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1. 2 Chapter Two Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2. Planning Control DecisionMaking Directing Process of Management Managers need
cost information toperform each of these functions.
3. What Do We Mean By a Cost? A Costis the measure ofresources givenup to achieve
aparticular purpose.
4. DirectLabor DirectMaterial Manufacturing Overhead TheProduct Manufacturing Costs
5. Example: Steel used tomanufacturethe automobile. Direct Material Cost of raw material
that is used tomake, and can be convenientlytraced, to the finished product.

6. Direct Labor Cost of salaries, wages, and fringebenefits for personnel who workdirectly
on manufactured products. Example: Wages paid to anautomobile assemblyworker.
7. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor
OtherCosts Materials used to support the production process. Examples: lubricants and
cleaning supplies used in an automobile assembly plant.
8. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor
OtherCosts Cost of personnel who do not work directly on the product. Examples:
maintenance workers, janitors and security guards.
9. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor
OtherCosts Examples: depreciation on plant and equipment, property taxes, insurance,
utilities, overtime premium, and unavoidable idle time.
10. Classifications of Costs in Manufacturing Companies Manufacturing costs are
oftencombined as follows: DirectMaterial DirectLabor ManufacturingOverhead PrimeCost
ConversionCost
11. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer •
Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work
in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid
Expenses • Merchandise Inventory
12. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer •
Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work
in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid
Expenses • Merchandise Inventory Those materials waiting to be processed.
13. Cost Classifications on Financial Statements – Balance Sheet • Merchandiser •
Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory •
Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw
Materials • Work in Process • Finished Goods Partially complete products – material to which
some labor and/or overhead has been added.
14. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer •
Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work
in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid
Expenses • Merchandise Inventory Completed products awaiting sale.
15. Income StatementExpenses Work in Process Cost of GoodsSold FinishedGoods
Selling andAdministrative Period Expenses Manufacturing Cost Flows Balance SheetCosts
Inventories Material Purchases Raw Material Direct Labor ManufacturingOverhead Selling
andAdministrative
16. Material, labor andmanufacturingoverhead costsremain in inventoryuntil the product
issold, so they aresometimes calledinventoriable costs. Manufacturing Cost Flows Income
StatementExpenses Balance SheetCosts Inventories Material Purchases Raw Material Direct
Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Selling
andAdministrative Selling andAdministrative Period Expenses
17. Manufacturing Cost Flows Income StatementExpenses Balance SheetCosts
Inventories Material Purchases Raw Material Direct Labor Work in Process
ManufacturingOverhead Cost of GoodsSold FinishedGoods Period expenses are not
associated with manufacturing the product and are expensed in the period incurred. Selling
andAdministrative Selling andAdministrative Period Expenses
18. Manufacturing Cost Flows Income StatementExpenses Balance SheetCosts
Inventories Material Purchases Raw Material Direct Labor Work in Process
ManufacturingOverhead Cost of GoodsSold FinishedGoods Selling andAdministrative Selling
andAdministrative Period Expenses
19. Types of Production Processes
20. Let’s look at aSchedule of Cost ofGoods Manufactured forComet Computer
Corporation. Schedule of Cost of Goods Manufactured
21. Schedule of Cost of Goods Manufactured
22. Schedule of Cost of Goods Manufactured
23. Schedule of Cost of Goods Manufactured Include all direct labor costs incurred during
the current period.
24. Schedule of Cost of Goods Manufactured
25. Schedule of Cost of Goods Manufactured Beginning work-in-process inventory is
carried over from the prior period.
26. Schedule of Cost of Goods Manufactured Ending work-in-process inventory contains
the cost of unfinished goods, and is reported in the current assets section of the balance
sheet.
27. Now let’s look at an income statement for Comet Computer Corporation. Income
Statement for a Manufacturer
28. Income Statement for a Manufacturer
29. Income Statement for a Manufacturer
30. Cost Classifications Cost behavior means how a cost will react to changes in the level
of business activity. • Total variable costs change when activity changes. • Total fixed costs
remain unchanged when activity changes.
31. Cost Classifications Activities thatcause costs to be incurred are calledcost drivers.
Cost behavior means how a cost will react to changes in the level of business activity. • Total
variable costs change when activity changes. • Totalfixed costs remain unchanged when
activity changes.
32. Identifying Cost Drivers
33. Total Variable Cost Example Your total long distance telephone bill is based on how
many minutes you talk. Total Long DistanceTelephone Bill Minutes Talked
34. Variable Cost Per Unit Example The cost per long distance minute talked is constant.
For example, 5 cents per minute. Per MinuteTelephone Charge Minutes Talked
35. Total Fixed Cost Example Your monthly basic telephone bill probably does not change
when you make more local calls. Monthly Basic Telephone Bill Number of Local Calls
36. Fixed Cost Per Unit Example The average cost per local call decreases as more local
calls are made. Monthly Basic Telephone Bill per Local Call Number of Local Calls
37. Cost Classifications
38. Cost Behavior Question 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.
39. Cost Behavior Question 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.
40. Cost Behavior Question Variable costs are usually characterized by: a. Unit 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.
41. Cost Behavior Question Variable costs are usually characterized by: a. Unit 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.
42. Direct costs Costs that can beeasily and conveniently traced to a product or department.
Example: cost of paint in the paint department of an automobile assembly plant. Indirect costs
Costs that must be allocated in order to be assigned to a product or department. Example:
cost of national advertising for an airline is indirect to a particular flight. Direct and Indirect
Costs
43. Direct and Indirect Costs • A cost can be direct to the department, but indirect to units of
product produced in the department. • Example: department manager’s salary. • Tracing costs
directly to departments or products facilitates responsibility accounting.
44. Controllable andUncontrollable Costs A cost that can be significantly influencedby a
manager is a controllable cost.
45. Opportunity Cost The potential benefit that is given up when one alternative is selected
over another. • Example: If you werenot attending college,you could be earning$20,000 per
year. Your opportunity costof attending college for one year is $20,000.
46. Sunk Costs All costs incurred in the past that cannot be changed by any decision made
now or in the future. Sunk costs should not be considered in decisions. • Example: You
bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because
whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.
47. Differential Costs Costs that differ between alternatives. Example: You can earn $1,500
per month in yourhometown or $2,000 per month in a nearby [Link] commuting costs are
$50 per month in yourhometown and $300 per month to the city. What is your differential
cost?
48. Differential Costs Costs that differ between alternatives. Example: You can earn $1,500
per month in yourhometown or $2,000 per month in a nearby [Link] commuting costs are
$50 per month in yourhometown and $300 per month to the city. What is your differential
cost? $300 - $50 = $250
49. Marginal Costs and Average Costs The extra costincurred to produceone additional
unit. The total cost toproduce a quantitydivided by thequantity produced. Marginal and
average costs arelargely a function of cost behavior -- variable and fixed costs.
50. Benefits Costs Costs and Benefits of Information More information does not mean more
benefits if information overload results.