Topic 6 Introduction To Cost

Topic 6:
Introduction to Cost
Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTRODUCTION
 Cost- monetary value of goods and services paid by
producers and consumers
 Ex.: a consumer typically equates cost with the price of
a good or a service
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost
Monetary measure of resources given up to attain an objective (such as

acquiring a good or delivering a service)
Cost Categories
 Association with cost object

 Cost object is anything for which management
wants to collect or accumulate costs
 Reaction to changes in activity
 Classification on the financial statements
Cost Object (example)
 Departments
1. Food and Beverages
2. Packaging
3. Fuel and Oil
4. Energy
5. Infrastructure
 Products
Association with a Cost Object
 Direct—traceable to a cost object

 Indirect—not conveniently or practically
traceable to a cost object
 Treated as overhead
 Allocated
Association with Cost Object
 Direct Costs- fabric/leather, zipper,

accessories, direct labor costs
 Indirect Costs- rent, telephone, electricity,
depreciation
Association with Cost Object
 Classification as DIRECT or INDIRECT

depends on the cost object specification
 Ex. Depreciation Cost
Classification on the Financial
Statements
 Unexpired—balance sheet assets
 Expired—income statement expenses
 Product—inventoriable costs
 Prime—direct material and direct labor
 Conversion—direct labor and overhead
 Product costs are unexpired before sale
 Product costs are expired when sold
 Period—expensed in period incurred
Basic Financial Statements
Unexpired and Expired Costs
Product Costs
 Product costs
 Direct material—Measurable part of a product
 Direct labor—Labor used to manufacture a
product or perform a service
 Overhead—Indirect production cost
 First appear on the balance sheet in
inventory accounts
 Transferred to the income statement when
product is sold
Period Costs
 Period costs
 Selling and administrative costs
 Distribution costs
 Cost to warehouse, transport, and/or deliver a product or
service
 Major impact on managerial decision making
 Appear on the income statement when
incurred
 Expensed when incurred
Product and Period Costs
The Conversion Process
 Change inputs into outputs
The Conversion Process
Input Output
Purchase Product or
raw materials Service
or supplies
CONVERSION
Degrees of Conversion
Low Moderate High
Moderate
 Low  High
 Department stores  Manufacturing
 Gas stations  Construction
 Jewelry stores  Agriculture
 Travel agencies  Architecture
 Auditing
 Moderate
 Mining
 Florists
 Printing
 Meat markets
 Restaurants
 Oil-change businesses
Retail Company
Input
Output
Purchase
Warehouse
products
and/or display
for resale
Purchase finished goods Sell to

Resell to customers customer
Service Company
Input
Purchase
supplies
Significant amount of labor
Tangible or intangible output
Use supplies,
labor, overhead Output
to provide service
Sell to
customer
Manufacturer
Significant amount of labor and machinery
Input
Tangible output Output
Purchase Finished
raw materials product
and supplies
Production
Center Sell to
add labor and
overhead
customer
Cost Accumulation in a
Manufacturing Company
Materials
Inventory
Work in Process
Inventory
Finished Goods Cost of
Inventory Goods Sold
Income
Balance Sheet Statement
Product Cost—Direct
 Direct Material
 Conveniently and economically traced
to cost object
 Direct Labor
 To manufacture a product or perform a service
 Includes wages paid to direct labor employees,
production bonuses, payroll taxes
 May include holiday and vacation pay, insurance,
retirement benefits
Product Cost—Indirect
 Overhead—indirect production costs

 Fringe benefits, if cannot be easily traced to
product
 Overtime, if due to random scheduling
 Cost of quality
 Prevention costs
 Appraisal costs
 Failure costs
Indirect Product Costs/Overhead
Product Cost Behavior
 Direct Material Variable
 Direct Labor Variable
 Overhead Variable, fixed, or mixed
Overhead Cost Allocation
Assign indirect costs to one or more
cost objects
 To determine full absorption cost (GAAP)
 To motivate management
 To compare alternative courses of action for
planning, controlling, and decision making
Allocation process should be
rational and systematic
Overhead Cost Allocation
Assign indirect costs to one or more cost objects
 To determine full absorption cost (GAAP)

 To motivate management
 To compare alternative courses of action for
planning, controlling, and decision making
Allocation process should be rational and

systematic
Allocating Overhead
Actual Cost System
 Product Cost Cost Used
 Direct Materials Actual
 Direct Labor Actual
 Overhead Actual
Allocating Overhead:
Actual Cost System
 The Actual Cost System is not timely
 All costs must be known before calculating
product cost
Allocating Overhead:
Actual vs. Normal
Product Cost Actual Cost Normal Cost
System System
Direct Materials Actual Actual
Direct Labor Actual Actual
Overhead Actual Predetermined

Overhead Rate
Predetermined Overhead Rate
 Allows overhead to be assigned during the
period
 Compensates for fluctuations
 that are not related to activity level
 in activity level that do not affect fixed overhead
Reference
Cost Accounting: Foundation and Evolutions 8th

Edition by Kinney and Raiborn
Topic 6:
Introduction to Cost
Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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Topic 6:

Monetary measure of resources given up to attain an objective (such as

 Association with cost object

 Direct—traceable to a cost object

 Direct Costs- fabric/leather, zipper,

 Classification as DIRECT or INDIRECT

 Change inputs into outputs

Purchase finished goods Sell to

 Overhead—indirect production costs

 Direct Material Variable

 Direct Labor Variable

 Overhead Variable, fixed, or mixed

Assign indirect costs to one or more cost objects

 To determine full absorption cost (GAAP)

Allocation process should be rational and

 Direct Materials Actual

 Direct Labor Actual

Direct Labor Actual Actual

Overhead Actual Predetermined

Cost Accounting: Foundation and Evolutions 8th

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