Managing Resources, Activities, and People

Directing
An organization . . .

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People
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 Strategic Cost Management
and the Value Chain

Product
Design
Production
Research
and
Development Marketing

Securing raw
materials and Distribution
other resources

Customer
Start Service
2
 Uses of
Accounting Information
Scorekeeping is the accumulation and
classification of data.

Attention directing involves reporting

and interpreting information.

Problem solving quantifies the likely

results of possible courses of action.
3
What Do We Mean By a Cost?

A Cost
is the measure of
resources given
up to achieve a
particular purpose.

4
 Cost and Cost Terminology

Cost is a resource sacrificed or forgone to achieve

a specific objective.
An actual cost is the cost incurred (a historical cost)
as distinguished from budgeted costs.
A cost object is anything for which a separate
measurement of costs is desired.

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Cost and Cost Terminology

Cost Object
Cost
Accumulation Cost Object

Cost Object
Cost Tracing
Assignment
Allocating
6
 Examples of Cost Objects at Procter & Gamble

Cost Object Illustration

Product Crest Tartar Control: Original Flavor toothpaste product

Service Telephone hotline providing information and assistance to users of Pampers
Diapers products

Project R&D project on alternative scent-free formulations of Tide detergent products

Customer Safeway, the retailer, which purchases a broad range of Procter & Gamble
products

Brand category Vidal Sassoon range of hairstyle products

Activity Development and updating Web site on the Internet or setting up machines for
production

Department Environmental, Health, and Safety Department

7
What Do We Mean By a Cost?

A Cost
is the measure of
resources given
up to achieve a
particular purpose.

8
Cost Classifications

Cost behavior means

how a cost will react to
changes in the level of
business activity.
– Total variable costs change
when activity changes.
– Total fixed costs remain
unchanged when activity
changes.

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 Cost Classifications

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Total variable cost changes Variable cost per unit

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

10
 Direct and Indirect Costs

Direct costs Indirect costs

• Costs that can be • Costs that must be
easily and conveniently allocated in order to be
traced to a product or assigned to a product or
department. department.
• Example: cost of paint in • Example: cost of national
the paint department of an advertising for an airline
automobile assembly plant. is indirect to a particular
flight.

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 Direct and Indirect Costs

• A cost can be direct to the department, but

indirect to units of product produced in the
department.
– Example: department manager’s salary.

• Tracing costs directly to departments or

products facilitates responsibility accounting.

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 Controllable and Uncontrollable Costs

A cost that can be significantly influenced

by a manager is a controllable cost.

Cost item Manager Classificaton

Cost of food used Restaurant Controllable
in a restaurant manager
Cost of national Restaurant Uncontrollable
advertising by a manager
restaurant chain
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Relationships of Types of Costs

Direct

Variable Fixed

Indirect
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 Examples of Costs in Combinations of the Direct/Indirect and
Variable/Fixed Cost Classifications
Assignment of Costs to Cost Object

Direct Costs Indirect Costs

 Cost object: Maruti 800  Cost object: Maruti 800

Example: Tires used in Example: Power costs at
assembly of Gurgaon plant
automobile Power usage is
metered only to
Variable Cost
the plant, where
multiple
products are
Cost assembled
Behavior
Pattern  Cost object: Maruti 800  Cost object: Maruti 800
Example: Salary of Example: Annual lease
supervisor on costs at Gurgaon
Maruti 800 plant. Lease is
Fixed Cost assembly line for whole plant,
where multiple
products are
assembled. 15
 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
Rs. 10,00,000 per year.
Your opportunity cost
of attending college for one year is
Rs. 10,00,000.

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 Differential Costs

Costs that differ between alternatives.

Example: You can earn Rs.75,000 per month in your

hometown or Rs. 1,00,000 per month in a nearby city.
Your commuting costs are Rs. 2,500 per month in your
hometown and Rs. 15,000 per month to the city.

What is your differential cost?

