Managerial Accounting and Cost Concepts
Managerial Accounting and Cost Concepts
Managerial Accounting and Cost Concepts
Cost Concepts
Chapter 01
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
1-2
Classifications of Manufacturing
Costs
Direct Direct Manufacturing
Materials Labor Overhead
The Product
1-3
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
1-4
Direct Labor
Those labor costs that can be easily
traced to individual units of product.
1-5
Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
1-6
Nonmanufacturing Costs
Administrative
Costs
All executive,
organizational, and
clerical costs.
1-7
Learning Objective 2
Distinguish between
product costs and
period costs and give
examples of each.
1-8
Product Costs Versus Period Costs
Sale
1-10
Quick Check
Which of the following costs would be considered
a period rather than a product cost in a
manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
1-11
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead
Prime Conversion
Cost Cost
1-12
Learning Objective 3
Understand cost
behavior patterns
including variable costs,
fixed costs, and mixed
costs.
1-13
Cost Classifications for Predicting Cost
Behavior
Cost behavior refers to
how a cost will react to
changes in the level of
activity. The most
common classifications
are:
▫ Variable costs
▫ Fixed costs
▫ Mixed costs
1-14
Variable Cost
Your total texting bill is based on how
many texts you send.
Total Texting Bill
1-15
Variable Cost Per Unit
The cost per text sent is constant at
5 cents per text message.
A measure of what
causes the
incurrence of a
variable cost
Miles Labor-
driven hours
1-17
Fixed Cost
Your monthly contract fee for your cell phone is
fixed for the number of monthly minutes in your
contract. The monthly contract fee does not
change based on the number of calls you make.
Monthly Cell Phone
Contract Fee
Committed Discretionary
Long term, cannot be May be altered in the
significantly reduced in short term by current
the short term. managerial decisions
Examples Examples
Depreciation on Buildings Advertising and
and Equipment and Real Research and
Estate Taxes Development
1-20
The Linearity Assumption and the
Relevant Range
Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
relevant range.
Total Cost
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Activity
1-21
Fixed Costs and the Relevant
Range
For example, assume office space is available at
a rental rate of $30,000 per year in increments of
1,000 square feet.
1-22
Fixed Costs and the Relevant
Range
90
Rent Cost in Thousands
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
1-23
Cost Classifications for Predicting Cost
Behavior
1-24
Quick Check
Which of the following costs would be variable with respect
to the number of cones sold at a Baskins & Robbins shop?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
1-25
Quick Check
Which of the following costs would be variable with respect
to the number of cones sold at a Baskins & Robbins shop?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
1-26
Mixed Costs
(also called semivariable costs)
A mixed cost contains both variable and fixed
elements. Consider the example of utility cost.
Y
Total Utility Cost
o st
d c
xe
al mi
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
1-27
Mixed Costs
Y
Total Utility Cost
ost
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
1-28
Mixed Costs – An Example
If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what is
the amount of your utility bill?
1-29
Analysis of Mixed Costs
Account Analysis and the Engineering Approach
1-30
Learning Objective 4
1-31
Scattergraph Plots – An Example
Assume the following hours of maintenance work and the total maintenance costs for six months.
1-32
The Scattergraph Method
Plot the data points on a graph
(Total Cost Y vs. Activity X).
Y
Total Maintenance Cost
$2,400
= $6.00/hour
400
1-34
The High-Low Method – An
Example
1-37
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
Units Cost
b. $0.10 per unit High level 120,000 $ 14,000
c. $0.12 per unit Low level 80,000 10,000
d. $0.125 per unit Change 40,000 $ 4,000
1-38
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
1-39
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
1-40
Least-Squares Regression Method
A method used to analyze mixed costs if a
scattergraph plot reveals an approximately linear
relationship between the X and Y variables.
1-42
Comparing Results From
the Two Methods
The two methods just discussed provide
different estimates of the fixed and variable cost
components of a mixed cost.
This is to be expected because each method
uses differing amounts of the data points to
provide estimates.
Least-squares regression provides the most
accurate estimate because it uses all the data
points.
1-43
Learning Objective 5
Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.
1-44
The Traditional and Contribution
Formats
1-46
Learning Objective 6
Understand the
differences between
direct and indirect costs.
1-47
Assigning Costs to Cost Objects
Direct costs Indirect costs
• Costs that can be • Costs that cannot
easily and be easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost object. or other cost object.
• Examples: direct • Example:
material and direct manufacturing
labor overhead
1-48
Learning Objective 7
Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.
1-49
Cost Classifications for Decision
Making
Every decision involves a choice
between at least two alternatives.
1-50
Differential Cost and Revenue
Costs and revenues that differ among alternatives.
1-51
Opportunity Cost
The potential benefit that is
given up when one alternative is
selected over another.
1-52
Sunk Costs
1-54
Quick Check
Suppose you are trying to decide whether to drive or take
the train to Portland to attend a concert. You have ample
cash to do either, but you don’t want to waste money
needlessly. Is the cost of the train ticket relevant in this
decision? In other words, should the cost of the train ticket
affect the decision of whether you drive or take the train to
Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
1-55
Quick Check
Suppose you are trying to decide whether to drive or take
the train to Portland to attend a concert. You have ample
cash to do either, but you don’t want to waste money
needlessly. Is the annual cost of licensing your car
relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
1-56
Quick Check
Suppose you are trying to decide whether to drive or take
the train to Portland to attend a concert. You have ample
cash to do either, but you don’t want to waste money
needlessly. Is the annual cost of licensing your car
relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
1-57
Quick Check
Suppose that your car could be sold now for $5,000. Is
this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
1-58
Quick Check
Suppose that your car could be sold now for $5,000. Is
this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
1-59
Summary of the Types of Cost
Classifications
1-60
End of Chapter 01
1-61