cost object

7/27/2019 cost object

http://slidepdf.com/reader/full/cost-object 1/20

Agenda

• Review: Some vocabulary, cost behavior,

simple (traditional) product costing, the

flow of costs through a manufacturer’s

accounts

• Overview of Tuesday’s class.

• Quiz: Learning with Cases

• Group exercise: product costing, cost flow,

cost behavior



Cost Concepts

• Important vocabulary• resources

• costs

• cost object

• direct costs

• indirect costs

• fixed costs• variable costs

• product costs

• overhead



Costing inventory and sales

• Resources = assets

• Costs = use or sacrifice of resources

• Product costs = manufacturing costs

(GAAP) – direct (e.g., DM and DL)

• variable or fixed

• traceable – indirect (overhead - O/H)

• variable

• fixed



Components of Product Costs

• Direct material

• Direct labor • Indirect manufacturing costs (O/H)

– Cost pool/s

– Factory costs – May vary, but not always with units of

production



Direct vs. Indirect Costs

• Cost object: The item we are trying to

determine a cost for (product, factory,headquarters, CEO)

• A cost can be categorized as direct or

indirect only after the cost object has beendefined.

• A cost that is a direct factory cost may be

an indirect product cost.



Direct vs. Indirect Costs

• Direct costs can be either fixed or variable.

• Indirect costs can be either fixed or variable



Fixed cost behavior

Total Cost

Production Volume

Fixed mfg.costs = $100,000

• Example: Variable cost/unit = $1

• Fixed costs are budgeted at $100,000• Production volume = 1

• Production volume = 100,000



Fixed manufacturing cost behavior

Unit costs

Production Volume

Unit fixed manufacturing

costs vary with production

volume

• Example: Fixed manufacturing

costs = $100,000

• Production volume = 1, or




Variable costs

Total cost

Production volume

• Example:

Variable cost/unit = $1

• Production volume = 1


Total variable costs

increase with

production volume





• Retainer paid to video distributor

• Electricity costs of the HEC store

• Cost of videos purchased

• Subscription to Video Trends

• Computer leased for HEC store

• Cost of free popcorn for customers

• Earthquake insurance for store

• Freight-in costs of videos

D or I V or F

D FI F

D V

D F

I F

I V

I F

D V

Home Entertainment Center operates a large store in San

Francisco. The store has both a video section and a musical

section. HEC reports revenues for the video section separately

from the musical section. Classify direct and indirect and

variable and fixed costs with respect to the video section.



Other cost concepts

• Outlay costs• Opportunity costs

• Differential costs

• Sunk costs





Traditional Product Costing

• DL = $3 per unit, DM = $2 per unit

• Labor costs $3 per hour, 500,000 units aremanufactured; 505,000 DL hours are used.

• What is a unit of product expected to cost?

• How much did the company spend building 500,000 units?

• How much would would we expect them

to spend building 400,000 units?







Other important concepts

• Contribution margin

• Gross margin

• What is the difference between the two?

• Which one would you look at to decide

what product to manufacture?

• Which one would you expect to see on an

income statement?



Who uses cost accounting

information?

• Cost of goods sold, inventories financial

statements.

• Bids, product pricing managers

• Budgeting, production scheduling

managers

• Can the same cost system serve both

masters? Should it?



Tuesday

• Cost-Volume-Profit analysis - a simple

decision model.• Lecture and demonstration problems

• Group exercise that is a little tough.

• Cost-Volume-Profit analysis is required for the Prestige Telephone Company case next

Thursday.



cost object

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