Basic cost management concepts and accounting for mass customization operations
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2. Chapter Two . Basic Cost Management Concepts and Accounting for Mass Customization Operations. Planning. Control. Decision Making. Directing. Process of Management. Managers need cost information to perform each of these functions. What Do We Mean By a Cost?.

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Basic cost management concepts and accounting for mass customization operations

2

Chapter Two

Basic Cost Management Concepts and Accounting for Mass Customization Operations


Process of management

Planning

Control

DecisionMaking

Directing

Process of Management

Managers need cost information toperform each of these functions.


What do we mean by a cost

What Do We Mean By a Cost?

A Costis the measure ofresources givenup to achieve aparticular purpose.


Manufacturing costs

DirectLabor

DirectMaterial

Manufacturing Overhead

TheProduct

Manufacturing Costs


Direct material

Example:

Steel used tomanufacturethe automobile.

Direct Material

Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.


Direct labor

Direct Labor

Cost of salaries, wages, and fringebenefits for personnel who workdirectly on manufactured products.

Example:

Wages paid to anautomobile assemblyworker.


Manufacturing overhead

Manufacturing Overhead

All other manufacturing costs

IndirectMaterial

IndirectLabor

OtherCosts

Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.


Manufacturing overhead1

Manufacturing Overhead

All other manufacturing costs

IndirectMaterial

IndirectLabor

OtherCosts

Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards.


Manufacturing overhead2

Manufacturing Overhead

All other manufacturing costs

IndirectMaterial

IndirectLabor

OtherCosts

Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.


Classifications of costs in manufacturing companies

Classifications of Costs in Manufacturing Companies

Manufacturing costs are oftencombined as follows:

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost


Cost classifications on financial statements balance sheet

Cost Classifications on Financial Statements – Balance Sheet

  • Manufacturer

  • Current Assets

    • Cash

    • Receivables

    • Prepaid Expenses

    • Inventories

      • Raw Materials

      • Work in Process

      • Finished Goods

Merchandiser

Current Assets

  • Cash

  • Receivables

  • Prepaid Expenses

  • Merchandise Inventory


Cost classifications on financial statements balance sheet1

Cost Classifications on Financial Statements – Balance Sheet

  • Manufacturer

  • Current Assets

    • Cash

    • Receivables

    • Prepaid Expenses

    • Inventories

      • Raw Materials

      • Work in Process

      • Finished Goods

Merchandiser

Current Assets

  • Cash

  • Receivables

  • Prepaid Expenses

  • Merchandise Inventory

Those materials waiting to be processed.


Cost classifications on financial statements balance sheet2

Cost Classifications on Financial Statements – Balance Sheet

  • Merchandiser

  • Current Assets

    • Cash

    • Receivables

    • Prepaid Expenses

    • Merchandise Inventory

  • Manufacturer

  • Current Assets

    • Cash

    • Receivables

    • Prepaid Expenses

    • Inventories

      • Raw Materials

      • Work in Process

      • Finished Goods

Partially complete products – material to which some labor and/or overhead has been added.


Cost classifications on financial statements balance sheet3

Cost Classifications on Financial Statements – Balance Sheet

  • Manufacturer

  • Current Assets

    • Cash

    • Receivables

    • Prepaid Expenses

    • Inventories

      • Raw Materials

      • Work in Process

      • Finished Goods

Merchandiser

Current Assets

  • Cash

  • Receivables

  • Prepaid Expenses

  • Merchandise Inventory

Completed products awaiting sale.


Manufacturing cost flows

Income StatementExpenses

Work in Process

Cost of GoodsSold

FinishedGoods

Selling andAdministrative

Period Expenses

Manufacturing Cost Flows

Balance SheetCosts Inventories

Material Purchases

Raw Material

Direct Labor

ManufacturingOverhead

Selling andAdministrative


Manufacturing cost flows1

Material, labor andmanufacturingoverhead costsremain in inventoryuntil the product issold, so they aresometimes calledinventoriable costs.

Manufacturing Cost Flows

Income StatementExpenses

Balance SheetCosts Inventories

Material Purchases

Raw Material

Direct Labor

Work in Process

ManufacturingOverhead

Cost of GoodsSold

FinishedGoods

Selling andAdministrative

Selling andAdministrative

Period Expenses


Manufacturing cost flows2

Manufacturing Cost Flows

Income StatementExpenses

Balance SheetCosts Inventories

Material Purchases

Raw Material

Direct Labor

Work in Process

ManufacturingOverhead

Cost of GoodsSold

FinishedGoods

Period expenses are not associated with manufacturing the product and are expensed in the period incurred.

