COST ACCOUNTING

AND COST CONCEPTS

Chapter 01

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Accounting
- Isthe intersection between financial and managerial
accounting. Cost accounting information is needed and
used by both financial and managerial accounting. Cost
accounting provides product cost information to external
parties such as stockholders, creditors, various regulatory
boards for credit and investment decisions. Cost
accounting provides product cost information also to
internal parties such as managers for planning and
controlling.

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Learning Objective 1

Identify and give

examples of each of the
three basic
manufacturing cost
categories.

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Classifications of Manufacturing
Costs
Manufactu
Direct Direct
ring
Materials Labor
Overhead

The Product

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Direct Materials
Raw 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

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Direct Labor
Those labor costs that can be easily
traced to individual units of product.

Example: Wages paid to automobile assembly workers

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Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.

Examples: Indirect materials and indirect labor

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Nonmanufacturing Costs

Administrative
Costs

All executive,
organizational, and
clerical costs.

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Learning Objective 2

Distinguish between
product costs and
period costs and give
examples of each.

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Product Costs Versus Period Costs

Product costs include Period costs include all

direct materials, direct selling costs and
labor, and administrative costs.
manufacturing
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
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Quick Check ✔
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.
E. Sales commissions.

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Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

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Learning Objective 3

Understand cost
behavior patterns
including variable costs,
fixed costs, and mixed
costs.

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Cost Classifications for Predicting Cost
Behavior
Cost behavior refers to
how a cost will react to
changes in the level of
activity. The most
common classifications
are:
▫Variable costs
▫Fixed costs
▫Mixed costs

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Variable Cost
Your total texting bill is based on how
many texts you send.
Total Texting Bill

Number of Texts Sent

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Variable Cost Per Unit
The cost per text sent is constant at
5 cents per text message.

Cost Per Text Sent

Number of Texts Sent

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 Fixed Cost
Your monthly contract fee for your cell phone is
fixed for the number of monthly minutes in your
contract. The monthly contract fee does not
change based on the number of calls you make.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan 1-18
 Fixed Cost Per Unit
Within the monthly contract allotment, the average
fixed cost per cell phone call made decreases as
more calls are made.

Monthly Cell Phone

Contract Fee

Number of Minutes Used

Within Monthly Plan
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Types of Fixed Costs

Committed Discretionary
Long term, cannot be May be altered in the
significantly reduced in short term by current
the short term. managerial decisions

Examples Examples
Depreciation on Buildings Advertising and
and Equipment and Real Research and
Estate Taxes Development
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Cost Classifications for Predicting Cost
Behavior

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Quick Check ✔
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.

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Mixed Costs
(also called semivariable costs)
A mixed cost contains both variable and fixed
elements. Consider the example of utility cost.
Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge

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Mixed Costs

Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge

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Mixed Costs – An Example
If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what is
the amount of your utility bill?

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Learning Objective 4

Analyze a mixed cost

using a scattergraph plot
and the high-low
method.

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Scattergraph Plots – An Example
Assume the following hours of maintenance work
and the total maintenance costs for six months.

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The Scattergraph Method
Plot the data points on a graph
(Total Cost Y vs. Activity X).
Y
Total Maintenance Cost

Hours of Maintenance 1-29

The High-Low Method – An
Example
The variable cost
per hour of
maintenance is
equal to the change
in cost divided by
the change in hours.

$2,400
= $6.00/hour
400
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The High-Low Method – An
Example

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)
Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = $4,700 1-31
The High-Low Method – An
Example

The Cost Equation for Maintenance

Y = $4,700 + $6.00X
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Quick Check ✔
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit

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Quick Check ✔
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales salaries
and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000

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Learning Objective 5

Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.

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The Traditional and Contribution
Formats

Used primarily for

external reporting.
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 Uses of the Contribution Format
The contribution income statement format is used
as an internal planning and decision-making tool.
We will use this approach for:
1. Cost-volume-profit analysis (Chapter 5).
2. Budgeting (Chapter 7).
3. Segmented reporting of profit data (Chapter 6).
4. Special decisions such as pricing and make-or-
buy analysis (Chapter 10).

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Learning Objective 6

Understand the
differences between
direct and indirect costs.

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Assigning Costs to Cost Objects
Direct costs Indirect costs
• Costs that can be • Costs that cannot
easily and be easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost object. or other cost object.
• Examples: direct • Example:
material and direct manufacturing
labor overhead

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Learning Objective 7

Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.

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Cost Classifications for Decision
Making
Every decision involves a choice
between at least two alternatives.

Only those costs and benefits that

differ between alternatives are relevant
in a decision. All other costs and
benefits can and should be ignored as
irrelevant.

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Differential Cost and Revenue
Costs 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: Differential cost is:

$2,000 – $1,500 = $500 $300

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Opportunity Cost
The potential benefit that is
given up when one alternative
is selected over another.

Example: If you were

not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.

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Sunk Costs

Sunk costs have already been incurred and cannot

be changed now or in the future. These costs
should be ignored when making decisions.

Example: Suppose you had purchased gold for $400

an ounce, but now it is selling for $250 an ounce.
Should you wait for the gold to reach $400 an ounce
before selling it? You may say, “Yes” even though
the $400 purchase is a sunk cost.

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Quick Check ✔
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.

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Quick Check ✔
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.

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Quick Check ✔
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.

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Summary of the Types of Cost
Classifications

Financial Predicting Cost

Reporting Behavior

Assigning Costs Making Business

to Cost Objects Decisions
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End of Chapter 01

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