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7/24/2019 Cost Concepts.ppt
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Learning Objectives
LO1- Define Cost
LO2- Distinguish between Financial & Managerial Accounting
LO3-State the goals of Managerial Accounting.
LO- Define cost ter!s use" in #lanning$ control$ an" "ecision !a%ing.
LO-'"entif( the cost co!#onents of a #ro"uct !a"e b( a !anufacturing co!#an() the costof !aterials$ labor & o*erhea"
LO+-,#lain the effects on the financial state!ents of #ro"uct costs *ersus #erio" costs.
LO-Distinguish #ro"uct costs fro! u#strea! & "ownstrea! costs
LO/-,#lain how #ro"uct costing "iffers in ser*ice$ !erchan"ising & !anufacturingco!#anies
LO0-) Describe how "irect !aterial$ "irect labor$ an" !anufacturing o*erhea" are assigne" toobs.
LO1-,#lain the role of a #re"eter!ine" o*erhea" rate in a##l(ing o*erhea" to obs
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Cost & CostAccounting
Cost
is a resource sacrifice" or forgone to achie*e
a s#ecific obecti*e.
Actual cost a cost that has occurred
Budgeted cost a predicted cost Cost object anything of interest for which a cost isdesired
Cost accounting is concerne" with recor"ing$ classif(ing an"su!!ari4ing costs for "eter!ination of costs of #ro"ucts or
ser*ices$ #lanning$ controlling an" re"ucing such costs an"
furnishing of infor!ation to !anage!ent for "ecision !a%ing
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Comparing Managerial Accounting &
Financial Accounting
's !eant #ri!aril( for internal users while financial accounting is !eant foreternal users.
's !ore fleible 5 !ore "etaile"
Does not focus on generall( acce#te" accounting #rinci#les 67AA89
:as a future rather than #ast focus
's !ore ti!el(
,!#hasi4es #arts of a co!#an( 6the "etails9$ rather than the whole
co!#an(
,!#hasi4es both ;ualitati*e an" ;uantitati*e infor!ation
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Cost & 8rofit as a #ercentage of total inco!e
6
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Cost Terms
=he ter! >cost? a##ears in !an( contets an"
carries a nu!ber of !eanings.
Different categories of cost ter!s are !erel(
"ifferent wa(s to loo% at costs or to slice an" "ice
cost infor!ation. =he( are not necessaril(
co!#le!entar( to or !utuall( eclusi*e of other
cost categories.
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Cost Classication Elements
Direct Material Direct Labour Direct Epense !"erhead
Behaviour Pattern #ied Cost $ariable Cost %ei $ariable Cost
Function Wise
'roduct Cost Adinistrati"e Cost %elling Cost Distribution Cost (esearch & De"elopent Cost
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Normality
)oral Cost Abnoral Cost
Financial accounting classifcation Capitali*ed Cost 'roduction Cost 'eriod Costs
Managerial decision making Marginal Cost %un+ Cost
Coitted Costs !pportunity Cost ,ncreental Cost A"oidable & -na"oidable Cost Controllable & )on Controllable Costs
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Variable & Fixed Cost
@ariable costs) costs that increase or "ecrease6in total9 relati*e to increases or "ecreases in
the le*el of business acti*it(.
Fie" costs) costs that "o not change 6in total9
relati*e to changes in business acti*it(.
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Sunk Cost
So!eti!es calle" >#ast costs.? =hese costs are
O= rele*ant to the "ecision !a%ing #rocess.
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Opportunit Cost
=hese are the *alues of #otentialbenefits foregone when a "ecision is
!a"e.
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!irect & "ndirect Cost
Direct costs) costs that are "irectl( traceable to
so!e obect such as a #ro"uct$ acti*it( or
"e#art!ent.
'n"irect costs) costs that are O= "irectl(
traceable to a #ro"uct$ acti*it( or "e#art!ent#
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Controllable and $on%controllable
Costs
Bet another wa( to slice an" "ice costs. =his ti!e it hasto "o with the "egree of influence a !anager has o*er
the cost.
'f a !anage!ent "ecision can i!#act the cost in the
short ter!$ it is consi"ere" controllable.Con*ersel($ if a !anager cannot influence 6control9 the
cost in the short ter!$ then it is non controllable.
A !anagers #erfor!ance shoul" O= inclu"e an
assess!ent of non controllable costs.
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.ypes of 'roduct Costs
Also +nown as ,n"entoriable Costs
Direct Materials
Direct Labor
,ndirect Manufacturing factory coststhat are not traceable to the product/!ther coon naes for this type of
cost include Manufacturing !"erheadcosts or #actory !"erhead costs/
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Accounting Distinction
Between Costs ,n"entoriable costs product
anufacturing costs/ .hese costsare capitali*ed as assets 0in"entory1until they are sold and transferred toCost of 2oods %old/
'eriod costs ha"e no future "alueand are epensed as incurred/
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Basic Costing.erinology3
%e"eral +ey points fro priorchapters4
Cost !bjects 5 including responsibility
centers6 departents6 custoers6products6 etc/
Direct costs and tracing aterials and
labor ,ndirect costs and allocation 5 o"erhead
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3logically etended
Cost 'ool any logical grouping of relatedcost objects
Cost5allocation base a cost dri"er is used
as a basis upon which to build a systeaticethod of distributing indirect costs/ #or eaple6 let7s say that direct labor hours cause
indirect costs to change/ Accordingly6 direct labor
hours will be used to distribute or allocate costsaong objects based on their usage of that costdri"er
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Costing %ystes Costing %ystes8Methods are used to
deterine cost per unit of output forin"entory "aluation/
9ob5Costing4 syste accounting for distinct
cost objects called 9obs/ Each job ay bedi:erent fro the net6 and consuesdi:erent resources ;edding announceents6 aircraft6 ad"ertising
'rocess5Costing4 syste accounting for assproduction of identical or siilar products !il rening6 orange juice6 soda pop
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%e"en5step 9obCosting
/ %elect the Cost5Allocation base0s1 touse for allocating ,ndirect Costs tothe 9ob
?/ Match ,ndirect Costs to theirrespecti"e Cost5Allocation base0s1
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%e"en5step 9ob Costing0continued1
@/ Calculate an !"erhead Allocation (ate4
Actual ! Costs Actual ! AllocationBase
/ Allocate !"erhead Costs to the 9ob4 ! Allocation (ate Actual Base Acti"ity #or the 9ob
/ Copute .otal 9ob Costs by adding alldirect and indirect costs together
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#low of Costs
,llustrated