Rs. 15,000 – Rs. 2,500 = Rs. 12,500

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 Sunk Costs
All costs incurred in the past that cannot be changed by
any decision made now or in the future.

Sunk costs should not be considered in decisions.

– Example: You bought an automobile that cost Rs. 6,00,000
two years ago. The Rs. 6,00,000 cost is sunk because
whether you drive it, park it, trade it, or sell it, you cannot
change the Rs. 6,00,000 cost.

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 Marginal Costs and Average Costs

The total cost to

The extra cost
produce a quantity
incurred to produce
divided by the
one additional unit.
quantity produced.

Marginal and average costs are

largely a function of cost behavior
-- variable and fixed costs.
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 Manufacturing Costs

Direct Direct Manufacturing

Labour Material Overhead

The
Product

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 Direct Material

Cost of raw material that is used to

make, and can be conveniently
traced, to the finished product.
Example:
Example:
Steel
Steelused
usedto
to
manufacture
manufacture
the
theautomobile.
automobile.

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 Direct Labour

Cost of salaries, wages, and fringe

benefits for personnel who work
directly on manufactured products.

Example:
Wages paid to an
automobile assembly
worker.

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 Manufacturing Overhead

All other manufacturing costs

Indirect Indirect Other

Material Labour Costs

Materials used to support the

production process. Examples:
lubricants and cleaning supplies
used in an automobile assembly
plant.

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 Manufacturing Overhead
All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

Cost of personnel who do

not work directly on the
product. Examples:
maintenance workers,
janitors and security
guards.
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 Manufacturing Overhead
All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

Examples: depreciation on
plant and equipment,
property taxes, insurance,
utilities, overtime premium,
and unavoidable idle time.
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Cost Classifications on Financial Statements – Balance
Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Cash
– Receivables
 Receivables
– Prepaid Expenses
 Prepaid Expenses
– Merchandise Inventory
 Inventories
Raw Materials
Work in Process
Finished Goods
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 BALANCE SHEET INCOME STATEMENT

Inventoriable
Costs Revenues
Revenues
when deduct
Finished
Finished sales
Materials
Materials Cost
Goods
Goods occur Cost of
of
Inventory
Inventory Goods
Inventory
Inventory Goods Sold
Sold
Equals Gross Margin
deduct
Work
Work in
in
Process Period
Period
Process Costs
Inventory
Inventory Costs
Equals Operating Income
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 Schedule of Cost of Goods
Manufactured
Comet Computer Corporation
Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Computation of Cost of Raw Material Used

Schedule of Cost of Goods

Raw-material inventory, January 1
Add: Purchases of raw materials
$ 6,000
134,000
Manufactured
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used $ 134,980
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labour 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Schedule of Cost of Goods
Manufactured
Include all direct labor costs incurred
duringComputer
Comet the current period.
Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labour 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Computation of Total Manufacturing Overhead

Schedule
Indirect material of Cost of Goods
Indirect labor
$ 10,000
40,000
DepreciationManufactured
on factory 90,000
Depreciation on equipment 70,000
Utilities 15,000
Insurance 5,000
Total manufacturing overhead $ 230,000
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labour 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Schedule of Cost of Goods
Manufactured
Beginning work-in-process
inventory is carried over
from the prior period.
Comet Computer Corporation
Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 ` 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Schedule of Cost of Goods
Manufactured
Ending work-in-process inventory
contains the cost of unfinished goods, and
is reported in the current assets section of
Comet Computerthe balance sheet.
Corporation
Schedule of Cost of Goods Manufactured
Raw material used $ 134,980
Direct labour 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
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 Income Statement for a
.

Manufacturer

Comet Computer Corporation

Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
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 Income Statement for a
Manufacturer
Comet Computer Corporation
Schedule of Cost of Goods Sold
Income Statement for
For the Year Ended December 31, 20X2
Finishe d-goods inventory, Jan. 1 $
a 200
Manufacturer
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Deduct Finished-goods inve ntory, Dec. 31 190
Comet
Cost of goods sold
Computer Corporation $ 415,010
Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
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