Selling andAdministrative

Selling andAdministrative

Period Expenses


Manufacturing cost flows3

Manufacturing Cost Flows

Income StatementExpenses

Balance SheetCosts Inventories

Material Purchases

Raw Material

Direct Labor

Work in Process

ManufacturingOverhead

Cost of GoodsSold

FinishedGoods

Selling andAdministrative

Selling andAdministrative

Period Expenses


Types of production processes

Types of Production Processes


Schedule of cost of goods manufactured

Let’s look at aSchedule of Cost ofGoods Manufactured forComet Computer Corporation.

Schedule of Cost of Goods Manufactured


Schedule of cost of goods manufactured1

Schedule of Cost of Goods Manufactured


Schedule of cost of goods manufactured2

Schedule of Cost of Goods Manufactured


Schedule of cost of goods manufactured3

Schedule of Cost of Goods Manufactured

Include all direct labor costs incurred during the current period.


Schedule of cost of goods manufactured4

Schedule of Cost of Goods Manufactured


Schedule of cost of goods manufactured5

Schedule of Cost of Goods Manufactured

Beginning work-in-process inventory is carried over from the prior period.


Schedule of cost of goods manufactured6

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 the balance sheet.


Income statement for a manufacturer

Now let’s look at an income statement for Comet Computer Corporation.

Income Statement for a Manufacturer


Income statement for a manufacturer1

Income Statement for a Manufacturer


Income statement for a manufacturer2

Income Statement for a Manufacturer


Cost classifications

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.


Cost classifications1

Cost Classifications

Activities thatcause costs to be incurred are calledcost drivers.

Cost behavior means how a cost will react to changes in the level of business activity.

  • Total variable costs change when activity changes.

  • Totalfixed costs remain unchanged when activity changes.


Identifying cost drivers

Identifying Cost Drivers


Total variable cost example

Total Variable Cost Example

Your total long distance telephone bill is based on how many minutes you talk.

Total Long DistanceTelephone Bill

Minutes Talked


Variable cost per unit example

Variable Cost Per Unit Example

The cost per long distance minute talked is constant. For example, 5 cents per minute.

Per MinuteTelephone Charge

Minutes Talked


Total fixed cost example

Total Fixed Cost Example

Your monthly basic telephone bill probably does not change when you make more local calls.

Monthly Basic Telephone Bill

Number of Local Calls


Fixed cost per unit example

Fixed Cost Per Unit Example

The average cost per local call decreases as more local calls are made.

Monthly Basic Telephone Bill per Local Call

Number of Local Calls


Cost classifications2

Cost Classifications


Cost behavior question

Cost Behavior Question

Fixed 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 constant.


Cost behavior question1

Cost Behavior Question

Fixed 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 constant.


Cost behavior question2

Cost Behavior Question

Variable costs are usually characterized by:

a.Unit costs that decrease as activity increases.

b.Total costs that increase as activity decreases.

c.Total costs that increase as activity increases.

d.Total costs that remain constant.


Cost behavior question3

Cost Behavior Question

Variable costs are usually characterized by:

a.Unit costs that decrease as activity increases.

b.Total costs that increase as activity decreases.

c.Total costs that increase as activity increases.

d.Total costs that remain constant.


Direct and indirect costs

Direct costs

Costs that can beeasily and conveniently traced to a product or department.

Example: cost of paint in the paint department of an automobile assembly plant.

Indirect costs

Costs that must be allocated in order to be assigned to a product or department.

Example: cost of national advertising for an airline is indirect to a particular flight.

Direct and Indirect Costs


Direct and indirect costs1

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.


Controllable and uncontrollable costs

Controllable andUncontrollable Costs

A cost that can be significantly influencedby a manager is a controllable cost.


Opportunity cost

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another.

  • Example: If you werenot attending college,you could be earning$20,000 per year. Your opportunity costof attending college for one year is $20,000.


Sunk costs

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 $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.


Differential costs

Differential Costs

Costs that differ between alternatives.

Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.Your commuting costs are $50 per month in yourhometown and $300 per month to the city.

What is your differential cost?


Differential costs1

Differential Costs

Costs that differ between alternatives.

Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.Your commuting costs are $50 per month in yourhometown and $300 per month to the city.

What is your differential cost?

$300 - $50 = $250


Marginal costs and average costs

Marginal Costs and Average Costs

The extra costincurred to produceone additional unit.

The total cost toproduce a quantitydivided by thequantity produced.

Marginal and average costs arelargely a function of cost behavior -- variable and fixed costs.


Costs and benefits of information

Benefits

Costs

Costs and Benefits of Information

More information does not mean more benefits if information overload results.


End of chapter 2

End of Chapter 2


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