Cost Concepts
Cost Concepts
Cost Concepts
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
2-3
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
2-4
Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
2-5
Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
2-6
Nonmanufacturing Costs
Administrative
Costs
All executive,
organizational, and
clerical costs.
2-7
Sale
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead
Prime Conversion
Cost Cost
2-9
Variable Cost
Units Machine
produced hours
A measure of what
causes the
incurrence of a
variable cost
Miles Labor
driven hours
2-12
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
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
2-15
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Activity
2-16
90
Rent Cost in Thousands
The
The relevant
relevant range
range
Relevant of
of activity
activity for
for aa fixed
fixed
60
of Dollars
cost
cost is
is the
the range
range of of
Range activity
activity over
over which
which
the
the graph
graph ofof the
the
cost
cost is
is flat.
flat.
30
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
2-17
Mixed Costs
Y
Total Utility Cost
os t
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
2-18
Questions