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1、ACCT 2102Lecture 2:Introduction to Cost Terms and Purposes1Reading:Reading:Lecture notes&Horngren et al.Chapter 2Lecture objectives1.Define and explain cost terms2.Explain different cost classifications 3.Identify types of costing systems4.Inserting cost and management accounting concepts in a finan
2、cial accounting framework developed in previous accounting courses(e.g.ACCT1101)2What is this course about?3Three Dog Bakery?MuffinsMuffinsCakesCakesBiscuitsBiscuitsLabour$Insurance$Rent$Equipment$Materials$IMPORTANT!4You need to know and to understand certain assumptions,definitions and concepts wh
3、ich are essential for cost and management accounting,before proceeding with the remainder of the course.1.Cost terms Cost is the sacrifice made,usually measured by the price paid or to be paid,to achieve a specific objective(e.g.to acquire goods or services).Costing means assigning a dollar value,re
4、presenting what it costs the firm to produce something.Actual cost is the cost incurred(a historical or past cost)as distinguished from a budgeted cost(future cost).Opportunity cost is the value of what is given up when one alternative is chosen instead of another.5Cost termsCost object(or cost obje
5、ctive)is the item that the firm is costing.It may be a whole process,a department,a product/service or a job.For most of ACCT2102,the cost object considered will be a product(or a job).Product cost is the sum of the costs assigned to a product for a specific purpose.There are 3 elements of product c
6、ost:Materials(Direct Materials=DM)Labour(Direct Labour=DL)Manufacturing/Factory Overhead(O/H)(Indirect Materials,Indirect Labour,Other O/H)6More cost termsCost accumulation is the collection of cost data in some organized way by means of an accounting system.Cost assignment involves both cost tracin
7、g and cost allocation.Cost tracing is the assignment of accumulated costs that have a direct relationship to a particular cost object(direct cost).Cost allocation is the assignment of accumulated costs that have an indirect relationship to a cost object(indirect cost).The process of“cost accumulatio
8、n”and“cost assignment”requires a distinction be made between Direct Costs and Indirect Costs.Cost Driver is the factor or variable(such as the level of activity or volume)that causes a change of total cost over a range of activity/volume and time period(Cost BehaviorTopic 3)72.Cost classificationMan
9、ufacturing versus non-manufacturing costsManufacturing versus non-manufacturing costsManufacturing costs are the costs of obtaining and transforming raw materials into a finished product.Only manufacturing costs are considered as“product”costs(inventory)under AASB 102.Non-manufacturing costs include
10、 all other costs of the firm.Traditionally,non-manufacturing costs are considered“period”costs.These include:Distribution costsSelling costsMarketing costsResearch and development costsGeneral and Administrative costs89Total CostManufacturingProduct Costs/Inventory CostsNon-ManufacturingPeriod Costs
11、/ExpensedMaterialsMaterialsLabourLabourOverheadOverheadCommercial,Distribution and AdministrationPrime CostsConversion Costs(Direct vs Indirect)(Fixed vs Variable)(Fixed vs Variable)Total Cost of a manufacturing company:10Quick check Quick check 1 1Classify the following costs as either manufacturin
12、g or non-Classify the following costs as either manufacturing or non-manufacturing costs:manufacturing costs:CostManufacturingNon-ManufacturingAssembly-Line LabourFreight OutFreight InOffice suppliesDepreciation on Factory EquipmentGeneral Managers SalarySand Glass FactoryFactory Renti.Direct and in
13、direct costsA manufacturing cost is a cost which is directly or indirectly related to the production(manufacture)of a product or a job.Manufacturing costs do not include costs such as design,research and development,selling,distribution,administration,financing.Direct costs are costs directly relate
14、d to the particular cost object that can be traced to that object in an economically feasible way(e.g.based on material requisition document).Indirect costs are also manufacturing costs but only indirectly identified with the particular cost object(cannot be traced to that object in an economically
15、feasible way).11 Quick check 2Given the respective cost objects classify the following costs as Direct(D)or Indirect(O/H):Cost(Manufacturing)When the cost object considered is:Each individual repair jobThe entire repair workshopParts used in the jobService LabourSupervisors salaryIncidental material
16、12What does this mean for us?Traceability of costCost objectDirect costIndirect costProductRaw materialsOverhead costs(e.g.factory supervisors salary)Factory labourDepartmentProduct costsCorporate expenditure(e.g.directors fees)Supervisors salaryOther OH costsCompanyProduct costsNoneDepartment costs
17、Corporate expenditureAll other costs13There are only three manufacturing costs:Direct Materials(DM)-recorded in Materials control account.Direct labour(DL)-recorded in Wages Payable account(or equivalent).Manufacturing(or Factory)Overhead(OH)-recorded in OH control account14Manufacturing OH:Indirect
