Cost Concepts

Week 01 Topic
02

ACCT112: Management Accounting

Themin Suwardy, SMU 2005

How do you respond to this accusation?

Slide 2

Seminar Outline
1. Introduction to Cost Concepts
2. Manufacturing Costs
3. Cost Behaviour
4. A Few other Cost Concepts

Chapter 2, Supplements A, B & C, & Appendix 2A

Slide 3

1.1 Introduction to Cost Concepts

What is Cost?
Why do we need to classify
costs?

Exhibit 2-1 p37

Slide 4

1.2 Costs Classification & Basic Types of Businesses

Manufacturing
Manufacturing

Retail
Retail

Service
Service

Production
Production
Costs
Costs

Purchasing
Purchasing
Costs
Costs

Servicing
Servicing Costs
Costs

Labour +
Materials +
Overheads =
Costs of Goods
Manufactured

Goods Purchased
+
Freight Inward +
etc. =
Costs of Goods
Sold

Labour +
Materials +
Overheads =
Costs of Jobs

Selling
Selling Costs
Costs

Advertisement/Marketing/Wages / etc.
All Overheads related to marketing

Administrative
Administrative Costs
Costs
Finance, Legal, Facilities (rental), etc.
Every other costs that support the operation of the
company
Slide 5

2.1 Manufacturing Costs

E.g.
E.g. Producing
Producing Cars
Cars
Manufacturing
Manufacturing Costs
Costs
Direct
Direct
Materials
Materials

Direct
Direct Labour
Labour

Engines
Tyres
Radio,
Etc.

Mfg
Mfg Overheads
Overheads
**
Indirect Labour

Production
Workers

Supervisor, etc.
Indirect
Material
Lubricants, etc.
Machine Depr.
Rent, etc.

Non-Manufacturing
Non-Manufacturing Costs
Costs
Selling
Selling Costs
Costs

Administrative
Administrative Costs
Costs

Pages 38 46, Exhibit 2-2 @ p43

Slide 6

Manufacturing Costs

Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

The Product

Slide 7

Manufacturing
Manufacturing
Overhead
Overhead

Direct Materials

Raw materials that become an integral

part of the product and that can be
conveniently traced directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an
automobile
automobile
Slide 8

Direct Labor

Those labor costs that can be easily

traced to individual units of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly
workers
workers
Slide 9

Manufacturing Overhead

Manufacturing costs that cannot be traced

directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect
labor
labor
Materials used to
support the
production process.
Examples: lubricants
and cleaning supplies
used in the
automobile assembly
plant.

Slide 10

Wages paid to
employees who are
not directly involved
in production work.
Examples:
maintenance workers,
janitors and security
guards.

Nonmanufacturing Costs

Selling
Costs

Administrative
Costs

Costs necessary to
secure the order
and deliver the
product.

All executive,
organizational, and
clerical costs.

Slide 11

2.2 Overtime Premium is an Overhead Costs

If
If Direct
Direct Labour
Labour is
is paid
paid $10
$10 per
per
hour
hour
But
But they
they are
are paid
paid $15
$15 per
per hour
hour on
on
Overtime
Overtime
Then
Then $5
$5 ($15
($15 -- $10)
$10) is
is called
called the
the Overtime
Overtime
Premium
Premium
Overtime
Overtime Premium
Premium is
is usually
usually
classified
classified as
as Manufacturing
Manufacturing
Overheads
Overheads
Why
Why ??
Appendix 2A
Slide 12

An exercise in classifying Manufacturing Costs

ABC
ABC Ltd
Ltd manufactures
manufactures LED
LED torch
torch lights.
lights.
Both
Both factory
factory and
and office
office are
are within
within a
a single
single
building.
building.
Accounts
All other Sales & Admin Expenses
Cleaning and other facility related services
Depreciation
Entertainment Expenses
LED and parts
Total Overtime Wages *
Rent
Transportation Inward *
Transportation Outward
Utilities
Wages of factory managers and supervisors
Wages of factory workers
Wages of Management & Admin staff
Slide 13

DM

DL

Period
Cost

OH

EXP

2.3 Product vs. Period

Product costs include
direct materials, direct
labor, and manufacturing
overhead.
Inventory

Cost of Good Sold

Period costs include all

selling costs and
administrative costs.

Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement

Slide 14

Quick Check (1)

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.

