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CHAPTER 2
CHAPTER 2
Basic Cost Terminology
Basic Cost Terminology
Cost Object Examples at BMW
Cost Object Examples at BMW
Basic Cost Terminology
Basic Cost Terminology
Direct and Indirect Costs
Direct and Indirect Costs
BMW: Assigning Costs to a Cost Object
BMW: Assigning Costs to a Cost Object
Cost Examples
Cost Examples
Factors Affecting Direct/Indirect Cost Classification
Factors Affecting Direct/Indirect Cost Classification
Cost Behavior
Cost Behavior
Cost Behavior
Cost Behavior
Cost Behavior Summarized
Cost Behavior Summarized
Cost Behavior Visualized
Cost Behavior Visualized
Other Cost Concepts
Other Cost Concepts
Relevant Range Visualized
Relevant Range Visualized
A Cost Caveat
A Cost Caveat
Multiple Classification of Costs
Multiple Classification of Costs
Multiple Classification of Costs, Visualized
Multiple Classification of Costs, Visualized
Different Types of Firms
Different Types of Firms
Types of Manufacturing Inventories
Types of Manufacturing Inventories
Types of Product Costs
Types of Product Costs
Accounting Distinction Between Costs
Accounting Distinction Between Costs
Cost Flows
Cost Flows
Cost Flows Visualized
Cost Flows Visualized
Multiple-Step Income Statement
Multiple-Step Income Statement
Cost of Goods Manufactured
Cost of Goods Manufactured
Other Cost Considerations
Other Cost Considerations
Different Definitions of Costs for Different Applications
Different Definitions of Costs for Different Applications
Different Definitions of Costs for Different Applications
Different Definitions of Costs for Different Applications
Three Common Features of Cost Accounting and Cost Management
Three Common Features of Cost Accounting and Cost Management
CHAPTER 2
CHAPTER 2

: An Introduction to Cost Terms and Purposes. : Michael Flores. : An Introduction to Cost Terms and Purposes.ppt. zip-: 664 .

An Introduction to Cost Terms and Purposes

An Introduction to Cost Terms and Purposes.ppt
1 CHAPTER 2

CHAPTER 2

An Introduction to Cost Terms and Purposes

2012 Pearson Prentice Hall. All rights reserved.

2 Basic Cost Terminology

Basic Cost Terminology

Costsacrificed resource to achieve a specific objective Actual costa cost that has occurred Budgeted costa predicted cost Cost objectanything of interest for which a cost is desired

3 Cost Object Examples at BMW

Cost Object Examples at BMW

Cost Object

Illustration

Product

BMW X 5 sports activity vehicle

Service

Dealer-support telephone hotline

Project

R&D project on DVD system enhancement

Customer

Herb Chambers Motors, a dealer that purchases a broad range of BMW vehicles

Activity

Setting up production machines

Department

Environmental, Health and Safety

4 Basic Cost Terminology

Basic Cost Terminology

Cost accumulationa collection of cost data in an organized manner Cost assignmenta general term that includes gathering accumulated costs to a cost object. This includes: Tracing accumulated costs with a direct relationship to the cost object and Allocating accumulated costs with an indirect relationship to a cost object

5 Direct and Indirect Costs

Direct and Indirect Costs

Direct costs can be conveniently and economically traced (tracked) to a cost object. Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner.

6 BMW: Assigning Costs to a Cost Object

BMW: Assigning Costs to a Cost Object

7 Cost Examples

Cost Examples

Direct Costs Parts Assembly line wages Indirect Costs Electricity Rent Property taxes

8 Factors Affecting Direct/Indirect Cost Classification

Factors Affecting Direct/Indirect Cost Classification

Cost materiality Availability of information-gathering technology Operational design

9 Cost Behavior

Cost Behavior

Variable costschanges in total in proportion to changes in the related level of activity or volume. Fixed costsremain unchanged in total regardless of changes in the related level of activity or volume. Costs are fixed or variable only with respect to a specific activity or a given time period.

