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COST CONCEPTS IN MANAGERIAL ACCOUNTING, :!!: Raw Materials. Any materials…
COST CONCEPTS IN MANAGERIAL ACCOUNTING
Cost Classifications for
Assigning Costs to Cost Objects
Direct Cost
can be easily traced to a cost object, e.g.
sales manager's salary for working in the sales office
paper used to make brochures
Indirect Cost
can't be traced to a cost object, e.g.
factory manager's salary for producing canned soup (i.e.
common cost
: cost that supports a no. of cost objects but can't be traced individually)
electricity, water, rent cost for producing canned soup
Cost Classifications for
Manufacturing Companies
Manufacturing Costs
Direct Materials.
Materials that become an integral part of finished product,
e.g. Seats bought by Airbus
Direct Labor (Touch Labor).
Labor costs that can be easily traced to individual units of product, e.g.
assembly-line workers at Toyota
cooks at McDonald's
Manufacturing Overhead.
All manufacturing costs, except direct materials & direct labor,
e.g. Indirect materials, indirect labor, maintenance & repairs of prod equipment, heat & light, property taxes, depreciation, insurance
Nonmanufacturing Costs
aka Selling, General, & Administrative (SG&A) Costs
Selling Costs.
All costs incurred to secure cust orders & get finished product to the cust,
e.g. Advertising, shipping, sales travel, sales salaries
Administrative Costs.
Costs associated with
general management of organization
, not manufacturing/selling
e.g. Exec compensation, general accounting, secretarial, PR
Cost Classifications for
Preparing Financial Statement
Product Costs.
Costs involved in acquiring/making a product,
incl. Direct materials, direct labor, manufacturing overhead
Period Costs.
All costs that are not product costs
incl. All selling & administrative
e.g. Advertising, exec salaries, PR, rent
Prime Cost & Conversion Cost
Prime Cost = Direct Materials + Direct Labor
Conversion Cost = Direct Labor + Manufacturing Overhead
Cost Classifications for
Predicting Cost Behavior
Cost behavior: How a cost reacts to changes in lv of activity
Cost structure: Relative proportion of each type of cost
Variable Cost.
If level of activity changes, VC will change
e.g. COGS, direct materials, direct labor, supplies, power
VC has an activity base/cost driver (measure of whatever causes incurrence of a VC, e.g. direct labor-hours, unit produced, unit sold)
Fixed Cost.
Remains constant in total regardless of level of activity
e.g. Insurance, property taxes, rent, advertising
For planning purposes, FC can be viewed as
Committed fixed costs
represent org investments with multiyear planning horizon, can't be significantly reduced without making fundamental changes, e.g. Investments in facilities & equipment, insurance expenses, salaries of top mgmt
Discretionary fixed costs
arise from annual decisions by mgmt, e.g. Advertising, research, PR, mgmt development programs
Mixed Costs (Semivariable Costs)
contains VC and FC elements
Y = a + bX
fixed portion = minimum cost of having a service ready and available for use
variable portion = actual consumption of the servoce
Account Analysis.
Classification of FC/VC depends on analyst's prior knowledge of how cost in the account behaves
Engineering Approach.
Analysis of what cost behavior should be, based on industrial engineer's evaluation
Diagnosing cost behavior with scatter plot
before using high-low/least-squares, plot costs on a scatter plot
plot cost on the Y axis because cost = dependent variable (amount varies according to activity)
plot activity on X axis because activity = independent variable
if scatter shows linearity, continue with either high-low/least-squares. if not, don't
High-Low Method
identify highest & lowest activities
VC = rise : run = change in cost : change in activity
FC = TC (at either highest/lowest activity) - VC element
defect
: only uses 2 data points, not enough to produce accurate results
Least-Squares Regression Method
uses all data to separate FC and VC
Y = a + bX, a (total FC), b (VC per unit of activity)
Traditional & Contribution Format Income Statement
Traditional Format.
Prepared for external reporting purposes
Limitations: When used for internal purposes, this format doesn't distinguish between FC and VC
Contribution Format
clearly distinguishes between FC and VC to aid planning, controlling, and decision-making
Contribution margin:
Amount remaining from sales revenue after VC has been deducted. This amount
contributes
to covering fixed expenses
Cost Classifications for
Decision-Making
Differential Cost & Revenue
Differential Cost:
Difference in costs between 2 alt
Differential Revenue:
Difference in revenues between 2 alt
Opportunity Cost & Sunk Costs
Opportunity Cost:
Potential benefit that's given up when one alt is selected over another
Sunk Cost:
Cost that has already been incurred, can't be changed by any decision
:!!:
Raw Materials.
Any materials used in final product; finished product of one company can become raw materials of another company
:!!:
Selling costs can be direct and indirect cost.
e.g. A product
Direct cost: Advertising campaign
Indirect cost: Salary of marketing manager
:!!:
Administrative costs can be direct and indirect cost.
e.g. Surabaya region
Direct cost: Salary of accounting manager for Surabaya
Indirect cost: Salary of company's CFO
:!!:
the period when a cost is incurred doesn't necessarily mean the period cash changes hands, e.g. cost of insurance paid up front for 2 years
:question:
Why 'conversion'? Because these costs are used to convert materials into finished product
:!!:
Relevant Range
range of activity where it is assumed that cost behavior is linear.
Outside of relevant range, FC may not be strictly fixed, VC may not be strictly variable
Step-variable costs e.g. e.g. Mayo Clinic rents a machine that costs $20,000 per month, capable of running 3,000 tests. if Mayo Clinic needs to run 5,000 tests it needs to rent another machine, making the cost $40,000 per month