product-mix-sk2
Transcript of product-mix-sk2
Classification of Costs
COSTS
Direct Material
Direct Labor
Manufacturing Overhead
Selling Expenses
General & AdministrativeExpenses
Manufacturing Costs
Include the acquisition costs of all
materials that are physically
identified as a part of the
manufactured goods and that may
be traced to the manufactured goods
in an economically feasible way.
1. Direct Material Costs1. Direct Material Costs
Manufacturing Costs
Include the wages of all labor
that can be traced specifically
and exclusively to the
manufactured goods in an
economically feasible way.
2. Direct Labor Cost -2. Direct Labor Cost -
Manufacturing Costs
Or “Indirect manufacturing cost” or
“factory overhead”
Include all costs associated with the
manufacturing process that cannot
be traced to the manufactured
goods in an economically feasible
way.
Can be further classified as:
3. Manufacturing Overhead 3. Manufacturing Overhead
Production Cost
Production CostLabor
Material
Manufacturing Overhead
Prime Costs and Conversion Costs
All indirect costs are commonly combined into a single cost pool call factory overhead
Prime cost refers to direct materials and direct labor that are sometimes considered together
Conversion cost refers to direct labor and factory overhead combined into a single amount
Manufacturing costs are often combined as follows:Direct
MaterialsDirect
MaterialsDirectLabor
DirectLabor Factory
OverheadFactory
Overhead
Fixed Costs or capacity cost
Definition: The costs of providing a company’s basic operating capacity
Cost behavior: Remain constant over the time though volume may change.
Some examples; Annual insurance premium, property tax, and license fee, building rents, depreciation of buildings, salaries of administrative and production personnel.
Variable Costs Definition: Costs that vary depending on the
level of production or sales
Cost behavior: Increase or decrease according to the level of volume change.
Example: Ice cream cone company, wages, payroll taxes, sales tax, and supplies. Fuel consumption is directly related to miles driven.
Cost Concepts relevant to the decision making.
Costs are an important feature of many business decisions. In order to make such decisions following cost needed to be well understood… Differential costs Opportunity costs Sunk costs Marginal costs
Differential (Incremental) Costs Revenues
Decision involve selection among alternatives. Each alternative have certain costs / benefits that
are needed to be compared to the costs / benefits of the other alternatives
Increase or decrease in total cost resulting from an alternative course of action
Differential (Incremental) Costs and Revenues
Definition: Difference in costs between any two alternatives known as Differential cost.
Difference in revenues between any two alternatives is known as differential revenue.
Example 3.3: Differential Cost Associated with Adopting a New Production Method
Variable costs: Materials $150,000 $170,000 $20,000 Machining labor 85,000 64,000 -21,000 Electricity 73,000 66,000 -7,000Fixed costs: Supervision 25,000 25,000 0 Taxes 16,000 16,000 0 Depreciation 40,000 43,000 3,000
Total $392,000 $387,000 -$5,000
Current Dies Better Dies Differential Cost
Opportunity Costs
Definition: The potential benefit that is given up as you seek an alternative course of action
Example: When you decide to pursue a college degree, your opportunity cost would include the 4-year’s potential earnings foregone.
Sunk Costs
Definition:Cost that has already been incurred by past actions
Economic Implications: Not relevant to future decisions
Example: Rs. 500 spent to replace tires last year—not relevant in making selling decision in the future
Marginal Costs
Definition: Added costs that result from increasing rates of outputs, usually by single unit
Unit Marginal Contribution (MC) Definition: Difference between the
unit sales price and the unit variable cost, also known as marginal income or producer’s marginal contribution (MC). This means each unit sold contributes toward absorbing the company’s fixed cost.
MC = Sales price – Variable cost Application: Break-even volume
analysis:
Break - even volume =Fixed costs
MC
Income Statement For External ReportingSales Revenue $400,000
Less Cost of Goods Sold 210,000
Gross Margin $190,000
Less Mktg. & Admin Exp. 80,000
Net Income Before Taxes $110,000
Contribution Margin Format Income Statement
Sales Revenue $400,000
Less Variable Costs:
Variable Cost of Sales $160,000
Variable Mktg & Admin 8,000 168,000
Contribution Margin $232,000
Less Fixed Costs:
Fixed Cost of Sales $50,000
Fixed Mktg & Admin 72,000 122,000
Net Income Before Taxes $110,000
Marginal Costing-short term decision making Selling price decision Exploring new markets Make or buy decisions Sales mix decision Selecting a suitable method of production Plant shut down decision
EXAMPLES OF OPERATING EXAMPLES OF OPERATING DECISIONSDECISIONS
PRICE OF SALESPRICE OF SALES IN HOUSE PRODUCTION (MAKE) IN HOUSE PRODUCTION (MAKE) OR OUTSOURCING (BUY)OR OUTSOURCING (BUY) END OF PRODUCTION LINES END OF PRODUCTION LINES RESOURCES REPLACEMENTRESOURCES REPLACEMENT SPECIAL ORDERSSPECIAL ORDERS PRODUCTS MIXPRODUCTS MIX ETC.ETC.
IF ALL THE PRODUCTS ARE IF ALL THE PRODUCTS ARE INDEPENDENT, WE DON’T HAVE TO INDEPENDENT, WE DON’T HAVE TO
CHOOSE ONE TO PUSH MORECHOOSE ONE TO PUSH MORE
(we’ll try to maximize the sales of all products)(we’ll try to maximize the sales of all products)
ANSWERING THE QUESTION USING ANSWERING THE QUESTION USING
““CONTRIBUTION MARGIN”CONTRIBUTION MARGIN”
PROPORTIONED TO PROPORTIONED TO
THE SCARCE RESOURCETHE SCARCE RESOURCE
(ratio)(ratio)