the nature of cost

1、Manufacturing Cost Concepts,Financial AccountingCost is a measure of resources used or given up to achieve a stated purpose.,Managerial AccountingProduct costs are the costs a company assigns to units produced.,,,,,The

2、 Product,DirectMaterials,DirectLabor,ManufacturingOverhead,Manufacturing Costs,Direct Materials,Those materials that become an integral part of the product and that can be conveniently traced directly to it.,Example:

3、 A radio installed in an automobile,Direct Labor,Those labor costs that can be easily traced to individual units of product.,Example: Wages paid to automobile assembly workers,Manufacturing costs that cannot be traced d

4、irectly to specific units produced.,Manufacturing Overhead,Examples: Indirect labor and indirect materials,,Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, jan

5、itors and security guards.,,Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.,,,,,Classifications of Costs,DirectMaterials,DirectLabo

6、r,ManufacturingOverhead,,,,,PrimeCost,ConversionCost,Manufacturing costs are oftencombined as follows:,Nonmanufacturing Costs,Marketing and selling costs . . .Costs necessary to get the order and deliver the product

7、.Administrative costs . . .All executive, organizational, and clerical costs.,Product Costs Versus Period Costs,Product costs include direct materials, direct labor, and manufacturing overhead.,Period costs are not inc

8、luded in product costs. They are expensed on the income statement.,Inventory,,,Cost of Good Sold,BalanceSheet,IncomeStatement,,Sale,,,Expense,IncomeStatement,,Cost Classifications for Predicting Cost Behavior,How a co

9、st 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.,,Total Variable Cost,Your total long distance telep

10、hone bill is based on how many minutes you talk.,,,Minutes Talked,Total Long DistanceTelephone Bill,Variable Cost Per Unit,Minutes Talked,,,,Per MinuteTelephone Charge,,The cost per long distance minute talked is const

11、ant. For example, 10 cents per minute.,Total Fixed Cost,Your monthly basic telephone bill probably does not change when you make more local calls.,,,,Number of Local Calls,Monthly Basic Telephone Bill,Fixed Cost Per Uni

12、t,Number of Local Calls,,,,Monthly Basic Telephone Bill per Local Call,,The average cost per local call decreases as more local calls are made.,Cost Classifications for Predicting Cost Behavior,Cost Behavior,Fixed costs

13、are usually characterized by: a.Unit costs that remain constant.b.Total costs that increase as activity decreases. c.Total costs that increase as activity increases.d.Total costs that remain constant.,Fi

14、xed costs are usually characterized by: a.Unit costs that remain constant.b.Total costs that increase as activity decreases. c.Total costs that increase as activity increases.d.Total costs that remain co

15、nstant.,Cost Behavior,,Cost Behavior,Variable costs are usually characterized by: a.Unit costs that decrease as activityincreases. b.Total costs that increase as activity decreases. c.Total costs that incre

16、ase as activity increases. d.Total costs that remain constant.,Variable costs are usually characterized by: a. Unit costs that decrease as activity increases. b.Total costs that increase as activity decrease

17、s. c.Total costs that increase as activity increases. d.Total costs that remain constant.,Cost Behavior,,The Linearity Assumption and the Relevant Range,Activity,Total Cost,Economist’sCurvilinear Cost Function,,,

18、Activity,Total Cost,Economist’sCurvilinear Cost Function,Accountant’s Straight-Line Approximation (constant unit variable cost),,,The Linearity Assumption and the Relevant Range,,,Activity,Total Cost,RelevantRange,,The

19、 Linearity Assumption and the Relevant Range,Accountant’s Straight-Line Approximation (constant unit variable cost),,,,Economist’sCurvilinear Cost Function,A straight line closely approximates a curvilinear variable cos

20、t line within the relevant range.,,,,Types of Fixed Costs,Fixed Costs,,DiscretionaryMay be altered in the short-term by current managerial decisions,CommittedLong-term, cannot be reduced in the short term.,ExamplesDep

21、reciation on Buildings and Equipment,ExamplesAdvertising and Research and Development,Trend Toward Fixed Costs,Increased automation.Increase in salaried knowledge workers who are difficult to train and replace.,Implica

22、tionsManagers are more “l(fā)ocked-in” with fewer decision alternatives.Planning becomes more crucial because fixed costs are difficult to change with current operating decisions.,Example: Office space is available at a re

23、ntal rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost.,Fixed Costs and Relevant Range,,,,,Rent Cost in Thousands of Dollars,0

24、1,000 2,000 3,000 Rented Area (Square Feet),0,30,60,Fixed Costs and Relevant Range,90,,Relevant Range,Total cost doesn’t change for a wide range of activity, and then jumps to a

25、new higher cost for the next higher range of activity.,,,How does this type of fixed cost differ from a step-variable cost?,Step-variable costs can be adjusted more quickly and . . .The width of the activity steps is mu

26、ch wider for the fixed cost.,Fixed Costs and Relevant Range,A mixed costhas both fixed and variablecomponents.,Mixed Costs,Consider thefollowing electric utility example.,,,Fixed MonthlyUtility Charge,Variable Utili