Slide 15

2.4 Prime vs. Conversion

Manufacturing costs are often
classified as follows:
Indirect Mfg Costs

Direct
Material

Direct
Labor

Prime
Cost

Manufacturin
g
Overhead

Conversion
Cost

Slide 16

2.5 Some Cost Flows of Manufacturing Costs

Work-in-Progress

Raw Materials
O. Bal.
$200
Buy
$700

Used
$500
C. Bal.
$400

O. Bal.
$400
DM
$500
DL
$600
MOH

$900
C. Bal.
$400

$900

$700
$2,200
C. Bal.
$700

CoGS
$1,300
C. Bal.

$1,500

$1,200

C. Bal.
$700
$2,200

Costs of Goods Sold

Finished Goods
O. Bal.
$1,000
CoGM

CoGM
$1,500

CoGS
$1,300

$2,500
$2,500
C. Bal.
$1,200
Supplements A to C
Slide 17

2.6 From the Income Statements Perspective

Computing
Computing Costs
Costs of
of Goods
Goods Sold
Sold
Beginning
Beginning FG
FG Inv.
Inv.
$1,000
$1,000
+
+ CoGM
CoGM
$1,500
$1,500
----------------Goods
Goods Available
Available for
for Sales
Sales
$2,500
$2,500
-- Ending
Ending FG
FG Inv.
Inv.
$1,200
$1,200
----------------CoGS
CoGS
$1,300
$1,300
-----------------

Slide 18

Quick Check (2)

If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

This
This is
is a
a Retail
Retail Example
Example

Slide 19

Quick Check (3)

Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

Slide 20

Quick Check (4)

Direct materials used in production totaled
$280,000. Direct labor was $375,000 and factory
overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

Slide 21

Quick Check (5)

Beginning work in process was $125,000. Manufacturing
costs incurred for the month were $835,000. There were
$200,000 of partially finished goods remaining in work in
process inventory at the end of the month. What was the
cost of goods manufactured during the month?
A.

$1,160,000

B.

$ 910,000

C.

$ 760,000

D.

Cannot be determined.

Slide 22

Quick Check (6)

Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

Slide 23

3.1 Cost Behaviour (1)

Pages 5055

If producing 1,000 units costs

$200,000
How much will it costs to make 1,500
units?
Total Costs
$300,00
0
$200,00
0

x
x

1,000

1,500
Slide 24

Quantity
Produced

3.2 Cost Behaviour (2)

If producing 1,000 units costs
$200,000
How much will it costs to make 1,500
units?
Total Costs

$200,00
0

1,000

1,500
Slide 25

Quantity
Produced

3.3 Cost Behaviour (3)

If producing 1,000 units costs
$200,000
How much will it costs to make 1,500
units?
Total Costs

$250,00
0
$200,00
0

x
x

1,000

1,500
Slide 26

Quantity
Produced

3.4 Cost Behaviour (4)

Total Costs

Quantity
Produced

The Relevant Range concept

Slide 27

Quick Check (7)

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.
D. The cost of napkins for customers.

Slide 28

4.1 Differential Costs

If your estimated Costs of getting a
B. Acc. degree from SMU is about
$80,000

$20,000
per year
for 4 years

What is the costs of getting a double

degree (say, Acc + Econs)?
If your estimated
answer is about
$100,000

$20,000
per year
for 5 years

Then, the differential costs of

nd degree is only $20,000
the 2nd
Pages 57-59
Slide 29

4.2 Opportunity Costs

But if getting the double degree
requires you to spend another year
studying
And you estimated that you could
have earned $30,000 a year working

Then, your opportunity costs of

doing a double degree is $30,000

Slide 30

4.3 Sunk Costs

If youve bought a cute handphone for $1,000 to celebrate
being admitted to SMU
But you want to buy a newer model
now and someone offers $300 for
your old but still cute hand-phone
Is the original $1,000 costs
relevant for you decision
whether to accept the offer?
Sunk Costs are NEVER
relevant
Slide 31

Q&A

Slide 32

Reinforcement of Issues Discussed

What
What are
are the
the main
main components
components of
of manufacturing
manufacturing
costs?
costs?
Which
Which accounts
accounts would
would the
the raw
raw materials
materials costs
costs flow
flow
through?
through?
Give
Give an
an example
example of
of a
a Stepped
Stepped
Costs
Costs
What
What about
about your
your costs
costs of
of studying
studying in
in SMU
SMU
when
when youre
youre looking
looking for
for a
a job
job upon
upon
graduation?
graduation?
Is
Is Cost
Cost Behaviour
Behaviour really
really useful?
useful?

Slide 33

Example of Exam/Test Question for Topic 02

2014-15 T1 Test 1 - Q1

Slide 34