Basic Cost Management Concepts. M. En C. Eduardo Bustos as

Transcription

1 Basic Cost Management Concepts M. En C. Eduardo Bustos Farías as 1

2 Objectives 1. Explain what is meant by the word "cost." 2. Distinguish among product costs, period costs,, and expenses. 3. Describe the role of costs on published financial statements. 4. List five types of manufacturing operations and describe mass customization. 5. Give examples of three types of manufacturing costs. 6. Prepare a schedule of cost of goods manufactured,, a schedule of cost of goods sold,, and an income statement for a manufacturer. 7. Explain what is meant by "different" costs for different purposes." 8. Understand the importance of identifying an organization's cost drivers. 9. Describe the behavior of variable costs and fixed costs, both in total and on a per-unit basis. 10. Distinguish among direct cost, indirect cost, controllable cost, and uncontrollable cost. 11. Define and give examples of an opportunity cost, an out-of of pocket cost,, a sunk cost,, a differential cost,, a marginal cost,, and an average cost. 12. Explain the behavioral tendencies many people show when they encounter opportunity costs and sunk costs. 2

3 Accounting Information Systems 3

4 The Need for Cost Accounting Cost accounting provides the detailed cost data that management needs to control current operations and plan for the future. Companies must control costs in order to keep mantener prices competitive. In today s s global environment, cost information is more crucial than ever in remaining competitive. 4

5 Accounting Information Systems The cost management information system is an accounting information subsystem that is primarily concerned with producing outputs for internal users using inputs and processes needed to satisfy management objectives. 5

6 Accounting Information Systems The cost management information system has three broad objectives that provide information for-- 1) Costing out services, products, and other objects of interest to management 2) Planning and control 3) Decision making 6

7 An Integrated Cost Management System Design and Development System Production System Cost Management System Marketing and Distribution System Customer Servicing System 7

8 The Subsystems of the Accounting Information System Accounting Information System Financial Accounting Information System Cost Management Information System Cost Accounting Information System Operational Control System 8

9 Costs and Benefits of Information Costs Benefits More information does not mean more benefits if information overload results. 9

10 Economics cost 10

11 Economics Cost Terms Short run Long run Fixed Variable Total Average Marginal 11

12 Cost Functions Short run cost function - use for day-to to-day operating decisions at least one input is fixed Long run cost function - use for strategic planning all inputs can be varied 12

13 Fixed Costs Do not vary with output Relevant only in the short run Examples Contrato de arrendamiento lease contract employees fixed insurance costs 13

14 Variable Costs Vary with output Relevant in the short and long runs Examples wages material costs social insurance taxes 14

15 Total Cost TC = TFC+ TVC 15

16 Marginal Costs and Average Costs The extra cost incurred to produce one additional unit. The total cost to produce a quantity divided by the quantity produced. Marginal and average costs are largely a function of cost behavior -- variable and fixed costs. 16

17 Average Fixed Costs Cost ($ s) AFC = TFC Q AFC Quantity 17

18 Cost ($ s) Average Variable Costs TVC AVC = Q AVC Quantity 18

19 Average Total Cost ATC Cost ($ s) ATC = TC Q Quantity 19

20 Average Total Costs ATC = AFC + AVC 20

21 Marginal Cost MC = TC Q = TVC Q MC Cost ($ s) Quantity 21

22 Cost Curves MC ATC Cost ($ s) AVC Quantity 22

23 Other Cost Terms Opportunity Cost - foregone value abandonado associated with next-best use. Consider what a firm forgoes by accepting a special order. 23

24 Cost Terms Explicit measured by cash costs Implicit - non-cash costs measured by opportunity cost concept 24

25 Accounting cost 25

26 Basic Cost Concepts Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit genere to the organization. Costs are incurred to produce future benefits. Expired costs are called expenses. Unexpired costs are classified as assets and appear financieros on the balance sheet. Assigning cost accurately to cost objects is crucial. 26

27 Basic Cost Concepts A cost object is any item, such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned. Example: A bicycle is a cost object when you are determining the cost to produce a bicycle. An activity is a basic unit of work performed within an organization. Dentro de Example: Moving materials, maintaining equipment, designing products, etc. 27

