Cost Terms, Concepts,

and Classifications

UAA – ACCT 202

Principles of Managerial Accounting
Dr. Fred Barbee

Chapter
Specify “Tag” the Cost

 We need to place
an adjective (tag)
on the cost to
D
ire Co
ct st

identify what it is.

 Cost
Cost Flows
Flows in
in aa Manufacturing
Manufacturing Firm
Firm

Direct
Direct
Materials
Materials

Direct
Direct Work-in-
Work-in- Finished
Finished Cost-of
Cost-of
Labor
Labor Process
Process Goods
Goods Goods
GoodsSold
Sold

Mfg.
Mfg.
Overhead
Overhead
 Cost
Cost Flows
Flows in
in a
a Manufacturing
Manufacturing Firm
Firm
Manufacturing Costs
Costs incurred in the
Direct
manufacture of goods
Direct
Materials
Materials being produced.
Direct
Direct Work-in-
Work-in- Finished
Finished Cost-of
Cost-of
Labor
Labor •Known
Process
Process asGoods
product Goods
Goods GoodsSold
Sold

Mfg.
Mfg.
(inventoriable) costs.
Overhead
Overhead
•They are expensed
when the product is
sold.
 Those
Cost
Cost Flows
Flows in aamaterials
in that become
Manufacturing
Manufacturing Firman
Firm
integral part of the finished
product and can be physically
traced to the product.
Direct
Direct
Materials
Materials
Those factory labor costs that
Direct
Direct can be physically
Work-in-
Work-in- traced to the
Finished
Finished Cost-of
Cost-of
Labor
Labor production
Process
Process of the
Goodsfinished Goods
Goods GoodsSold
Sold
product.
Mfg.
Mfg.
Overhead
Overhead
All costs associated with the
manufacture of a product except
direct materials and direct labor.
 Direct
Direct
Materials
Materials Nonmanufacturing
•Known as Period
Costs
costs.
Direct
Direct
Labor
Work-in-
Work-in-
Process
Finished
Finished
Goods
Cost-of
Cost-of
Goods
Labor Process Goods GoodsSold
Sold
•They are Costs incurred for
Mfg.
expensed
Mfg.
in the other than production
Overhead old
activities.
Overhead S
period in which
they are Sales
incurred. - Cost
Costof
ofGoods
GoodsSold
Sold
Income
Statement = Gross Margin
- Nonmanufacturing
Nonmanufacturing
Expenses
Expenses

= Net Income
 General
Direct
Direct & Administrative Expenses
Materials
Materials
All executive, organizational, and clerical
costs associated
Direct
Direct with the general
Work-in-
Work-in- Finished management
Finished Cost-of
Cost-of
of the firm. Process
Labor
Labor Process Goods
Goods Goods
GoodsSold
Sold

Selling
Mfg.
Mfg. & Distribution Expenses
Overhead
Overhead old
All costs necessary to secure customer
S

orders andSales
get the products/services to the
customer.
- Cost
Costof
ofGoods
GoodsSold
Sold
Income
Statement = Gross Margin

- Nonmanufacturing
Nonmanufacturing
Expenses
Expenses

= Net Income
 Direct
Direct

Product Costs
Materials
Materials

Direct
Direct Work-in-
Work-in- Finished
Finished Cost-of
Cost-of
Labor
Labor Process
Process Goods
Goods Goods
GoodsSold
Sold

Mfg.
Mfg.
Overhead
Overhead Sold

Sales
- Cost
Costof
ofGoods
GoodsSold
Sold
Income
Statement = Gross Margin

- Nonmanufacturing
Nonmanufacturing
Expenses
Expenses
Period
Costs
= Net Income
Manufacturing Costs
 Manufacturing Costs

Materials that are directly

traceable to the goods or
services being produced
(physical observation).

Steel in cars, wood in furniture, etc.

 Direct Materials
 DM in Theory
 Every component

 DM in Reality
 Must apply cost-benefit rule
 DM – What is Cost?

 Theinvoice price of the raw

materials,
 Shipping costs,
 Import duties, and
A reduction for any allowable
discounts for prompt payment.
Manufacturing Costs

Labor that is directly

traceable to the goods
being produced.

Assembly line workers, chefs, pilots

 Manufacturing Costs

All production costs other

than direct materials and
direct labor.

Utilities, security, janitorial, etc.

 MOH – Other Names

 Overhead

 Burden

 Indirect Manufacturing Costs

 Factory Expenses
 MOH – A Few Examples

 Factory Supervision,
 Factory Telephone, heat, light, power,
 Factory bookkeeping salaries,
 Insurance
 Depreciation/factory equipment
 Indirect materials, labor.
 Nonmanufacturing Costs

 Allcosts not associated with the

production of goods.
 Selling Costs
 Administrative Costs
 Cost
Cost Flows
Flows in
in aa Manufacturing
Manufacturing Firm
Firm
Manufacturing Costs Balance Sheet
Unused
DM DM
DMInv.
Produ ct Costs

DM Use Inv.
d
Used Unfinished
DL
DL WIP
WIP WIP
WIPInv.
Inv.
plied Fini
Ap she
d
MOH
MOH FG
FGInv.
Inv.

