COST MANAGEMENT

1
CHAPTER 4

• COST MANAGEMENT
• SYSTEMS AND
• ACTIVITY-BASED
• COSTING

2
Classification of Costs

• Costs may be classified in many ways. We have
  already seen costs classified by their behaviour
  --
• fixed, variable, step, and mixed.

3
Classification of Costs

• This section concentrates on the big picture of
  how manufacturing costs are accumulated and
  classified.

4
Cost

• A cost may be defined as a sacrifice or giving
  up of resources for a particular purpose.
• Costs are frequently measured by the monetary
  units that must be paid for goods and services.

5
Cost Objective

• A cost objective or cost object is defined as
  anything for which a separate measurement of
  costs is desired.
• Examples include departments, products,
  activities, and territories.
• Accounts could be type of cost, to which
  product, department?

6
Direct Costs

• Direct costs can be identified specifically and
  exclusively with a given cost objective in an
  economically feasible way.

7
Indirect Costs

• Indirect costs cannot be identified specifically
  and exclusively with a given cost objective in an
  economically feasible way.

8
What Distinguishes Direct and Indirect Costs?

• Managers prefer to classify costs as direct
  rather than indirect whenever it is economically
  feasible or cost effective.
• Other factors also influence whether a cost is
  considered direct or indirect.

9
What Distinguishes Direct and Indirect Costs?

• For example, consider a supervisors salary in
  the maintenance department of a telephone company.

10
What Distinguishes Direct and Indirect Costs?

• If the cost objective is the department, the
  supervisors salary is a direct cost.
• In contrast, if the cost objective is a service
  (the product of the company), such as a
  telephone call, the supervisors salary is an
  indirect cost.

11
Categories of Manufacturing Costs

• Any raw material, labour, or other input used by
  any organization could, in theory, be identified
  as a direct or indirect cost,
• depending on the cost objective.

12
Categories of Manufacturing Costs

• All costs which are eventually allocated to
  products are classified as either
• 1. direct materials,
• 2. direct labour, or
• 3. indirect manufacturing.

13
Direct-Material Costs

• Direct-material 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.

14
Direct-Labour Costs

• Direct-labour costs include the wages of all
  labour that can be traced specifically and
  exclusively to the manufactured goods in an
  economically feasible way.

15
Indirect Manufacturing Costs

• Indirect manufacturing costs or factory overhead
  include all costs associated with the
  manufacturing process that cannot be traced to
  the manufactured goods in an economically
  feasible way.

16
Prime Costs, Conversion Costs, and Direct-Labour
Costs

• 1. Direct Materials
• Prime
• Costs 2. Direct Labour
• Conversion
• 3. Factory Overhead Costs

17
Cost Accounting forFinancial Reporting

• Regardless of the type of cost accounting system
  used, the resulting costs are used in a companys
  financial statements.

18
Product Costs

• Product costs are costs identified with goods
  produced or purchased for resale.

19
Product Costs

• Product costs are initially identified as part
  of the inventory on hand.
• These product costs (inventoriable costs) become
  expenses (in the form of cost of goods sold) only
  when the inventory is sold.

20
Period Costs

• Period costs are costs that are deducted as
  expenses during the current period without going
  through an inventory stage.

21
Period Costs - Merchandising and Manufacturing

• In both merchandising and manufacturing
  accounting, selling and general administrative
  costs are period costs.

22
Balance Sheet Presentation

• The merchandisers inventory account is
  supplanted in a manufacturing concern by three
  inventory classes that help managers trace all
  product costs through the production process to
  the time of sales.
• Look page 138

23
Direct Materials Inventory

• Direct materials inventory is the materials on
  hand and awaiting use in the production process.

24
Work-in-Process Inventory

• Work-in-process inventory is goods undergoing
  the production process but not yet fully
  completed.
• Costs include appropriate amounts of the three
  major manufacturing costs (direct material,
  direct labour, and indirect manufacturing).

25
Finished Goods Inventory

• Finished goods inventory is goods fully
  completed but not yet sold.

26
Costs and Income Statements

• In income statements, the detailed reporting of
  selling and administrative expenses is typically
  the same for manufacturing and merchandising
  organizations, but the cost of goods sold is
  different

27
Cost of Goods Sold for a Manufacturer

• The manufacturers cost of goods produced and
  then sold is usually composed of the three major
  categories of cost
• direct materials
• direct labour
• indirect manufacturing.

28
Cost of Goods Soldfor a Retailer or Wholesaler

• The merchandisers cost of goods sold is usually
  composed of the purchase cost of items, including
  freight in, that are acquired and then resold.

29
Direct Materials Inventory

• INCREASED BY
• Purchases of direct materials.

• DECREASED BY
• Use of direct materials.

30
Work-in-Process Inventory

• INCREASED BY
• Use of direct materials, direct labour, or
  indirect manufacturing.

• DECREASED BY
• Transfer of completed goods to finished-goods
  inventory.

31
Finished-Goods Inventory

• INCREASED BY
• Transfers of completed goods from work-in-process
  inventory.

• DECREASED BY
• The amount of cost of goods sold at time of sale.

32
What about direct labour and indirect
manufacturing ?

• Direct labour and indirect manufacturing are
  used at the same time they are acquired.
• Therefore, they are entered directly into
  work-in-process inventory and have no separate
  inventory account.

33
Absorption Approach

• The absorption approach is used by many firms
  and is a costing approach that considers all
  factory overhead (both variable and fixed) to be
  product (inventoriable) costs that become an
  expense in the form of manufacturing cost of
  goods sold only as sales occur.

34
Contribution Approach

• In contrast, the contribution approach, which is
  not allowed for external financial reporting, is
  used by many companies for internal (management
  accounting) reporting because it emphasizes the
  distinction between variable and fixed costs for
  the purpose of better decision making.