost Behavior
Cost behavior refers to
how a cost will react to
changes in the level of
activity. The most
common classifications
are:
▫Variable costs.
▫Fixed costs
▫Mixed costs.
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Variable Cost
A cost that varies, in total, in direct proportion to changes in
the level of activity. In some cases your total texting bill is
based on how many texts you send.
Total Texting Bill

Number of Texts Sent

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Variable Cost Per Unit

However, variable cost per unit is constant. In some cases the
cost per text sent is constant at constant cost per text.

Cost Per Text Sent

Number of Texts Sent

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The Activity Base (Cost Driver)

Units Machine
produced hours

A measure of what
causes the incurrence
of a variable cost

Miles Labor
driven hours
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Fixed Cost
A cost that remains constant, in total, regardless of
changes in the level of the activity. However, if
expressed on a per unit basis, the average fixed cost
per unit varies inversely with changes in activity.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
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Fixed Cost Per Unit

However, if expressed on a per unit basis, the average fixed cost
per unit varies inversely with changes in activity.

Monthly Cell Phone Contract

Fee

Number of Minutes Used

Within Monthly Plan
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Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced in the short-term by current
short term. managerial decisions

Examples Examples
Depreciation on Buildings Advertising and Research
and Equipment and Real and Development
Estate Taxes
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The Linearity Assumption and

the Relevant Range

A straight line
closely
approximates a
curvilinear
variable cost line
within the
relevant range.
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Fixed Costs and the Relevant

Range
For example, assume office space is available at a
rental rate of $30,000 per year in increments of
1,000 square feet.

Fixed costs would increase in a

step fashion at a rate of
$30,000 for each additional
1,000 square feet.
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Fixed Costs and the Relevant

Range
90
The relevant range
Thousands of Dollars

Relevant of activity for a fixed

Rent Cost in

60 cost is the range of

Range
activity over which
the graph of the
30 cost is flat.
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
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Cost Classifications for Predicting Cost

Behavior
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Quick Check 

Which of the following costs would be

variable with respect to the number of
cones sold at a Baskins & Robbins shop?
(There may be more than one correct
answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
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Quick Check 

Which of the following costs would be

variable with respect to the number of
cones sold at a Baskins & Robbins shop?
(There may be more than one correct
answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
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Mixed Costs
(also called semivariable costs)
A mixed cost contains both variable and fixed elements.
Consider the example of utility cost.
Y
Total Utility Cost

os t
d c
i x e
al m
Tot
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
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Mixed Costs

Y
Total Utility Cost

os t
c
i x ed
al m
Tot
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
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Mixed Costs – An Example

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Quick Check 
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
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Quick Check 
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
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Quick Check 
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
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Quick Check 
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
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The Traditional and Contribution

Formats

Used primarily for

external reporting.
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Assigning Costs to Cost Objects

Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
• Examples: direct • Example:
material and direct manufacturing
labor overhead
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Differential Cost and Revenue

Costs and revenues 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: Differential cost is:

$2,000 – $1,500 = $500 $300
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Opportunity Cost
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
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
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Sunk Costs
Sunk costs have already been incurred and cannot
be changed now or in the future. These costs
should be ignored when making decisions.

Example: Suppose you had purchased gold for $400 an

ounce, but now it is selling for $250 an ounce. Should you
wait for the gold to reach $400 an ounce before selling it?
You may say, “Yes” even though the $400 purchase is a
sunk costs.
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A company has reported the following costs and

expenses for the most recent year:

Direct materials ………………………………….…………69,000
Direct labor …………………………………….…………….35,000
Variable moh………..15,000
Fixed moh…………….28,000
Total moh ………………………………………..……………..43,000
Variable selling exp…12,000
Fixed selling exp………..18,000
Total selling exp……………………………….……………….30,000
Variable administrative exp….4,000
Fixed administrative exp……...25,000
Total administrative exp…………………………………….29,000
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Product cost = direct material + direct labor + MOH

=69,000+35,000+43,000
=147,000
Period cost = selling exp. +administrative exp.
=30,000 + 29,000
=59,000
Conversion cost = direct labor + MOH
=35,000 + 43,000
Prime cost = direct material + direct labor
=69,000 + 35,000
=104,000
Variable moh cost = direct materials + direct labor + variable MOH
=69,000 + 35,000 +15,000
=119,000
Total fixed cost = fixed MOH +fixed selling exp. + fixed administrative exp.
=28,000 + 18,000 + 25,000
= 71,000
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Quick Check 
Suppose you are trying to decide whether to drive or
take the train to Portland to attend a concert. You
have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
 2-47

Quick Check 
Suppose you are trying to decide whether to drive or
take the train to Portland to attend a concert. You
have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
 2-48

Quick Check 
Suppose you are trying to decide whether
to drive or take the train to Portland to
attend a concert. You have ample cash to
do either, but you don’t want to waste
money needlessly. Is the annual cost of
licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
 2-49

Quick Check 
Suppose you are trying to decide whether
to drive or take the train to Portland to
attend a concert. You have ample cash to
do either, but you don’t want to waste
money needlessly. Is the annual cost of
licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
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Quick Check 
Suppose that your car could be sold now
for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
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Quick Check 
Suppose that your car could be sold now
for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
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Computing Predertermined
overhead rate
Moh is an indirect cost
Moh consist of many different kind of cost
Having a large amount of fixed Moh

Predetermined overhead rate

= estimated total MOH cost/ estimated total
amount of the allocation base
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What if estimated total Moh cost is

not given?

y=a+bX
y= estimated total Moh cost
A= estimated total fixed Moh cost
B= estimated total variable Moh cost / unit of
allocation based
X=estimated total amount of allocation based
 2-54

Dickson company
(pohr of milling is based on machine hrs while assembly department is based on labor hours)

Milling department Assembly department

 Machine hours …….60,000
 Direct labor hours….8,000
 Total fixed moh……390,000
 Variable moh/mhr……..2.00
 Variable moh/lhr………………
 Machine hours ……….3,000
 Direct labor hours…..80,000
 Total fixed moh……50,000
 Variable moh/mhr…………..
 Variable moh/lhr…………3.75
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Dickson company
(pohr of milling is based on machine hrs while assembly department is based on labor hours)

Milling department Assembly department

 Machine hours ……….90  Machine hours ……….4
 Direct labor hours…….5  Direct labor hours…….20
 Direct materials………..800  Direct materials………..370
 Direct labor cost………..70  Direct labor cost………..280
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Dickson company
(pohr of milling is based on machine hrs while assembly department is based on labor hours)

Milling department Assembly department

y=a+bX y=a+bX
Y=390,000 + 2(60,000) Y=500,000 + 3.75(80,000)
=510,000 =800,000

pohr = E total MOH cost/E pohr = E total MOH cost/E

total amount of allocation total amount of allocation
based based
=510,000/60,000 =800,000/80,000
=8.5 =10
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Dickson company
(pohr of milling is based on machine hrs while assembly department is based on labor hours)

Milling department Assembly department

 Machine hours ……….90
 Direct labor hours…….5
 Direct materials………..800
 Direct labor cost………..70
 Manuf overhead……….765
 Machine hours ……….4
 Direct labor hours…….20
 Direct materials………..370
 Direct labor cost………..280
 Manuf overhead……….200