28 Cost and Cost Terminology Cost is a resource sacrificed or forgone to achieve abandonado a specific objective. An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object is anything for which a separate measurement of costs is desired. deseado 28

29 Cost and Cost Terminology Cost Accumulation Cost Assignment Cost Object Cost Object Cost Object Tracing Allocating 29

30 Cost Terms Historical - actual cash outlay desembolsado Current - amount in prevailing market one form of current cost is replacement cost i.e. cost of duplicating productive capacity using current technology may be above or below historical cost 30

31 Cost Terms Incremental Cost cost of a management decision profit contribution profit before fixed charges profit before fixed charges antes 31

32 Cost Terms Sunk cost - cost that does not vary across hundido management decision option on land purchase 32

33 Classifying Costs 33

34 Classifying Costs By Behavior Fixed Variable By Traceability Direct Indirect By Function Product Period origen 34

35 Cost Classifications by Behavior 35

36 Cost Classifications by Behavior Cost Behavior How a cost will react to changes in in the level of business activity. Total variable costs change when the level of activity changes. Total fixed costs remain unchanged when the level of activity changes. 36

37 Total Variable Cost A variable cost is one that changes in total in proportion to changes in the volume of activity. Total Long Distance Telephone Bill Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked 37

38 Variable Cost Per Unit On a per unit basis, a variable cost remains constant over a wide range of activity. The cost per long distance minute talked is constant. For example, 10 cents per minute. Per Minute Telephone Charge Minutes Talked 38

39 Total Fixed Cost A fixed cost is one that remains constant in total even when the volume of activity changes. Your monthly basic telephone bill probably does not change when you make more local calls. Monthly Basic Telephone Bill Number of Local Calls 39

40 Fixed Cost Per Unit On a per unit basis, a fixed cost changes as the volume of activity changes. The average cost per local call decreases as more local calls are made. Monthly Basic Telephone Bill per Local Call Number of Local Calls 40

41 Cost Classifications Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Total variable cost changes Variable cost per unit Variable as activity level changes. remains the same over wide ranges of activity. Total fixed cost remains Fixed cost per unit Fixed the same even when the goes down as activity activity level changes. level goes up. 41

42 Pelicula 42

43 Cost Behavior Patterns Example Bicycles by the Sea buys a handlebar at $52 for each of its bicycles. manubrio What is the total handlebar cost when 1,000 bicycles are assembled? 43

44 Cost Behavior Patterns Example 1,000 units $52 = $52,000 What is the total handlebar cost when 3,500 bicycles are assembled? 3,500 units $52 = $182,000 44

45 Cost Behavior Patterns Example Bicycles by the Sea incurred $94,500 in a given year for the leasing of its plant. This is an example of fixed costs with respect to the number of bicycles assembled. 45

46 Cost Behavior Patterns Example What is the leasing (fixed) cost per bicycle when Bicycles assembles 1,000 bicycles? $94,500 1,000 = $94.50 What is the leasing (fixed) cost per bicycle when Bicycles assembles 3,500 bicycles? $94,500 3,500 = $27 46

47 Cost Drivers De gestión The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately. The number of bicycles assembled is a cost driver of the cost of handlebars. 47

48 Relevant Range Example Assume that fixed (leasing) costs are $94,500 for a year and that they remain the same for a certain volume range (1,000 to 5,000 bicycles). 1,000 to 5,000 bicycles is the relevant range. 48

49 Relevant Range Example Fixed Costs $94, Volume 49

50 Classification of Costs by Traceability origen 50

51 Basic Cost Concepts Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a causal relationship. Direct costs are those costs that can be easily and accurately traced to a cost object. Example: The salary of a supervisor of a department, where the department is defined as the cost object. 51

52 Basic Cost Concepts Indirect costs are those costs that cannot be traced easily and accurately to a cost object. Example: The cost of heating and cooling a plant that manufactures five products. 52