27、ty Charge,,,Activity (Kilowatt Hours),Total Utility Cost,Mixed Costs,Total mixed cost,Total mixed cost Y = a + bX,,,Fixed MonthlyUtility Charge,Variable Utility Charge,,,Activity (Kilowatt Hours),Total Utility Cost,M

28、ixed Costs,,,Fixed MonthlyUtility Charge,Variable Utility Charge,,,Activity (Kilowatt Hours),Total Utility Cost,Total mixed cost Y = a + bX,Mixed Costs,bX,a,The Analysis of Mixed Costs,Account Analysis,Each account i

29、s classified as eithervariable or fixed based on the analyst’s knowledge of how the account behaves.,Engineering Estimates,Cost estimates are based on an evaluation of production methods, and material, laborand overh

30、ead requirements.,WiseCo recorded the following production activity and maintenance costs for two months: Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then expre

31、ss the costs in equation form Y = a + bX.,The High-Low Method,Unit variable cost =,Change?in costChange in units,,The High-Low Method,The High-Low Method,Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

32、,The High-Low Method,Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700

33、 – $8,100 = $1,600,Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 –

34、 $8,100 = $1,600 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $1,600 + $0.90X,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units

35、 are sold, what is the variable portion of sales salaries and commission?a. $0.08 per unitb. $0.10 per unit c. $0.12 per unitd. $0.125 per unit,The High-Low Method,If sales salaries and commissions are $

36、10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission?a. $0.08 per unitb. $0.10 per unit c. $0.12 per unitd. $0.125 per

37、unit,,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions?a. $ 2,000b.

38、 $ 4,000 c. $10,000d. $12,000,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries a

39、nd commissions?a. $ 2,000b. $ 4,000 c. $10,000d. $12,000,,The High-Low Method,The Scattergraph Method,Plot the data points on a graph (total cost vs. activity).,The Scattergraph Method,Draw a line thro

40、ugh the data points with about anequal numbers of points above and below the line.,The Scattergraph Method,The slope of this line is the variable unit cost. (Slope is the change in total cost for a one unit change in ac

41、tivity).,The Scattergraph Method,Vertical distance is the change in cost.,Accountants and managers may use computer software to fit a regression line through the data points.The cost analysis objective is the same: Y =

42、a + bx,,,,Least-Squares Regression Method,Least-squares regression also provides a statistic, calledthe adjusted R2, that is a measure of the goodnessof fit of the regression line to the data points.,,,0 1

43、 2 3 4,Total Cost,10,20,0,Activity,*,*,*,*,*,*,*,*,*,*,Least-Squares Regression Method,,,X,Y,The Contribution Format,,The contribution margin format emphasizes cost behavior. Contribution margin c

44、overs fixed costsand provides for income.,The Contribution Format,Direct Costs and Indirect Costs,Direct costsCosts that can beeasily and conveniently traced to a unit of product or other cost objective.Examples: di

45、rect material and direct labor,Indirect costsCosts cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead,Cost Concepts for Decision Making,A relevant cost

46、is a cost that differs between alternatives.,1,2,Identifying Relevant Costs,Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant co

47、sts.Unavoidable costs are never relevant and include:Sunk costs.Future costs that do not differ between the alternatives.,Identifying Relevant Costs,Sunk cost -- a cost that has already been incurred and that cannot b

48、e avoided regardless of what a manager decides to do.,Differential Costs and Revenues,Costs and revenues that differ among alternatives.,Example: You have a job paying $1,500 per month in your hometown. You have a job

49、offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.,Differential revenue is: $2,000 – $1,500 = $500,Differential Costs and Revenues,Costs and revenues that differ a

50、mong alternatives.,Differential revenue is: $2,000 – $1,500 = $500Differential cost is:$300,Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,0

51、00 per month. The commuting cost to the city is $300 per month.,Opportunity Costs,The potential benefit that is given up when one alternative is selected over another.Example: If you werenot attending college,you co

52、uld be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.,Sunk Costs,Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when m

53、aking decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.,,,,,,,,,,

54、,,,,,,,,,,,,,,,,,,,,,,,Adding/Dropping Segments,One of the most important decisions managers make is whether to add or drop a business segment such as a product or a store.,The Make or Buy Decision,A decision concerning

55、whether an item should be produced internally or purchased from an outside supplier is called a “make or buy” decision.,Utilization of a Constrained Resource,Firms often face the problem of deciding how to best utilize a

56、 constrained resource.Usually, fixed costs are not affected by this particular decision, so management can focus on maximizing total contribution margin.,Joint Product Costs,In some industries, a number of end products

57、are produced from a single raw material input.Two or more products produced from a common input are called joint products.The point in the manufacturing process where each joint product can be recognized as a separate

58、product is called the split-off point.,Sell or Process Further,It will always be profitable to continue processing a joint product after the split-off point so long as the incremental revenue exceeds the incremental proc