18、 Product Cost It Includes.Materials not directly traceable to the cost object(indirect materials).Labour not directly traceable to the cost object(indirect labour).Other Manufacturing Costs that are incurred in the production of the final product(e.g.,Factory rent,factory rates,factory electricity,d
19、epreciation of factory equipment etc.)15 Quick check 3Quick check 3Which Of the following is not and example of a manufacturing overhead?161.Indirect materials.2.Factory rent.3.Assembly line workers wages.4.Depreciation of factory machinery.5.Factory lighting.ii.Fixed,variable and mixed costsRelated
20、 to how the cost“behaves”in relation to changes in the cost driver(level of activity or volume).Some sales costs tend to vary with sales volume.Some administrative costs do not vary with volume of either production or sales.17Fixed costsHowever,unit costunit cost changes.changes.18$(y)Volume(x)Fixed
21、 CostsA Fixed Cost is one which in total does not change relative to changes in activity level of the cost driver(e.g.volume of sales)for a time periodExamples?Rent,Rates,Lease,Salaries,Depreciation of plant and equipment etc.Cost Function:Y=aC=F(Fixed costs)aVariable Costs However,However,unit cost
22、 unit cost is constant.is constant.19$(y)Volume(x)Variable CostsExamples?Inventory,sales commissions etc.Cost Function:Y=b*xC=V=v x n(Total Variable costs=Variable cost per unit x Number of units)A Variable Cost is one which in total varies in proportion to activity level of the cost driver(Variable
23、 cost does not just“vary”with activity level it varies“in proportion to”the activity level).Total CostsTotal Costs(mixed-cost behaviour)is the Sum of the fixed costs and the variable costs at the same volume20$(y)Volume(X)Y=a+b*x orY=a+b*x orC=F+V=F+(v x n)C=F+V=F+(v x n)aTotal variable costFixed co
24、stsMixed cost=Total costLecture Example 1(assuming the cost driver is the number of units produced)(assuming the cost driver is the number of units produced)For a Factory that makes pottery mugs:Activity level 100 units 200 unitsTotal cost of Insurance of Pottery Shed(F)$200$200 Per unit cost of Ins
25、urance of Pottery Shed(F)$2$1unit cost of Clay(V)$5$5Total cost of Clay(V)$500$1,000Note that the definition describes how the cost behaves in total,not how it behaves per unit.In the above example,Insurance cost is fixed-as the level of activity increases from 100 to 200,the total Insurance cost do
26、es not increase proportionately.Note that the cost per unit of a fixed cost decreases as activity level increases.Clay cost is variable-as the level of activity increases,the total cost of clay increases in proportion to the activity level.Note that for a variable cost,the cost per unit($5)remains c
27、onstant.21But there are some exceptionsBut there are some exceptionsFor the variable materials cost,it is likely that as volume increases the firm may buy in bulk,and possibly the$5 per unit reduces marginally.In reality the cost graph is a curve,not a straight line,but this refinement is assumed aw
28、ay for our purposes.Fixed costs in practice tend to remain fixed for a range of activity/volume,and then jump up to a higher amount for the next range,and so on.For example,if production is 100 units the firm may lease one machine.If production doubles,it may need to lease a second machine.In all ou
29、r work we will choose the expected range of activity,called the relevant range.22Another category a Another category a mixed costmixed costWhile most costs are either fixed or variable,some may have both a fixed and a variable component.For example,a supervisor may be paid a salary of$400 per week,r
30、egardless of output(Fixed),plus 20c per unit produced(Variable).This type of cost is called a mixed cost,and for decision-making purposes must be split into its fixed and variable components.How that is done is covered in lecture 3.23Consider now the three categories of manufacturing Consider now th
31、e three categories of manufacturing cost.Are they fixed,variable or mixed?cost.Are they fixed,variable or mixed?DM is always variable.If one mug takes$5 worth of clay,two mugs will use$10 worth,3 mugs$15 worth,and so on.DL is always variable.This particular item frequently causes students difficulty
32、 because in todays business environment the larger proportion of the workforce is paid a fixed salary,rather than hourly wage rates.However,if you think of direct labour in terms of the cost of labour hours that were spent on a particular product(or job)”?If so,it is likely to be direct and variable
33、.For example,is it possible to know how long the potter spent working on one coffee mug or a batch of coffee mugs?If yes,therefore this would be direct labour and variable cost.24What about OH?Some factory overhead costs will be fixed,some are variable,and others could be mixed.The Insurance on Pott