Sales
- COGS
COGS Sold

Income = Gross Margin

Statement
- S&A
S&A Period
Costs
= Net Income
 Cost
Cost Flows
Flows in
in aa Manufacturing
Manufacturing Firm
Firm
Manufacturing Costs Balance Sheet
Unused
DM DM
DMInv.
Produ ct Costs

DM Use Inv.
d
Used Unfinished
DL
DL WIP
WIP WIP
WIPInv.
Inv.
plied Fini
Ap she
d
MOH
MOH FG
FGInv.
Inv.

Sales
Product Costs: Costs assigned to products (i.e.,
- COGS
COGS So
Work in Process Inventory.
ld

Income = Gross Margin

Statement
-
They “attach” themselves
S&A to units of product
S&A
and remain with the product until it is sold.
= Net Income
 Cost
Cost Flows
Flows in
in aa Manufacturing
Manufacturing Firm
Firm
Manufacturing Costs Balance Sheet
Unused
DM DM
DMInv.
Produ ct Costs

DM Use Inv.
d
Used Unfinished
DL
DL WIP
WIP WIP
WIPInv.
Inv.
plied Fini
Ap she
d
MOH
MOH FG
FGInv.
Inv.

Sales
- COGS
COGS Sold

Income = Gross Margin

Statement
- S&A
S&A
= Net Income
 Cost
Cost Flows
Flows in
in aa Manufacturing
Manufacturing Firm
Firm

Period Costs:
Manufacturing Expired non productBalance
Costs costs.
Sheet
Unused
Always
DM charged
DM
Use
to expense in the period
DM
DM in
Inv.
Inv.
d they occur.
which
Used Unfinished
DL
DL WIP
WIP WIP
WIPInv.
Inv.
plied Fini
Ap she
d
MOH
MOH FG
FGInv.
Inv.

Sales
- COGS
COGS Sold

Income = Gross Margin

Statement
- S&A
S&A Period
Costs
= Net Income
 Product
Product Costs
CostsVs.
Vs.Period
PeriodCosts
Costs

DM,
DM, DL,
DL,MOH,
MOH,S&A
S&ACosts
Costs

Work-in-
Product Process
Costs DM,
DM,DL
DL DM,
DM,DL
DL DM,
DM,DL
DL
MOH
MOH MOH
MOH MOH
MOH
Finished
S S S Goods
& & &
Period A A A
Costs Selling and Administrative Costs Sale
DM ,DL
MOH

Expensed in the current Cost of Goods

period. Sold
Balance Sheet Presentation
 Variable Costs

 Total costs that vary in direct proportion

to changes in the level of activity within
the relevant range.
Total Variable Costs

Volume (Activity Base)

Per Unit Variable Cost

Volume (Activity Base)

 Fixed Costs

 Costs that remain constant in total,

regardless of the changes in activity
within the relevant range.
Total Fixed Costs

Volume (Activity Base)

Per Unit Fixed Costs

Volume (Activity Base)

 Curvilinear Costs and the
Relevant Range
Economist’s
Curvilinear
Cost Function

$
Accountant’s
Straight-Line
Approximation

Relevant Range

Volume (Activity Base)

Anything for which a separate
measurement of costs is
Direct
desired (products, customers,
Costs
departments, etc.)
Cost
Object
Indirect
Costs
 Costs that are related to and
directly traceable to the
Direct identified cost objective.
Costs (Direct Material, Direct Labor)
Cost
Object
Costs that are related to, but
Indirect not traceable to, the identified
Costs cost objective.
(Manufacturing overhead)
Different Costs for
Different Purposes
 Product Costing Definitions
Value-Chain Operating Traditional
Product Costs Product Costs Product Costs

Research
Researchand
and
Development
Development
Production
Production Production
Production Production
Production
Marketing
Marketing Marketing
Marketing
Customer
CustomerService
Service Customer
CustomerService
Service

Pricing Decisions Strategic Design External Financial

Product-Mix Decisions Decisions Reporting
Strategic Profitability Tactical Profitability
Analysis Analysis
 Value-Chain

Product Costs
Research
Researchand
and
Development
Development
Production
Production
Marketing
Marketing
Customer
CustomerService
Service
If making any of
Pricing Decisions
these types of
Product-Mix Decisions
Strategic Profitability
decisions, I need to
Analysis look at all costs.
 Operating
Product Costs

On the other hand,

Production
Production
for these decisions,
Marketing
Marketing we might be able to
Customer
CustomerService
Service ignore some of the
costs.
Strategic Design
Decisions
Tactical
Profitability
Analysis
 Product Costing Definitions
Value-Chain Operating Traditional
For external
Product Costs Product Costs Product Costs

financial
Research and reporting,
Researchand
Development
Development

we need only Production

Production
Production
these
Production Production
Production
Marketing
Marketing Marketing
Marketing
costs
Customer –
Service
Customer Service
because
Customer
CustomerService
Service

that is what GAAP

says
Pricing Decisions we need.
Product-Mix Decisions
Strategic Design
Decisions
External Financial
Reporting
Strategic Profitability Tactical Profitability
Analysis Analysis