53 Classification of Costs by Traceability Direct costs Costs that can be easily and conveniently traced to a unit of product or department or other cost objective. Example: Direct material Direct labor Cost of paint in the paint department of an automobile assembly plant. Indirect costs Costs that must be allocated in order to be assigned to a unit of product or department. Example: Manufacturing overhead Cost of national advertising for an airline is indirect to a particular flight. gastos 53

54 Direct and Indirect Costs Direct Costs Example: Paper on which Sports Illustrated magazine is printed COST OBJECT Example: Sports Illustrated magazine Indirect Costs Example: Lease cost for Time-Warner building housing the senior editors of its magazine 54

55 Direct and Indirect Costs Example Direct Costs: Maintenance Department $40,000 Personnel Department $20,600 Assembly Department $75,000 Finishing Department $55,000 Assume that Maintenance Department costs are allocated equally among the production departments. How much is allocated to each department? 55

56 Direct and Indirect Costs Example Maintenance $40,000 Assembly Direct Costs $75,000 $20,000 Allocated Finishing Direct Costs $55,000 $20,000 56

57 Relationships of Types of Costs Direct Variable Fixed Indirect 57

58 Interpret unit costs cautiously. 58

59 Total Costs and Unit Costs Example What is the unit cost (leasing and handlebars) when Bicycles assembles 1,000 bicycles? Total fixed cost $94,500 + Total variable cost $52,000 = $146,500 $146,500 1,000 = $

60 Total Costs and Unit Costs Example Total Costs $146,500 $94,500 + $52x $94, Volume 60

61 Use Unit Costs Cautiously Assume that Bicycles management uses a unit cost of $ (leasing and wheels). Management is budgeting costs for different levels of production. What is their budgeted cost for an estimated production of 600 bicycles? 600 $ = $87,900 61

62 Use Unit Costs Cautiously What is their budgeted cost for an estimated production of 3,500 bicycles? 3,500 $ = $512,750 What should the budgeted cost be for an estimated production of 600 bicycles? 62

63 Use Unit Costs Cautiously Total fixed cost $ 94,500 Total variable cost ($52 600) 31,200 Total $125,700 $125, = $ Using a cost of $ per unit would underestimate actual total costs if output is below 1,000 units. 63

64 Use Unit Costs Cautiously What should the budgeted cost be for an estimated production of 3,500 bicycles? Total fixed cost $ 94,500 Total variable cost (52 3,500) 182,000 Total $276,500 $276,500 3,500 = $

65 Distinguish among manufacturing companies, merchandising companies, and service-sector sector companies. 65

66 Manufacturing Manufacturing companies purchase materials and components and convert them into finished goods. A manufacturing company must also develop, design, market, and distribute its products. 66

67 Merchandising Merchandising companies purchase and then sell tangible products without changing their basic form. 67

68 Service Service companies provide services or intangible products to their customers. Labor is the most significant cost category. Labor is the most significant cost category. 68

69 PELICULA 69

70 Types of Inventory Manufacturing-sector companies typically have one or more of the following three types of inventories: 1. Direct materials inventory 2. Work in process inventory (work in progress) 3. Finished goods inventory 70

71 Types of Inventory Merchandising-sector companies hold only one type of inventory the product in its original purchased form. Service-sector companies do not hold inventories of tangible products. mantienen 71

72 PELICULA 72

73 Cost Classification by Function 73

74 Cost Classification by Function Product costs Include expenditures that are necessary and integral to finished products. Capitalized on the balance sheet until sold. Inventory Sale Cost of Good Sold Period costs Include expenditures identified more with a time period than with finished products. Expensed on the income statement. Expense Balance Sheet Edo. De Posicion financiera Income Statement Edo. De resultados Income Statement 74

75 Classification of Costs by Function Product Costs Direct materials Direct labor Overhead gastos Period Costs Selling General and administrative expenses 75

76 Manufacturing Costs Direct Labor Direct Material Manufacturing Overhead The Product 76

77 Película 77

78 Classification of Manufacturing Costs Direct materials costs Direct manufacturing labor costs Indirect manufacturing costs 78

79 Classifications of Costs in Manufacturing Companies Manufacturing costs are often combined as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost 79

