by hemang

Slides
43 slides

Classification of Cost

Published Aug 13, 2013 in Business & Management
Direct Link :

Classification of Cost... Read more

Student submission for Cost Accounting in Bachelor Accounting & Finance course

Read less


Comments

comments powered by Disqus

Presentation Slides & Transcript

Presentation Slides & Transcript

Cost ClassificationsChapter 2

Classification of costAccording to:Nature/ ElementsFunction Degree of traceability to productChange in volumeControllabilityNormality

Classification of cost contd….TimePlanning & controlIn relationship with accounting periodAssociation with productManagerial decisions

The ProductElements of Costs

Direct Materials Those materials that become an integral part of the product and that can be conveniently traced directly to it.Example: A radio installed in an automobile

Indirect MaterialThose materials that do not become an integral part of the product but which helps in production. Example: indirect materials

Direct LaborThose labor costs that can be easily traced to individual units of product.Example: Wages paid to automobile assembly workers

Indirect LabourThose labor costs that cannot be easily traced to individual units of product.Examples: Indirect labor

Expense The cost of services provided to an undertaking and the notional cost of the use of owned asset. Expenses are of two types: Direct expense Indirect expense

ExpenseDirect expense is an expense which is incurred with manufacture of a product. Eg: Purchase of raw materials, factory labour, factory wages, electricity Indirect expense also called as overhead are additional expenses which are incurred on bringing a product to final customer.Eg: Sales and Distribution, Office Salary, office electricity, office water, printing and stationery, outsourcing expenses, advertising expenses etc.

By Function

Direct Costs and Indirect CostsDirect costsCosts that can beeasily and conveniently traced to a unit of product or other cost objective.Examples: direct material and direct laborIndirect costsCosts cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of business activity.Total variable costs change when activity changes.Total fixed costs remain unchanged when activity changes.

A Cell Phone Bill….Family Plan for cell phone usage, unlimited nights and weekends, $60.00Includes 250 text messagesAny text messages above 250 are $0.10 per text sent AND $0.10 text received.You do NOT have a DATA PLAN and pay $0.01 per KB

Variable Cost Per Unit The cost per KB of DATA is constant. For example, $.01 cents per KB. DATA COST Per KB Used

Total Variable Cost Your total DATA cost is based on how many KB you use..

Total Fixed Cost Your monthly basic cellphone bill does not change when you make more calls. NTT DoCoMo's wristwatch-style cellphone

Fixed Cost Per UnitThe average cost per call decreases as more local calls are made.

Cost Classifications for Predicting Cost Behavior

Quick Check  Variable/Fixed Costs Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.

Quick Check  Variable/Fixed Costs Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.

Quick Check  Variable/Fixed Costs Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)A. The cost of renting the film.B. Royalties on ticket sales.C. Wage and salary costs of theater employees.D. The cost of cleaning up after the show.

Quick Check  Variable/Fixed Costs Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)A. The cost of renting the film.B. Royalties on ticket sales.C. Wage and salary costs of theater employees.D. The cost of cleaning up after the show.The royalties on ticket sales is directly related to the number of tickets sold. The cost of cleaning up MAY also be variable if the theater pays cleaning crews by the hour. The more tickets sold would increase the time it would take to clean up the theater.

Classification of cost contd….

Classification of cost contd….

Classification of cost contd….

Classification of cost contd….

Product Costs Versus Period CostsProduct costs include direct materials, direct labor, and manufacturing overhead.Period costs are not included in product costs. They are expensed on the income statement.

Quick Check  Period vs. Product Costs Which of the following costs would be considered a period rather than a product cost in a manufacturing company?A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.C. Direct materials costs.D. Electrical costs to light the production facility.

Quick Check  Period vs. Product Costs Which of the following costs would be considered a period rather than a product cost in a manufacturing company?A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.C. Direct materials costs.D. Electrical costs to light the production facility.

Differential Costs and RevenuesCosts and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 – $1,500 = $500Differential cost is: $300

Quick Check  -Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Portland?A. Yes, the cost of the pizza is relevant.B. No, the cost of the pizza is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Portland?A. Yes, the cost of the pizza is relevant.B. No, the cost of the pizza is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the depreciation on your car relevant in this decision?A. Yes, the depreciation is relevant.B. No, the depreciation is not relevant.

Quick Check  Relevant Costs Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the depreciation on your car relevant in this decision?A. Yes, the depreciation is relevant.B. No, the depreciation is not relevant.Depreciation thatis a function of miles driven would be relevant.Depreciation that is a function of the passage of time would not be relevant.

Opportunity Costs The potential benefit that is given up when one alternative is selected over another.Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.

Sunk Costs Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

Quick Check  Sunk Costs Suppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.

Quick Check  Sunk Costs Suppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.