1、Manufacturing Cost Concepts,Financial AccountingCost is a measure of resources used or given up to achieve a stated purpose.,Managerial AccountingProduct costs are the costs a company assigns to units produced.,The Product,DirectMaterials,DirectLabor,ManufacturingOverhead,Manufacturing Costs,Direct
2、Materials,Those materials that become an integral part of the product and that can be conveniently traced directly to it.,Example: A radio installed in an automobile,Direct Labor,Those labor costs that can be easily traced to individual units of product.,Example: Wages paid to automobile assembly wo
3、rkers,Manufacturing costs that cannot be traced directly to specific units produced.,Manufacturing Overhead,Examples: Indirect labor and indirect materials,Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards.,Materials
4、 used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.,Classifications of Costs,DirectMaterials,DirectLabor,ManufacturingOverhead,PrimeCost,ConversionCost,Manufacturing costs are oftencombined as follows:,Nonmanufacturing Costs,Mark
5、eting and selling costs . . .Costs necessary to get the order and deliver the product.Administrative costs . . .All executive, organizational, and clerical costs.,Product Costs Versus Period Costs,Product costs include direct materials, direct labor, and manufacturing overhead.,Period costs are not
6、included in product costs. They are expensed on the income statement.,Inventory,Cost of Good Sold,BalanceSheet,IncomeStatement,Sale,Expense,IncomeStatement,Cost Classifications for Predicting Cost Behavior,How a cost will react to changes in the level of business activity.Total variable costs change
7、 when activity changes.Total fixed costs remain unchanged when activity changes.,Total Variable Cost,Your total long distance telephone bill is based on how many minutes you talk.,Minutes Talked,Total Long DistanceTelephone Bill,Variable Cost Per Unit,Minutes Talked,Per MinuteTelephone Charge,The co
8、st per long distance minute talked is constant. For example, 10 cents per minute.,Total Fixed Cost,Your monthly basic telephone bill probably does not change when you make more local calls.,Number of Local Calls,Monthly Basic Telephone Bill,Fixed Cost Per Unit,Number of Local Calls,Monthly Basic Tel
9、ephone Bill per Local Call,The average cost per local call decreases as more local calls are made.,Cost Classifications for Predicting Cost Behavior,Cost Behavior,Fixed costs are usually characterized by: a.Unit costs that remain constant.b.Total costs that increase as activity decreases. c.Total co
10、sts that increase as activity increases.d.Total costs that remain constant.,Fixed costs are usually characterized by: a.Unit costs that remain constant.b.Total costs that increase as activity decreases. c.Total costs that increase as activity increases.d.Total costs that remain constant.,Cost Behavi
11、or,Cost Behavior,Variable costs are usually characterized by: a.Unit costs that decrease as activityincreases. b.Total costs that increase as activity decreases. c.Total costs that increase as activity increases. d.Total costs that remain constant.,Variable costs are usually characterized by: a. Uni
12、t costs that decrease as activity increases. b.Total costs that increase as activity decreases. c.Total costs that increase as activity increases. d.Total costs that remain constant.,Cost Behavior,The Linearity Assumption and the Relevant Range,Activity,Total Cost,EconomistsCurvilinear Cost Function
13、,Activity,Total Cost,EconomistsCurvilinear Cost Function,Accountants Straight-Line Approximation (constant unit variable cost),The Linearity Assumption and the Relevant Range,Activity,Total Cost,RelevantRange,The Linearity Assumption and the Relevant Range,Accountants Straight-Line Approximation (co
14、nstant unit variable cost),EconomistsCurvilinear Cost Function,A straight line closely approximates a curvilinear variable cost line within the relevant range.,Types of Fixed Costs,Fixed Costs,DiscretionaryMay be altered in the short-term by current managerial decisions,CommittedLong-term, cannot be
15、 reduced in the short term.,ExamplesDepreciation on Buildings and Equipment,ExamplesAdvertising and Research and Development,Trend Toward Fixed Costs,Increased automation.Increase in salaried knowledge workers who are difficult to train and replace.,ImplicationsManagers are more “locked-in” with few
16、er decision alternatives.Planning becomes more crucial because fixed costs are difficult to change with current operating decisions.,Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the
17、total cost.,Fixed Costs and Relevant Range,Rent Cost in Thousands of Dollars,0 1,000 2,000 3,000 Rented Area (Square Feet),0,30,60,Fixed Costs and Relevant Range,90,Relevant Range,Total cost doesnt change for a wide range of activity, and then jumps to a new higher cost for the next higher range of
18、activity.,How does this type of fixed cost differ from a step-variable cost?,Step-variable costs can be adjusted more quickly and . . .The width of the activity steps is much wider for the fixed cost.,Fixed Costs and Relevant Range,A mixed costhas both fixed and variablecomponents.,Mixed Costs,Consi
19、der thefollowing electric utility example.,Fixed MonthlyUtility Charge,Variable Utility Charge,Activity (Kilowatt Hours),Total Utility Cost,Mixed Costs,Total mixed cost,Total mixed cost Y = a + bX,Fixed MonthlyUtility Charge,Variable Utility Charge,Activity (Kilowatt Hours),Total Utility Cost,Mixed
