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Chapter 2Cost Concepts and Behavior
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Learning Objectives
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What is a Cost?Cost a sacrifice of resources
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Cost ExampleCost of surfboard?
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Cost Example
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Recording Costs in Financial StatementsIncome StatementsService CompanyMerchandise Company
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Manufacturing Company CostsProduct CostsPeriod CostsNonmanufacturing CostsManufacturing CostsInventoriable Costs
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Income StatementManufacturing Company
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Product CostsDirect CostsIndirect Costs Direct MaterialsDirect LaborManufacturing OverheadRecorded as an asset in inventory when cost is incurredManufacturing CostsInventory CostsRecognized as an expense when product is sold
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Traceability of Costs
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Traceability of Cost
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Product CostsManufacturing CostsInventory Costs
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Product Cost ReviewPrime cost?Conversion cost?Indirect cost?Direct cost?Total Product Cost
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Period CostsMarketingAdministrativeRecognized as an expense when cost is incurredNonmanufacturing Costs
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Cost AllocationThe process of assigning indirect cost to a cost objectProduct LineDepartmentProductCustomer1. Define Cost Pool2. Determine Cost Allocation Rule3. AssignCost Object
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Rockford Corporation% Revenue$80 million$20 million20%80%Cost objectsCost allocation ruleCost pool
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Manufacturing Cost FlowsProduct costs recorded in inventory when cost incurred.
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The Inventory AccountsBalance Sheet
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Cost of Goods Manufactured StatementJackson GearsFor the Year Ending December 31, 200XJackson Gears
Beginning Work-In-Process Inventory, January 1$270,000
Manufacturing cost during the year:
Direct Materials
Beginning Inventory, Jan. 195,000
Add Purchases5,627,000
Direct Materials Available$5,722,000
Less Ending Inventory, Dec. 3172,000
Direct Materials put into production5,650,000
Direct Labor1,220,000
Manufacturing Overhead6,780,000
Total Manufacturing cost incurred13,650,000
Total Work-In-Process during the year13,920,000
Less Ending Work-In-Process Inventory, Dec. 31___310,000
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Jackson GearsCost of Goods Sold StatementFor the Year Ending December 31, 200XJackson Gears
Beginning Finished Goods Inventory, Jan. 1$420,000
Cost of goods manufactured13,610,000
Finished goods available for sale14,030,000
Less Ending Finished Goods Inventory, Dec. 31 _930,000
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Jackson GearsIncome StatementFor the Year Ending December 31, 200XJackson Gears
Operating Profit $3,500,000
Sales$20,450,000
Less cost of goods sold13,100,000
Gross Margin7,350,000
Marketing and Administrative Expenses 3,850,000
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Cost BehaviorHow costs respond to a change in activity level within the relevant range.Relevant range?Range of activity where the total fixed costs or the unit variable costs remain unchanged.
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Fixed CostsFixed costs are fixed in total as activity changes.Costs ($)Activity level
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Fixed costs are fixed in total as activity changes.Airfare cost ($)Days on the slopesFixed CostJoshs Spring Break Trip
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Variable CostsVariable costs vary in total as activity changes.Cost ($)Activity level
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Variable costs vary in total as activity changes.Lift ticket cost ($)Days on the slopesVariable CostJoshs Spring Break Trip
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Semivariable CostsCosts ($)Activity level
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Cost of trip ($)Days on the slopesSemivariable CostJoshs Spring Break Trip
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Step CostsCosts ($)Activity level
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Product Cost Components
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Costs: An Example
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Full Cost
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Full Absorption Cost
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Variable Cost
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Making Cost Information UsefulFull Absorption CostingVariable Costing
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Making Cost Information Useful ContinuedFinancial Income StatementContribution Margin Income StatementFull Absorption CostingVariable Costing
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Product vs Period CostsFull Absorption CostingVariable Costing
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Income StatementsFull Absorption CostingVariable Costing
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Gross Margin per Unit
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Contribution Margin per Unit
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Chapter 2
