Cost Accounting Foundations amp Evolutions 9e Kinney and Raiborn Learning Objectives Why are costs associated with a cost object What assumptions do accountants make about cost behavior and why are such assumptions necessary ID: 637727
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Slide1
Chapter 2:Cost Terminology and Cost Behaviors
Cost Accounting:
Foundations & Evolutions,
9e
Kinney and
RaibornSlide2
Learning Objectives Why are costs associated with a cost object?What assumptions do accountants make about cost behavior, and why are such assumptions necessary?How are costs classified on financial statements, and why are such classifications useful?How does the conversion process occur in manufacturing and service companies?
What are the product cost categories, and what items comprise those categories?
How and why does overhead need to be allocated to products?
How is cost of goods manufactured calculated and used in preparing an income statement?Slide3
Cost Categories
Association with cost object
Cost object
is anything for which management wants to collect or accumulate costs
Reaction to changes in activity
Classification on the financial statementsSlide4
Cost Categories
Association with cost object
Direct—traceable to a cost object
Indirect—not conveniently or practically traceable to a cost object
treated as overhead
allocatedSlide5
Cost Categories
Association with cost object
Reaction to changes in activity
Variable
Fixed
Mixed
Step
Relevant Range
—
normal operating rangeSlide6
Total and Unit Cost Behavior
Varies in direct
proportion to
changes in activity
Remains constant
throughout
the relevant range
Remains constant
throughout the
relevant range
Varies inversely
with changes in
activity throughout
the relevant range
Variable
Cost
Fixed
Cost
Total Cost
Unit CostSlide7
Cost Categories
Classification on the financial statements
Unexpired—balance sheet assets
Expired—income statement expenses
Product—inventoriable costs
Prime—direct material and direct labor
Conversion—direct labor and overhead
Product costs are unexpired before sale
Product costs are expired when sold
Period—expensed in period incurredSlide8
Product Costs
Direct material
Measurable part of a product
Direct labor
Labor used to manufacture a product or perform a service
Overhead
Indirect production costSlide9
Period Costs
Selling and administrative costs
Distribution costs
Cost to warehouse, transport, and/or deliver a product or service
Major impact on managerial decision makingSlide10
Purchase
raw materials
or supplies
Input
Product or
Service
Output
CONVERSION
Conversion Process
Change Inputs into Outputs
© 2013
Cengage
Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Slide11
Materials
Inventory
Work in Process
Inventory
Finished
Goods
Inventory
Cost of
Goods
Sold
Balance Sheet
Income
Statement
Cost Accumulation in a Manufacturing Company
© 2013
Cengage
Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Slide12
Product Cost – Direct
Direct Material
Conveniently and economically traced
to cost object
Direct Labor
to manufacture a product or perform a service
includes wages paid to direct labor employees, production bonuses, and payroll taxes
may include holiday and vacation pay, insurance, and retirement benefitsSlide13
Product Cost – IndirectOverhead—indirect production costsFringe benefits, if cannot be easily traced to productOvertime, if due to random schedulingCost of qualityPrevention costsAppraisal costsFailure costsSlide14
Product Cost BehaviorDirect Material VariableDirect Labor VariableOverhead Variable, fixed, or mixedSlide15
Overhead Cost AllocationAssign indirect costs to one or more cost objectsTo determine full absorption cost (GAAP)To motivate managementTo compare alternative courses of action for planning, controlling, and decision making
Allocation process should be
rational
and
systematicSlide16
Product Cost
Direct Materials
Direct Labor
Overhead
Actual Cost System
Actual
Actual
Actual
Normal Cost System
Actual
Actual
Predetermined
Overhead Rate
Allocating Overhead
Actual vs. Normal
© 2013
Cengage
Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Slide17
Predetermined Overhead Rate
Allows overhead to be assigned
during
the period
Compensates for fluctuations
that are not related to activity level
in activity level that do not affect fixed overheadSlide18
QuestionsWhat is the difference between a fixed and variable cost? What are the three components of product cost?What are the three inventory accounts for a manufacturing company?Slide19
Ethical IssuesExpired costs—not on the balance sheetPeriod costs—not inventoryProduct costs—not selling or administrative costsDirect labor—not overstated Ending inventory—not overstated