80 Manufacturing Cost Flows Costs Material Purchases Balance Sheet Inventories Raw Material Income Statement Expenses Direct Labor Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold Selling and Administrative Period Expenses Selling and Administrative 80

81 Cost Assignment Methods Cost of Resources Resource Drivers Direct Tracing Driver Tracing Allocation Physical Observation Activity Drivers Convenience Assumed Linkage Cost Objects 81

82 Product Cost Definitions Value-Chain Product Costs Operating Product Costs Traditional Product Costs Research and and Development Production Marketing Customer Service Pricing Decisions Product Mix Decisions Strategic Profitability Analysis Production Marketing Customer Service Strategic Design Decisions Tactical Profitability Analysis Production External Financial Reporting 82

83 Manufacturing Costs Direct materials are those materials that are directly traceable to the goods or services being produced. Example: The cost of wood in furniture. Direct labor is the labor that is directly traceable to the goods or services being produced. Example: Wages of assembly-line line workers. Overhead are all other manufacturing costs. Example: Plant depreciation, utilities, property taxes, indirect materials, indirect labor, etc. 83

84 Nonproduction Costs Marketing (selling) costs are the costs necessary to market, distribute, and service a product or service. Example: Advertising, storage costs, and freight out. Administrative costs are the costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production. Example: Legal fees, salary of the chief executive officer. 84

85 Nonproduction Costs For external financial reporting, marketing and administrative costs are not inventoried. They are referred to to as as period costs. 85

86 Production or Manufacturing Costs Nonproduction or Operating Costs Direct Materials Direct Labor Overhead Prime Cost Conversion Cost Marketing Expense Order-Getting Costs Order-Filling Costs Administrative Expense 86

87 Describe the three categories of inventories commonly found in manufacturing companies. 87

88 Inventoriable Costs Inventoriable costs (assets) Los recursos become cost of goods sold after a sale takes place. 88

89 Period Costs Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred. 89

90 Flow of Costs Example Bicycles by the Sea had $50,000 of direct materials inventory at the beginning of the period. Purchases during the period amounted to $180,000 and ending inventory was $30,000. How much direct materials were used? $50,000 + $180,000 $30,000 = $200,000 90

91 Flow of Costs Example Direct labor costs incurred were $105,500. Indirect manufacturing costs were $194,500. What are the total manufacturing costs incurred? Direct materials used $200,000 Direct labor 105,500 Indirect manufacturing costs 194,500 Total manufacturing costs $500,000 91

92 Flow of Costs Example Assume that the work in process inventory at the beginning of the period was $30,000, and $35,000 at the end of the period. What is the cost of goods manufactured? Beginning work in process $ 30,000 Total manufacturing costs 500,000 Ending work in process 35,000 Cost of goods manufactured $495,000 92

93 Flow of Costs Example Assume that the finished goods inventory at the beginning of the period was $10,000, and $15,000 at the end of the period. What is the cost of goods sold? Beginning finished goods $ 10,000 Cost of goods manufactured 495,000 Ending finished goods 15,000 Cost of goods sold $490,000 93

94 Flow of Costs Example Work in Process Beg. Balance 30, ,000 Direct mtls. used 200,000 Direct labor 105,500 Indirect mfg. costs 194,500 Ending Balance 35,000 94

95 Flow of Costs Example Work in Process 495,000 Finished Goods 10, , ,000 15,000 Cost of Goods Sold 490,000 95

96 Manufacturing Company BALANCE SHEET Inventoriable Costs Materials Inventory Work in Process Inventory Finished Goods Inventory INCOME STATEMENT when sales occur Revenues deduct Cost of Goods Sold Equals Gross Margin deduct Period Costs Equals Operating Income 96

97 Merchandising Company BALANCE SHEET Inventoriable Costs Merchandise Purchases Inventory INCOME STATEMENT when sales occur Revenues deduct Cost of Goods Sold Equals Gross Margin deduct Period Costs Equals Operating Income 97

98 Prime Costs Direct Materials Direct + = Labor Prime Costs 98

99 Prime Costs What are the prime costs for Bicycles by the Sea? Direct materials used $200,000 + Direct labor 105,500 = $305,000 99