34、ery Shed cost above is fixed.An example of variable overhead is overtime premium and idle time.They are indirect labour costs and not direct costs because they cannot be traced to one unit or job(the cost of one job cannot be“penalised”because it was worked on during overtime hours).Supervisors sala
35、ry(as described before)is often a mixed cost.25Note:Lecture 3 next week will cover more on variable,fixed and mixed,etciii.Product versus period costsFrom previous courses you should be familiar with determining whether costs should be immediately expensed,or capitalised and expensed at a later date
36、.The distinction between product and period costs similarly relates to when a cost is expensed.The definition is important because as an accountant you could be asked to treat an item as a product cost or a period cost.Consequently,you need to know the appropriate treatment.26What are What are perio
37、dperiod and and productproduct costs?costs?A PERIOD cost(also called non-inventoriable cost)is one which is expensed in the period in which it is incurred.A PRODUCT cost(also called inventoriable cost)is one which is only expensed when the product,to which it is attached/related,is sold.Product cost
38、s are recorded in inventory accounts(WIP and FG).They are expensed(transferred to COGS)when the goods are sold.27Treatment of product versus period costs28 Product costs Product costs include direct materials,direct labour,and manufacturing overhead.Period costs Period costs are not included in prod
39、uct costs.They are expensed in the Income Statement.InventoryCost of Good SoldBalanceSheetIncomeStatementSaleExpenseIncomeStatementiv.Summary of cost classifications The following classifications will always apply when costing products under absorption costing(no exceptions):Type of cost(Manufacturi
40、ng)Direct or indirect?Product or period?Fixed or variable?(Discussed more in Topic 3)DMDirectProductVariableDLDirectProductVariableManuf.OHIndirectProductSome fixed,some variableNon-manufacturing(Selling/admin/financing)Not classified as direct or indirectPeriodSome fixed,some variable293.Types of c
41、osting systemsMany of the topics covered in this course involve costing a job or product.The costing systems used are listed below,and will be explained in the coming weeks.(There is no need to try to understand them all at this point.)Costing systems will be either:and they will be either:and they
42、will be either:JOB COSTING(Lecture 4)orPROCESS COSTING(Lecture 7)ABSORPTION COSTING(most of the course)orVARIABLE COSTING ACTUAL COSTINGNORMAL COSTING STANDARD COSTING 304.4.Inserting cost and management Inserting cost and management accounting accounting concepts in a financial accounting framework
43、 concepts in a financial accounting framework developed in ACCT1101developed in ACCT1101In ACCT1101 you developed the Financial Statements for merchandisers and some service firms.Let us look at the financial statements of a manufacturer.Let us see how they might differ from Statements prepared for
44、a merchandiser.31Recall the difference in the Balance Sheets between Recall the difference in the Balance Sheets between Merchandising firms and Manufacturing firms as covered in Merchandising firms and Manufacturing firms as covered in ACCT1101.ACCT1101.Examine the two extracts from the current ass
45、ets sections of the balance sheets:32BALANCE SHEET EXTRACTS:Merchandiser Current AssetslCashlReceivableslPrepaid ExpenseslMerchandise Inventory Manufacturer Current AssetsCashReceivablesPrepaid ExpensesInventoriesRaw MaterialsWork in Process(WIP)Finished GoodsWaiting to be processedPartially complet
46、ed productsCompleted products(awaiting sale)Lets consider the Income Statement of the Merchandising Lets consider the Income Statement of the Merchandising and Manufacturing firms.and Manufacturing firms.The cost of goods sold for manufacturers differs only slightly from cost of goods sold for merch
47、andisers.Examine the two extracts from the Cost of goods sold section of the two firms:33INCOME STATEMENT EXTRACTS:Manufacturing Cost Flows34ManufacturingOverhead Work in ProcessFinishedGoodsCost of GoodsSoldSelling andAdministrativeMaterial PurchasesDirect labour Costs Balance Sheet (Inventories)In
48、come StatementIncome Statement(Expenses)Selling andAdministrativePeriod CostsRaw MaterialsProduct Costs a closer look35Conversion Costs DL and OH36Conversion costs are costs incurred to convert the direct material into a finished product.Total manufacturing costs=DM+DL+OH 37Cost of goods manufacture
49、d38Costs associated with the goods that are completed during the period are transferred to finished goods inventory.The journey of cost of goods manufactured:From WIP to FG39 Quick check 4Quick check 4:Beginning raw materials inventory was$32,000.Beginning raw materials inventory was$32,000.During t
50、he month,$276,000 of raw material was During the month,$276,000 of raw material was purchased.A count at the end of the month revealed purchased.A count at the end of the month revealed that$28,000 of raw material was still present.What that$28,000 of raw material was still present.What is the cost