20、Costs,Fixed MonthlyUtility Charge,Variable Utility Charge,Activity (Kilowatt Hours),Total Utility Cost,Total mixed cost Y = a + bX,Mixed Costs,bX,a,The Analysis of Mixed Costs,Account Analysis,Each account is classified as eithervariable or fixed based on the analysts knowledge of how the account be
21、haves.,Engineering Estimates,Cost estimates are based on an evaluation of production methods, and material, laborand overhead requirements.,WiseCo recorded the following production activity and maintenance costs for two months: Using these two levels of activity, compute: the variable cost per unit;
22、 the fixed cost; and then express the costs in equation form Y = a + bX.,The High-Low Method,Unit variable cost =,Changein costChange in units,The High-Low Method,The High-Low Method,Unit variable cost = $3,600 4,000 units = $0.90 per unit,The High-Low Method,Unit variable cost = $3,600 4,000 units
23、= $0.90 per unit Fixed cost = Total cost Total variable cost Fixed cost = $9,700 ($0.90 per unit 9,000 units) Fixed cost = $9,700 $8,100 = $1,600,Unit variable cost = $3,600 4,000 units = $0.90 per unit Fixed cost = Total cost Total variable cost Fixed cost = $9,700 ($0.90 per unit 9,000 units) Fixe
24、d cost = $9,700 $8,100 = $1,600 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $1,600 + $0.90X,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission
25、?a. $0.08 per unitb. $0.10 per unit c. $0.12 per unitd. $0.125 per unit,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission?a. $0.08 per unitb. $0.10 per un
26、it c. $0.12 per unitd. $0.125 per unit,The High-Low Method,If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions?a. $ 2,000b. $ 4,000 c. $10,000d. $12,000,The High-Low Method,If sa
27、les salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions?a. $ 2,000b. $ 4,000 c. $10,000d. $12,000,The High-Low Method,The Scattergraph Method,Plot the data points on a graph (total cost v
28、s. activity).,The Scattergraph Method,Draw a line through the data points with about anequal numbers of points above and below the line.,The Scattergraph Method,The slope of this line is the variable unit cost. (Slope is the change in total cost for a one unit change in activity).,The Scattergraph M
29、ethod,Vertical distance is the change in cost.,Accountants and managers may use computer software to fit a regression line through the data points.The cost analysis objective is the same: Y = a + bx,Least-Squares Regression Method,Least-squares regression also provides a statistic, calledthe adjuste
30、d R2, that is a measure of the goodnessof fit of the regression line to the data points.,0 1 2 3 4,Total Cost,10,20,0,Activity,*,*,*,*,*,*,*,*,*,*,Least-Squares Regression Method,X,Y,The Contribution Format,The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cos
31、tsand provides for income.,The Contribution Format,Direct Costs and Indirect Costs,Direct costsCosts that can beeasily and conveniently traced to a unit of product or other cost objective.Examples: direct material and direct labor,Indirect costsCosts cannot be easily and conveniently traced to a uni
32、t of product or other cost object. Example: manufacturing overhead,Cost Concepts for Decision Making,A relevant cost is a cost that differs between alternatives.,1,2,Identifying Relevant Costs,Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable c
33、osts. Avoidable costs are relevant costs.Unavoidable costs are never relevant and include:Sunk costs.Future costs that do not differ between the alternatives.,Identifying Relevant Costs,Sunk cost - a cost that has already been incurred and that cannot be avoided regardless of what a manager decides
34、to do.,Differential Costs and Revenues,Costs and revenues that differ among alternatives.,Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.,Differential revenue is
35、: $2,000 $1,500 = $500,Differential Costs and Revenues,Costs and revenues that differ among alternatives.,Differential revenue is: $2,000 $1,500 = $500Differential cost is:$300,Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,0
36、00 per month. The commuting cost to the city is $300 per month.,Opportunity Costs,The potential benefit that is given up when one alternative is selected over another.Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one yea
37、r is $15,000.,Sunk Costs,Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it,
38、 you cannot change the $10,000 cost.,Adding/Dropping Segments,One of the most important decisions managers make is whether to add or drop a business segment such as a product or a store.,The Make or Buy Decision,A decision concerning whether an item should be produced internally or purchased from an
39、 outside supplier is called a “make or buy” decision.,Utilization of a Constrained Resource,Firms often face the problem of deciding how to best utilize a constrained resource.Usually, fixed costs are not affected by this particular decision, so management can focus on maximizing total contribution
40、margin.,Joint Product Costs,In some industries, a number of end products are produced from a single raw material input.Two or more products produced from a common input are called joint products.The point in the manufacturing process where each joint product can be recognized as a separate product is called the split-off point.,Sell or Process Further,It will always be profitable to continue processing a joint product after the split-off point so long as the incremental revenue exceeds the incremental processing costs incurred after the split-off point.,