10 Cost Behavior

Cost Behavior

Variable costs are constant on a per-unit basis. If a product takes 5 pounds of materials each, it stays the same per unit regardless if one, ten, or a thousand units are produced. Fixed costs change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit.

11 Cost Behavior Summarized

Cost Behavior Summarized

Total Dollars

Cost per Unit

Total Dollars

Cost Per Unit

Variable Costs

Change in proportion with output More output = More cost

Change in proportion with output More output = More cost

Unchanged in relation to output

Variable Costs

Change inversely with output More output = lower cost per unit

Fixed Costs

Unchanged in relation to output

Change inversely with output More output = lower cost per unit

Fixed Costs

Unchanged in relation to output

12 Cost Behavior Visualized

Cost Behavior Visualized

13 Other Cost Concepts

Other Cost Concepts

Cost drivera variable that causally affects costs over a given time span Relevant rangethe band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost For example, fixed costs are considered fixed only within the relevant range.

14 Relevant Range Visualized

Relevant Range Visualized

15 A Cost Caveat

A Cost Caveat

Unit costs should be used cautiously. Because unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis. Unit costs that include fixed costs should always reference a given level of output or activity. Unit costs are also called average costs. Managers should think in terms of total costs rather than unit costs.

16 Multiple Classification of Costs

Multiple Classification of Costs

Costs may be classified as: Direct/Indirect, and Variable/Fixed These multiple classifications give rise to important cost combinations: Direct and variable Direct and fixed Indirect and variable Indirect and fixed

17 Multiple Classification of Costs, Visualized

Multiple Classification of Costs, Visualized

18 Different Types of Firms

Different Types of Firms

Manufacturing-sector companies purchase materials and components and convert them into finished products. Merchandising-sector companies purchase and then sell tangible products without changing their basic form. Service-sector companies provide services (intangible products).

19 Types of Manufacturing Inventories

Types of Manufacturing Inventories

Direct materialsresources in-stock and available for use Work-in-process (or progress)products started but not yet completed, often abbreviated as WIP Finished goodsproducts completed and ready for sale

20 Types of Product Costs

Types of Product Costs

Also known as inventoriable costs Direct materialsacquisition costs of all materials that will become part of the cost object. Direct laborcompensation of all manufacturing labor that can be traced to the cost object. Indirect manufacturingfactory costs that are not traceable to the product in an economically feasible way. Examples include lubricants, indirect manufacturing labor, utilities, and supplies.

21 Accounting Distinction Between Costs

Accounting Distinction Between Costs

Inventoriable costsproduct manufacturing costs. These costs are capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold. Period costshave no future value and are expensed in the period incurred.

22 Cost Flows

Cost Flows

The Cost of Goods Manufactured and the Cost of Goods Sold section of the Income Statement are accounting representations of the actual flow of costs through a production system. Note the importance of inventory accounts in the following accounting reports, and in the cost flow chart.

23 Cost Flows Visualized

Cost Flows Visualized

24 Multiple-Step Income Statement

Multiple-Step Income Statement

STEP 4

25 Cost of Goods Manufactured

Cost of Goods Manufactured

STEP 1

STEP 2

STEP 3

26 Other Cost Considerations

Other Cost Considerations

Prime cost is a term referring to all direct manufacturing costs (materials and labor). Conversion cost is a term referring to direct labor and indirect manufacturing costs. Overtime labor costs are considered part of indirect overhead costs.

27 Different Definitions of Costs for Different Applications

Different Definitions of Costs for Different Applications

Pricing and product-mix decisionsdecisions about pricing and maximizing profits Contracting with government agenciesvery specific definitions of allowable costs for cost plus profit contracts Preparing external-use financial statementsGAAP-driven product costs only

28 Different Definitions of Costs for Different Applications

Different Definitions of Costs for Different Applications

29 Three Common Features of Cost Accounting and Cost Management

Three Common Features of Cost Accounting and Cost Management

Calculating the cost of products, services, and other cost objects Obtaining information for planning and control, and performance evaluation Analyzing the relevant information for making decisions

30 CHAPTER 2
An Introduction to Cost Terms and Purposes
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