Chapter 8 Contemporary Engineering Economics Copyright 2016 Chapter Opening Story What Does It Cost to Make an i P hone Apples 16GB iPhone 6 is priced at 649 Do you know the profit margin for Apple from selling an iPhone 6 ID: 732775
Download Presentation The PPT/PDF document "Classification of Costs Lecture No. 27" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Classification of Costs
Lecture No. 27
Chapter 8
Contemporary Engineering Economics
Copyright © 2016Slide2
Chapter Opening Story: What Does It Cost to Make an i
P
hone?
Apple’s 16GB iPhone 6 is priced at $649. Do you know the profit margin for Apple from selling an iPhone 6?
At Issue
: The 16GB iPhone 6 costs Apple about $200 to build. How does Apple come up with such an estimate of various component costs before pricing their product? Slide3
General Cost Terms in Manufacturing Setting
Manufacturing Costs
Direct Raw Materials
Direct Labor
Manufacturing Overhead
Nonmanufacturing CostsOverheadMarketingAdministrative FunctionsSlide4
Components of Manufacturing Cost Slide5
Classifying Costs for
the Financial
Statements
Matching concept
: The costs incurred to generate particular revenue should be recognized as expenses in the same period that the revenue is recognized
Period costs: Those costs that are matched against revenues on a time period basisProduct costs: Those costs that are matched against revenues on a product basisSlide6
Example
Period costs
General and administrative expenses
Marketing expenses
Insurance premiums
Income taxesNonmanufacturing costsProduct costsDirect material costsDirect labor costsManufacturing overheadSlide7
How the Period Costs and Product Costs Flow Through
the Financial StatementsSlide8
Cost Flows and Classifications
of
a Manufacturing CompanySlide9
Example
8.1:
Classifying Costs for Uptown Ice Cream Shop
Given
: Breakdown of unit cost items
Find: Classify the cost items to product costs and period costs.Slide10
Solution
Breakdown of unit cost items
Product costs
Period costsSlide11
Cost Classification for Predicting Cost
Behaviors
Volume index
Cost behaviors
Fixed costs
Variable costs Mixed costsAverage unit costsSlide12
Volume Index
Definition
: The unit measure used to define “
volume
”
ExamplesAutomobileMiles drivenGenerating plantkWh producedStamping machine“Parts” stampedAssembly plantUnits assembledSlide13
Fixed Costs
Definition
: The costs of providing a company’s basic operating capacity
Cost behavior
: Remains constant over the relevant rangeSlide14
Variable Costs
Definition
: Costs that vary depending on the level of production or sales
Cost behavior
: Increases or decreases proportionally according to the level of volumeSlide15
Mixed Costs
Definition
: Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded.
Cost behavior
: Increases or decreases after maintaining a fixed level of expense
1000
2000
3000
4000
5000
6000
0
5
15
25
Mixed cost behavior
Miles Driven (Unit: 1,000)
Depreciation Expenses ($)Slide16
Average Unit Cost
Definition
: activity cost per unit basis
Cost behaviors
:
Fixed cost per unit varies with changes in volume.Variable cost per unit of volume is a constant. Mixed cost per unit of volume contains both the constant and variable elements.Slide17
Example 8.2: Average Driving Cost per Mile
Given
: Owning and Operating a 4WD Sport-Utility vehicle
Find
: Average driving cost per mile as a function of mileageSlide18
SolutionSlide19
Cost-Volume ChartSlide20
Average Cost Per MileSlide21
Future Costs for Business Decisions
Differential (incremental) cost
Opportunity cost
Sunk cost
Marginal costSlide22
Differential (Incremental) Costs
Definition
: Costs that represent the
difference
in total costs, which results from selecting one alternative instead of another
Cost behavior: Increases or decreases with the overall change that a company experiences by producing one additional unit of goodsSlide23
Opportunity Costs
Definition
: The potential benefit that is
given up
as you seek an alternative course of action
Example: When you decide to pursue a college degree, your opportunity cost would include four-years’ potential earnings given up.Slide24
Sunk Costs
Definition
: Cost that has already been incurred by
past
actions
Economic implications: Not relevant to future decisionsExample: $500 spent to replace brakes last year—not relevant to making a sales decision in the futureSlide25
Marginal Costs
Definition
: Added costs that result from increasing rates of output, usually by a
single unit
Example
: Cost of electricity—decreasing marginal rate