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Basic CostManagement Conceptsand Accounting for Mass

Customization Operations

Basic CostManagement Conceptsand Accounting for MassCustomization Operations

Chapter 2

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LearningObjective

1

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Process of ManagementProcess of Management

DecisionMaking

DirectingControl

PlanningStrategyFormulation

Managers need cost information toperform each of these functions.

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What o We Mean B! a Cost"What o We Mean B! a Cost"

A cost

is the measure ofresources givenup to achieve a

particular purpose.

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LearningObjective

2

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Product Costs# Period Costs and $%pensesProduct Costs# Period Costs and $%penses

Product costs are costs associated &ith goods forsa'e unti' the time period during &hich the productsare so'd# at &hich time the costs become e%penses(

Period costs are costs that are e%pensed during thetime period in &hich the! are incurred(

$%penses are the consumption of assets for thepurpose of generating revenue(

8/9/2019 Chap 002 Basic Cost Management Concepts and Accounting for Mass Customization Operations

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LearningObjective

)

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Product CostsProduct Costs

Cost of goods so'd

Period CostsPeriod Costs

Operating e%penses

Cost C'assifications on *inancia'Cost C'assifications on *inancia'

+tatements , -ncome +tatement+tatements , -ncome +tatement

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MerchandiserMerchandiser

Current Assets, Cash

, .eceivab'es

, Prepaid $%penses

, MerchandiseMerchandiseInventoryInventory

ManufacturerManufacturer

Current Assets CashCash

.eceivab'es.eceivab'es

Prepaid $%pensesPrepaid $%penses

InventoriesInventoriesRa MaterialsRa Materials

!ork in Process!ork in Process

Finished "oodsFinished "oods

Cost C'assifications on *inancia'Cost C'assifications on *inancia'

+tatements , Ba'ance +heet+tatements , Ba'ance +heet

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MerchandiserMerchandiser

Current Assets, Cash

, .eceivab'es

, Prepaid $%penses

, MerchandiseMerchandiseInventoryInventory

ManufacturerManufacturer

Current Assets CashCash

.eceivab'es.eceivab'es

Prepaid $%pensesPrepaid $%penses

InventoriesInventoriesRa MaterialsRa Materials

!ork in Process!ork in Process

Finished "oodsFinished "oods

Cost C'assifications on *inancia'Cost C'assifications on *inancia'

+tatements , Ba'ance +heet+tatements , Ba'ance +heet

#hose materialsaiting to $eprocessed.

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MerchandiserMerchandiser

Current Assets, Cash

, .eceivab'es

, Prepaid $%penses

, MerchandiseMerchandiseInventoryInventory

ManufacturerManufacturer

Current Assets CashCash

.eceivab'es.eceivab'es

Prepaid $%pensesPrepaid $%penses

InventoriesInventoriesRa MaterialsRa Materials

!ork in Process!ork in Process

Finished "oodsFinished "oods

Cost C'assifications on *inancia'Cost C'assifications on *inancia'

+tatements , Ba'ance +heet+tatements , Ba'ance +heet

Partially complete

products % material tohich some la$or

and&or overhead has$een added.

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MerchandiserMerchandiser

Current Assets, Cash

, .eceivab'es

, Prepaid $%penses

, MerchandiseMerchandiseInventoryInventory

ManufacturerManufacturer

Current Assets CashCash

.eceivab'es.eceivab'es

Prepaid $%pensesPrepaid $%penses

InventoriesInventoriesRa MaterialsRa Materials

!ork in Process!ork in Process

Finished "oodsFinished "oods

Cost C'assifications on *inancia'Cost C'assifications on *inancia'

+tatements , Ba'ance +heet+tatements , Ba'ance +heet

Completed productsaaiting sale.

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LearningObjective

/

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0!pes of Production Processes0!pes of Production Processes

#ype of Production Description of '(ample of Process Process Manufacturer

)o$ Shop *o volume Disney

*ittle standardi+ation

,ni-ue products

.atch Multiple products Caterpillar

*o volume

Assem$ly *ine A fe ma/or products Ford

0igher volume

Mass Customi+ation 0igh volume Dell

Many standardi+ed components

Customi+ed com$ination of components

Continuous Flo 0igh volume '((on

0ighly standardi+ed commodity products

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LearningObjective

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Manufacturing CostsManufacturing Costs

0heProduct

irectLabor

ManufacturingOverhead

irectMateria'

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irect Materia'irect Materia'

'(ample1Steel used tomanufacture

the automo$ile.

'(ample1Steel used tomanufacture

the automo$ile.

Cost of ra material that is used tomake2 and can $e conveniently

traced2 to the finished product.

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Cost of salaries2 ages2 and fringe$enefits for personnel ho ork

directly on manufactured products.

irect Laborirect Labor

'(ample1

!ages paid to anautomo$ile assem$lyorker.

'(ample1!ages paid to an

automo$ile assem$lyorker.

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All other manufacturing costs

Manufacturing OverheadManufacturing Overhead

Materials used to support

the production process.'(amples1 lu$ricants andcleaning supplies used in anautomo$ile assem$ly plant.

-ndirect

Labor

-ndirect

Materia'

Other

Costs

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All other manufacturing costs

Manufacturing OverheadManufacturing Overhead

Cost of personnel ho

do not ork directly onthe product. '(amples1maintenance orkers2/anitors and security

guards.