100 Conversion Costs Direct Labor Manufacturing Overhead + = Conversion Costs Indirect Labor Indirect Materials Other 100

101 Conversion Costs What are the conversion costs for Bicycles by the Sea? Direct labor $105,500 + Indirect manufacturing costs 194,500 = $300,

102 Measuring Costs Requires Judgment Manufacturing labor-cost classifications vary among companies. The following distinctions are generally found: Direct manufacturing labor Manufacturing overhead 102

103 Measuring Costs Requires Judgment Manufacturing overhead Indirect labor Managers salaries Payroll fringe costs Forklift truck operators (internal handling of materials) montacargas Janitors conserjes Overtime premium Nomina marginal Rework labor Idle time ocioso 103

104 Measuring Costs Requires Judgment Overtime premium is usually considered part of overhead. Assume that a worker gets $18/hour for straight time and gets time and one-half for overtime. 104

105 Measuring Costs Requires Judgment How much is the overtime premium? $18 50% = $9 per overtime hour If this worker works 44 hours on a given week, how much are his gross earnings? Direct labor 44 hours $18 = $792 Overtime premium 4 hours $ 9 = 36 Total gross earnings $

106 Cost Classifications on Financial Statements 106

107 107

108 108

109 Cost Classifications on Financial Statements Balance Sheet Merchandiser Current Assets Cash Receivables Prepaid Expenses Merchandise Inventory Manufacturer Current Assets Cash Receivables recibir Prepaid Expenses Gastos prepagados Inventories Raw Materials Work in Process Finished Goods 109

110 Manufacturing Organization Income Statement For the Year Ended December 31, 2004 Sales $2,800,000 Less: Cost of goods sold 1,300,000 Gross margin $ 700,000 Less operating expenses: Selling expenses $300,000 From the Cost Administrative expenses 150,000of of Goods 450,000 Sold Operating income $ Schedule 250,

111 Statement of Cost of Goods Manufactured For the Year Ended December 31, 2004 Direct materials: Beginning inventory $200,000 Add: Purchases 450,000 Materials available $650,000 Less: Ending inventory 50,000 Direct materials used in production $ 600,000 Direct labor 350,000 Manufacturing overhead: Indirect labor $122,500 Depreciation 177,500 Rent 50,000 Utilities 37,500 Property taxes 12,500 Maintenance 50, ,000 Total manufacturing costs added $1,400,000 continued 111

112 Total manufacturing costs added $1,400,000 Add: Beginning work in process 200,000 Less: Ending work in process 400,000 Cost of goods manufactured $1,200,000 Work in process consists of all partially completed units found in production at a given point in time. 112

113 Cost of Goods Sold Schedule For the Year Ended December 31, 2004 Cost of goods manufactured $1,200,000 Add: Beginning inventory finished goods 250,000 Cost of goods available for sale $1,450,000 Less: Ending inventory finished goods 150,000 Cost of goods sold $1,300,000 From the Statement of of Cost of of Goods Manufactured 113

114 Explain why product costs are computed in different ways for different purposes. 114

115 Many Meanings of Product Cost A product cost is the sum of the costs assigned to a product for a specific purpose. 1. Pricing and product emphasis decisions 2. Contracting with government agencies 3. Preparing financial statements for external reporting under generally accepted accounting principles 115

116 References 1. Garrison, Ray H. & Noreen,, Eric W. Managerial Accounting.. 10th ed. USA, Mc Graw Hill/Irwin Irwin,, pp. 2. Hansen & Mowen. Cost Management. Accounting and Control. Fourth Edition. USA, Thomson. 3. Hilton, Ronald W. Managerial Accounting: Creating Value in a Dynamic Business Environment.. 5th. Ed. USA, Mc Graw Hill/Irwin Irwin,, pp. 4. Horngren /Datar /Foster. Cost Accounting 11th. ed. USA, Prentice Hall Business Publishing, VanDerbeck,, Edward J. Principles of Cost Accounting.. 13th Ed. USA, Thomson. 6. Zimmerman, Jerold L. & Bittner, Ronald L. Accounting for Decision Making and Control Fourth Edition. USA, Irwin/McGraw-Hill,