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Cost Terms, Concepts and Classifications: Chapter Two
Cost Terms, Concepts and Classifications: Chapter Two
Classifications
Chapter Two
Learning Objective 1
Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
Direct Materials
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Non-manufacturing Costs
Selling Administrative
Costs Costs
Learning Objective 2
Distinguish between
product costs and period
costs and give examples
of each.
Sale
Quick Check
Quick Check
Classifications of Costs
Prime Conversion
Cost Cost
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
MegaLoMart
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses
Prepaid Expenses
Inventories
Merchandise
• Raw Materials
Inventory
• Work in Process
• Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Materials waiting to
Prepaid Expenses be processed.
Prepaid Expenses
Partially complete Inventories
Merchandise
products – some
Inventory • Raw Materials
material, labor, or • Work in Process
overhead has been • Finished Goods
added.
Completed products
awaiting sale.
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Learning Objective 3
Prepare an income
statement including
calculation of the cost of
goods sold.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory $ 14,200
+ Purchases 234,150
Goods available
for sale $ 248,350
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold $ 236,250
Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
Quick Check
Quick Check
Learning Objective 4
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs
costsare
arecosts
costs
+ Raw materials + Mfg. overhead incurred
incurredtoto
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
available for use
direct
directmaterial
material
in production into
intoaafinished
finished
– Ending raw materials product.
product.
inventory
= Raw materials used
in production
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Learning Objective 5
Understand the
differences between
variable costs and fixed
costs.
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 thethe
relevant
relevant range.
range.
Total
Totalvariable
variablecosts
costs
change
changewhen
whenactivity
activity
changes.
changes.
Total
Totalfixed
fixedcosts
costsremain
remain
unchanged
unchangedwhen
whenactivity
activity
changes.
changes.
Variable Cost
Minutes Talked
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Telephone Charge
Per Minute
Minutes Talked
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Fixed Cost
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.
Quick Check
Quick Check
Learning Objective 6
Understand the
differences between direct
and indirect costs.
Learning Objective 7
Opportunity Cost
Sunk Costs
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
• Financial reporting
• Predicting cost behavior
• Assigning costs to cost objects
• Decision making
Appendix 2A
Learning Objective 8
(Appendix 2A)
Properly account for labor
costs associated with idle
time, overtime, and fringe
benefits.
Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
Overtime
Appendix 2B
Learning Objective 9
(Appendix 2B)
Identify the four types of
quality costs and explain
how they interact.
Quality of Conformance
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
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
Learning Objective 10
(Appendix 2B)
Prepare and interpret a
quality cost report.
* AsMcGraw-Hill/Irwin
a percentage of total sales. In each year sales totaled $50,000,000. Copyright © 2008, The McGraw-Hill Companies, Inc.
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$10 20
9
Quality 18
7
External External
can also 14
External External
6 Failure Failure
be 12 Failure Failure
5
prepared 10
4 Internal
Failure
in 8 Internal
Failure
3 Internal
Failure
graphic 6 Internal
Failure
2
Appraisal form. 4
Appraisal
Appraisal Appraisal
1 2
Prevention Prevention Prevention Prevention
0 0
1 2 1 2
Year Year
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End of Chapter 2