BASIC COST MANAGEMENT CONCEPTS

Chapter 02 - Basic Cost Management Concepts 2-1 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

CHAPTER 2

BASIC COST MANAGEMENT CONCEPTS

Learning Objectives

• Explain what is meant by the word cost.

• Distinguish among product costs, period costs, and expenses.

• Describe the role of costs in published financial statements.

• List five types of manufacturing operations and describe mass customization.

• Give examples of three types of manufacturing costs.

• Prepare a schedule of cost of goods manufactured, a schedule of cost of goods

sold, and an income statement for a manufacturer.

• Understand the importance of identifying an organization's cost drivers.

• Describe the behavior of variable and fixed costs, in total and on a per-unit basis.

• Distinguish among direct, indirect, controllable, and uncontrollable costs.

• Define and give examples of an opportunity cost, an out-of-pocket cost, a sunk

cost, a differential cost, a marginal cost, and an average cost.Managerial Accounting Creating Value in a Dynamic Business Environment 10th Edition Hilton Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 02 - Basic Cost Management Concepts 2-2 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter Overview

• What Do We Mean by a Cost?
• Product costs, period costs, and expenses

II. Costs on Financial Statements

• Income statement
• Selling and administrative costs
• Costs of manufactured inventory
• Balance sheet
• Raw-materials inventory
• Work-in-process inventory
• Finished-goods inventory

III. Manufacturing Operations and Manufacturing Costs

• Job shop, batch, assembly line, continuous flow
• Assembly manufacturing
• Manufacturing costs
• Direct material
• Direct labor
• Manufacturing overhead
• Indirect material
• Indirect labor
• Other manufacturing costs
• Conversion cost, prime cost

IV. Manufacturing Cost Flows

• Cost of goods manufactured
• Production costs in service industry firms and nonprofit organizations

V. Basic Cost Management Concepts: Different Costs for Different Purposes

• The cost driver team
• Variable and fixed costs
• The cost management and control team
• Direct and indirect costs
• Controllable and uncontrollable costs
• The outsourcing action team
• Opportunity costs
• Out-of-pocket costs
• Sunk costs
• Differential and incremental costs

Chapter 02 - Basic Cost Management Concepts 2-3 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• Marginal and average costs
• Costs and benefits of information

VI. Costs in the Service Industry

• Product and period costs
• Variable and fixed costs
• Controllable and uncontrollable costs
• Opportunity, out-of-pocket, and sunk costs
• Differential, marginal, and average costs

Key Lecture Concepts

• What Do We Mean by a Cost?

 A cost is the sacrifice made to achieve a particular purpose.

 There are different costs for different purposes, with costs that are appropriate for one use being totally inappropriate for others (e.g., a cost that is used to determine inventory valuation may be irrelevant in deciding whether or not to manufacture that same product).

 An expense is defined as the cost incurred when an asset is used up or sold for the purpose of generating revenue. The terms "product cost" and "period cost" are used to describe the timing with which expenses are recognized.

 Product costs are the costs of goods manufactured or the cost of goods purchased for resale. These costs are inventoried until the goods are sold.

 Period costs are all other non-product costs in an organization (e.g., selling and administrative). Such costs are not inventoried but are expensed as time passes.

Chapter 02 - Basic Cost Management Concepts 2-4 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

II. Costs on Financial Statements

 Product costs are shown as cost of goods sold on the income statement when goods are sold. Income statements of service enterprises lack a cost- of-goods-sold section and instead reveal a firm's operating expenses.

 Product costs, housed on the balance sheet until sale, are found in three

inventory accounts:

 Raw materials—materials that await production

 Work in process—partially completed production

 Finished goods—completed production that awaits sale

III. Manufacturing Operations and Manufacturing Costs

 There are various types of production processes; for example:

 Job shop—low production volume, little standardization; one-of-a- kind products

 Batch—multiple products; low volume

 Assembly line—a few major products; higher volume

 Continuous flow—high volume; highly standardized commodity products

 Direct materials—materials easily traced to a finished product (e.g., the seat on a bicycle)

 Direct labor—the wages of anyone who works directly on the product (e.g., the assembly-line wages of the bicycle manufacturer)

 Manufacturing overhead—all other manufacturing costs such as:

 Indirect materials—materials and supplies other than those classified as direct materials,