2-1

Basic concepts of Cost Accounting

BBA-IV (A,B,)
 2-2

What is Cost Accounting?

The branch of accounting
that deals with
calculation of cost per
unit, management of
cost per unit and control
of cost per unit is called
cost accounting
 2-3

Objectives of Cost Accounting

1-To calculate accurate profit
2-To calculate correct value of ending
inventories
3-To calculate correct value of C.G.S
4- To calculate accurate price of Goods
 2-4

Learning Objective 1

Identify and give

examples of each of the
three basic
manufacturing cost
categories.
 2-5

Classifications of Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead or FOH

The Product
 2-6

Direct Materials
Raw materials that become an integral
part of the product and that can be
easily traceable

Example: Tyres in an automobile

 2-7

Direct Labor

Those labor costs that can be easily

traced to individual units of product.

Example: Wages paid to automobile assembly workers

 2-8

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

Examples: Indirect materials and indirect labor

 2-9

Nonmanufacturing Costs

Administrative
Costs

All executive,
organizational, and
clerical costs.
 2-10

Learning Objective 2

What is difference
between product costs
and period costs and give
examples of each.
 2-11

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
 2-12

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.
 2-13

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.
 2-14

Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost
 2-15

Learning Objective 3

Understand cost
behavior patterns
including variable costs,
fixed costs, and mixed
costs.
 2-16

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.
 2-17

Variable Cost

Your total texting bill is based on how

many texts you send.
Total Texting Bill

Number of Texts Sent

 2-18

Variable Cost Per Unit

The cost per text sent is constant at

Rs. 2 per text message.

Cost Per Text Sent

Number of Texts Sent

 2-19

Fixed Cost
Your monthly contract fee for your cell phone is
fixed for the number of monthly minutes in your
contract. The monthly contract fee does not
change based on the number of calls you make.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
 2-20

Fixed Cost Per Unit

Within the monthly contract allotment, the average fixed cost per
cell phone call made decreases as more calls are made.

Monthly Cell Phone

Contract Fee

Number of Minutes Used

Within Monthly Plan
 2-21

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
at a rate of $30,000 for each
additional 1,000 square feet.
 2-22

Fixed Costs and the Relevant Range

90
Rent Cost in Thousands

Relevant
60
of Dollars

Range

30

0
0 1,000 2,000 3,000
Rented Area (Square Feet)
 2-23

Cost Classifications for Predicting Cost

Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost Increase Variable cost per unit

and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level increase and
level within the relevant range. increases as the activity level falls.
 2-24

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.
 2-25

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.
 2-26

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

o st
d c
xe
al mi
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt )
Utility Charge
 2-27

Mixed Costs

Y
Total Utility Cost

ost
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
 2-28

Mixed Costs – An Example

If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt and your monthly
activity level is 2,000 kilowatt , what is the amount of
your utility bill?
 2-29

Learning Objective 4

Analyze a mixed cost

using the high-low
method.
 2-30

The High-Low Method – An Example

The variable cost

per hour of
maintenance is
equal to the change
in cost divided by
the change in hours.

$2,400
= $6.00/hour
400
 2-31

The High-Low Method – An Example

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)
Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = $4,700
 2-32

The High-Low Method – An Example

The Cost Equation for Maintenance

Y = $4,700 + $6.00X
 2-33

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
 2-34

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
 2-35

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
 2-36

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
 2-37

Learning Objective 5

Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.
 2-38

The Traditional and Contribution Formats

 2-39

Learning Objective 6

Understand the differences

between direct and indirect
costs.
 2-40

Assigning Costs to Cost Objects

Direct costs Indirect costs
• Costs that can be • Costs that cannot
easily traced to a be easily traced to
unit of product a unit of product
• Examples: direct • Example:
material and direct manufacturing
labor overhead
 2-41

Learning Objective 7

Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.
 2-42

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 travelling cost to
the city is $300 per month.

Differential revenue is: Differential cost is:

$2,000 – $1,500 = $500 $300
 2-43

Opportunity Cost
The potential benefit that is
given up when one alternative is
selected over another.
Example: If you were
not attending cost
accounting class,
you could be earning
$25,00 per semester.
Your opportunity cost
of attending accounting
class for one semester
is $25,00.
 2-44

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.
 2-45

Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have enough 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.
 2-46

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 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.
 2-48

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 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.
 2-50

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.
 2-51

Thank You