Basic Cost Management Concepts (Chapter 8)

(CC-NMF) Manufacturing costs

-are all costs associated with production of goods -classified as direct materials, direct labor, and factory overhead -usually are capitalized as inventory assets and do not become "expired cost'" or expenses until goods are sold

Cost

Basic definition -value forgone or sacrifice of resources for the purpose of achieving some economic benefit which will promote the profit making ability of the firm

Cost classification accdg to a time frame perspective

Committed Discretionary

Cost Classification accdg to managerial influence

Controllable cost Non controllable

Cost classification accdg to Traceability to cost objective

Direct cost-traceable, separable Indirect cost

Cost classified by nature of management function

Manufacturing costs Non manufacturing costs

COST CLASSIFIED ACCORDING TO THE TIMING OF RECOGNITION AS EXPENSE

Product Costs Period Costs

Cost classified by Types of Inventory

Raw materials Work in process Finished goods

Cost terminologies used for planning and control

Standard cost Budgeted cost Absorption costing Direct costing Information cost Ordering cost Out of pocket cost

COST CLASSIFICATION ON FINANCIAL STATEMENTS

Statement of Financial Position (inventory cost) -raw materials -work in process -finished goods -merchandise inventory Income Statement (Cost of sales and other operating expense -

Cost classification for predicting cost behavior

Variable costs Fixed costs Semi variable costs

Absorption costing (full cost method)

a costing method that includes all manufacturing costs-direct materials, direct labor, and both variable and fixed manufacturing overhead-in the cost of a unit of product

Standard cost

a predetermined cost estimate that should be attained;usually expressed in terms of costs per unit

Direct costing (variable costing)

a type of product costing where fixed costs are charged against revenue as incurred and are not assigned to specific units of product manufactured

Direct labor

all labor cost related to time spent on products that can be conveniently and economically assigned to specific units manufactured

direct materials

all raw materials that become integral part of the finished product and that can be conveniently and economically assigned to specific units manufactured includes invoice price + other costs paid to the vendor, shipping costs , sales taxes, duty, cost of delivery containers, and pallets, royalty payment - trade discounts and cash discounts include scarp, waste, and normally anticipated defective units that occur in ordinary course of the production process; routine quality assurance samples that are destroyed

Period costs

are all the costs that are identified with accounting periods and not included in product costs are expensed on the income statement in the period in which they are incurred not included as part of the cost of either purchased or manufactured goods ex. selling, administrative expenses

Allocation bases

are cost drivers used to allocate costs

Cost pools

are costs collected into meaningful group : -by type of cost -by source -by responsibility

Cost allocation

by: -Nature of management -timing of recognition as expense -financial statements -cost behavior -types of inventory -traceability to cost objective -managerial influence -planning and control -time frame/commitment to cost expenditure -period of incurrence -decision making and other analytical purpose

Information costs

cost of obtaining information

Noncontrollable cost

cost over which a given manager does not have a significant influence

Committed costs

cost that is inevitable consequence of a previous commitment

Controllable cost

cost that is subject to significant influence by a particular manager within the time period under consideration

Marginal costs

costs associated with the next unit or the next project or incremental cost associated with an additional project as opposed to the next discrete unit

Value added costs

costs that add value to the products

Out of pocket costs

costs that must be met with a current expenditure or cash outlay

Incremental costs

difference in cost between 2 or more alternatives

Conversion Costs

direct labor + overhead cost of converting or transforming raw material into finished products

Prime Costs

direct materials + direct labor

Relevant costs

future cost that are different under one decision alternative than under another decision

(CC-NMF)Nonmanufacturing Costs

generally include costs related to selling and other activities not related to the production of goods: marketing costs and general administrative costs

Cost classified accdg to Time period for which the cost is incurred

historical-pasts cost, incurred in past period future-budgetted costs expected to be incurred in a future period

Service vs manufacturing company

in Service company, service is consumed as it is produced, whereas a manufactured product can be stored in inventory

Marketing costs

include all costs associated with marketing or selling a product or all costs incurred by the marketing division from the time the manufacturing process is completed until the product is delivered to the customer or all costs necessary to secure customer orders and get the finished product or service into to hands of the customers : order getting and order filing costs

Product costs

include all costs that are involved in acquiring or making a product also called inventoriable costs, because they are costs that attach or cling to the units that are produced and reported as assets until the goods are sold might be incurred during one period but not treated as an expense until the product is sold

General and administrative costs

include all executive organizational and clerical costs associated with the general management of the organization rather than with manufacturing marketing or selling

Other manufacturing overhead

include overtime premiums, and the cost of idle time

Manufacturing overhead

includes all costs of manufacturing except direct materials and direct labor: indirect materials, indirect labor and other manufacturing overhead

Cost drivers

is any factor that has the effect of changing the level of total cost. ex. cost driver for retailers is loss and damage to merchandise

Cost object

is any product, service or organizational unit to which costs are assigned for some management purpose any item where costs can be traced and that has a key role in management strategy

Cost allocation

is the assignment of indirect costs to cost pools

Cost assignment

is the process of assigning costs to cost pools or from cost pools to cost object

indirect labor

labor costs that cannot be identified or traced to specific units manufactured ex. supervision, inspection, maintenance, personnel and material handling

indirect materials

materials and supplies used in the manufacturing operation that do not become part of the product

Sunk cost

past. costs that have been incurred and are irrelevant for a future decision

discretionary cost

programmed;managed cost cost for which the sizr or the time of incurrence is a matter of choice

Cost behavior

refers to how a cost will react or respond to changes in the business activity.

Cost classification accdg to Decision making and other Analytical purposes

relevant incremental sunk opportunity marginal value added

Ordering costs

the costs that increase with the number of orders placed for inventory

Cost in Managerial accounting

used in different ways because there are many types of costs that may be classified differently according to the immediate needs of management

Budgeted cost

used to represent the expected/planned cost for a given period

Opportunity costs

value of the best alternative forgone as the result of selecting a different use of resource or by choosing s particulat strategy