Chapter 2: Basic Cost Terms and Concepts • Cost Terms - Fixed - Variable • Cost Concepts • Management Implications Cost Terms $ Fixed Costs: costs that remain constant regardless of the quantity of product produced. Output Variable Costs: costs that increase $ linearly and proportionately as production volume increases. Output Profit = (Sales Revenue-Variable Cost) - Fixed Cost Total Contribution Margin Cost Terms (Continued) • Cost Driver: Any activity or event that causes costs to be incurred. • Manufacturing Direct material (DM), direct labor (DL), and Cost: manufacturing overhead (MOH). • Sales and General All costs associated with running the business, Administrative excluding production costs. Costs: • Direct and Indirect Costs that can either be traced (direct) or not traced Costs: (indirect) to a specific department in the organization. • Controllable and Costs used to describe the extent of a manager’s Uncontrollable influence on cost. Costs: • Product/Period Refers to the timing which costs become expenses. Cost: Economic Terms • Opportunity Benefit lost because the choice of one action Cost: precludes another action. • Sunk Cost: Costs that have already been incurred and can not be altered by current or future decisions. • Differential and Difference in the costs incurred under two Incremental Cost: alternative actions. • Marginal Cost: Cost associated with producing one additional unit. • Average Cost per Total cost for the quantity produced, divided by Unit: the number of units produced. Bala’s Bare Bones Manufacturing Facility Direct Material Purchased Direct Material Storage Raw Materials It’s a Warehouse! Direct Material Used Finished Goods Direct Material WIP Inventory Manufacturing Overhead Costs Cost Concept Direct Material Inventory Work in Process Inventory Finished Goods Inventory Beginning Transfer to Beginning Transfer to Beginning Cost of Inventory WIP Inventory Finished Inventory Goods Sold $1,000 $78,000 $40,000 Goods $1,000 (shipped) Inventory $340,000 Purchases Direct $350,000 Goods $79,000 Material Completed $78,000 From WIP $350,000 Direct Ending Labor Inventory $82,000 $2,000 Ending MOH Inventory Incurred $11,000 $170,000 Ending Inventory $20,000 Storeroom Allocation of Costs Raw Direct Material Material Used Factory Inventory (DMU) WIP Inventory Cost of Goods Manufactured Direct Material (COM) Warehouse Purchased (DMP) Direct Labor Finished Cost of Goods (DL) Goods Sold (COGS) Manufacturing Inventory Overhead (MOH) Managerial Implications • Is it better to under or over-apply overhead? If OH is over-applied (allocated >actual), you will be “surprised” how well you actually did when making end of period adjustments. If OH is under-applied (allocated<actual), you will be “surprised” how well you thought you did when making end of period adjustments. • If your compensation or incentive plan is based on profit, which would you choose?
Pages to are hidden for
"Basic Cost Terms and Concepts"Please download to view full document