-ndirect

Labor

-ndirect

Materia'

Other

Costs

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All other manufacturing costs

Manufacturing OverheadManufacturing Overhead

'(amples1 depreciation

on plant and e-uipment2property ta(es2insurance2 utilities2

overtime premium2 andunavoida$le idle time.

-ndirect

Labor

-ndirect

Materia'

Other

Costs

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C'assifications of Costs inC'assifications of Costs in

Manufacturing CompaniesManufacturing Companies

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as fo''o&s

DirectMaterial

Direct*a$or

Manufacturing3verhead

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Manufacturing Cost *'o&sManufacturing Cost *'o&s

Manufacturing3verhead

Direct Material

Direct *a$or

!ork inProcessInventory

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Manufacturing Cost *'o&sManufacturing Cost *'o&s

Manufacturing3verhead

Direct Material

Direct *a$or

Finished"oods

Inventory

!ork inProcessInventory

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Manufacturing Cost *'o&sManufacturing Cost *'o&s

Manufacturing3verhead

Direct Material

Direct *a$or

Finished"oods

Inventory

Cost of"oods

Sold

!ork inProcessInventory

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Learning

Objective3

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Comet Computer Corporation

Schedule of Cost of "oods Manufactured

Ra material used 4562789:

Direct la$or ;92999

#otal manufacturing overhead

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Comet Computer Corporation

Schedule of Cost of "oods Manufactured

Ra material used 4562789:

Direct la$or ;92999

#otal manufacturing overhead

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Comet Computer Corporation

Schedule of Cost of "oods Manufactured

Ra material used 4562789:

Direct la$or ;92999

#otal manufacturing overhead

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Comet Computer Corporation

Schedule of Cost of "oods Manufactured

Ra material used 4562789:

Direct la$or ;92999

#otal manufacturing overhead

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+chedu'e of Cost of 4oods+chedu'e of Cost of 4oodsManufacturedManufactured

eginning ork=in=process inventory iscarried over from the

prior period.

'nding ork=in=process

inventory contains the cost ofunfinished goods2 and isreported in the current assetssection of the $alance sheet.

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-ncome +tatement for a-ncome +tatement for aManufacturerManufacturer

Comet Computer Corporation

Income StatementFor the @ear 'nded Decem$er 542

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Comet Computer Corporation

Income StatementFor the @ear 'nded Decem$er 542

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Learning

Objective5

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Activities that cause costs to beActivities that cause costs to be

incurred are ca''edincurred are ca''ed C3S# DRI'RSC3S# DRI'RS

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Objective6

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Cost C'assificationsCost C'assifications

Cost behavior meansho& a cost &i'' reactto changes in the 'eve'

of business activit!(, 0ota'variab'e costs

change &hen activit!changes(

, 0ota'fi%ed costsremainunchanged &hen activit!changes(

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0ota' 7ariab'e Cost $%amp'e0ota' 7ariab'e Cost $%amp'e

8our tota' cab'e pa!9per9vie& bi'' is based onho& man! movies !ou &atch(

Pa!9Per97ie&

Movies Watched

0ota'P

a!9Per97ie&

Bi''

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7ariab'e Cost Per :nit $%amp'e7ariab'e Cost Per :nit $%amp'e

Movies Watched

PerM

ovieCharge

0he cost per movie &atched is constant( *ore%amp'e# ;/(

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0ota' *i%ed Cost $%amp'e0ota' *i%ed Cost $%amp'e 8our month'! cab'e bi'' probab'! does not change&hen !ou &atch movies on channe's that !ou have

e'ected to be paid on a month'! basis =>BO?(

@umberof >BO Movies

Watched

Month

'!Chargefor

>

BOBi''

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*i%ed Cost Per :nit $%amp'e*i%ed Cost Per :nit $%amp'e

@umber of >BO

Movies Watched

Month'!>

BOBi''p

erM

ovie

Watched

0he average cost per >BO movie decreasesas more >BO movies are &atched(

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Cost C'assificationsCost C'assifications

Summary of aria$le and Fi(ed Cost ehavior

Cost In #otal Per ,nit

#otal varia$le cost changes aria$le cost per unit

aria$le as activity level changes. remains the same over

ide ranges of activity.

#otal fi(ed cost remains Fi(ed cost per unit

Fi(ed the same even hen the goes don as activity

activity level changes. level goes up.

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Objective

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irect and -ndirect Costsirect and -ndirect Costs

irect costs Costs that can be

easi'! andconvenient'! traced to

a product ordepartment(

$%amp'e cost ofpaint in the paintdepartment of anautomobi'e assemb'!p'ant(

-ndirect costs Costs that must be

a''ocated in order tobe assigned to a

product ordepartment(

$%amp'e cost ofnationa' advertisingfor an air'ine isindirect to a particu'arf'ight(

C t '' b' dContro''ab'e and

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A cost that can be significant'! inf'uencedb! a manager is a contro''ab'e cost(

Contro''ab'e andContro''ab'e and

:ncontro''ab'e Costs:ncontro''ab'e Costs

Cost item Manager Classificaton

Cost of food used Restaurant Controlla$le

in a restaurant manager

Cost of national Restaurant ,ncontrolla$le

advertising $y a manager

restaurant chain

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Learning

Objective1