CHAPTER 2
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Classification of
costs
Learning Objectives
I. COST CLASSIFICATION
III. COST ESTIMATIONS
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II. COST BEHAVIOR
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I. COST
CLASSIFICATION
1. PRODUCTION COST VS PERIOD COST
(OPERATION COSTS)
Production cost
Period cost
(Operation costs)
(Manufacturing cost)
(Non - Manufacturing cost)
Direct Direct Manufacturing
material labor
overheads
Eg:
Your
Boat,
Inc.,
assembles
Administrative
cost
custom
Marketing
cost
sailboats
from
components supplied by various manufacturers. The company is
very small and its assembly shop and retail sales store are
housed in a Gig Harbor, Washington, boathouse. Listed below are
some of the costs incurred by the company.
Eg: (continue)
1. The wages of employees who build the sailboats.
2. The cost of advertising in the local newspapers.
3. The cost of an aluminum mast installed in a sailboat.
4. The wages of the assembly shop’s supervisor.
5. Rent on the boathouse.
6. The wages of the company’s bookkeeper.
7. Sales commissions paid to the company’s salespeople.
8. Depreciation on power tools.
Required:
Classify each cost as direct labor, direct materials, manufacturing
overhead, selling, or an administrative cost.
Answer:
2. DIRECT COST vs INDIRECT COST
Direct cost
Indirect cost
- Those costs that can be
identified
directly
each unit of output;
Eg:
with
- Those costs that cannot be
identified
directly
each unit of output;
Eg:
with
Eg: Following costs are incurred by a factory on the
production of identical cupboards:
1.Laborers' wages
9. Supervisors' salaries
2.Synthetic wood
10.Factory depreciation
3.Power consumption
11.Varnish, glue, paints
4.Glass
12.Factory manager's salary
5.Nails and screws
6.Factory insurance
7.Handles, locks and hinges
8.Wood
Answer:
3. Opportunity costs, Sunk Cost, Incremental
costs, Differential costs
School
fee:
$10,000
Salary:
$15,000
Marginal cost
No. of product
Total cost
1
2,000
2
3,900
Marginal
cost
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II. COST
BEHAVIOR
1. VARIABLE COST & FIXED COST
Variable cost
-
Vary
with
changes
Fixed cost
of
- Accrue with the passage of
activity in the cost centre to
time and are not affected
which they relate
by changes in the activity
level, known as period costs.
COST CLASSIFICATIONS FOR PREDICTING
COST BEHAVIOR
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable
Total variable cost Increase
and decrease in proportion
to changes in the activity level.
Variable cost per unit
remains constant.
Fixed
Total fixed cost is not affected
by changes in the activity
level within the relevant range.
Fixed cost per unit decreases
as the activity level rises and
increases as the activity level falls.
2. STEP FIXED COSTS & SEMIVARIABLE COST (MIXED COST)
Step fixed
cost
Semivariable cost
- Fixed over a range of output
- Contain a fixed and variable
then increase in one big jump
portion.
Rent
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III. COST
ESTIMATION
1. HIGH-LOW METHOD
Eg 1:
Units produced
per week
Total cost per
week ($)
200
300
400
500
600
700
800
3400 4000 5200
6800
7500
8900
9100
1. HIGH-LOW METHOD
Difference between the costs corresponding
Variable cost
per unit
=
to the highest and lowest activities levels
Difference between the highest and lowest
activity levels
=
=
1. HIGH-LOW METHOD
Fixed cost = ???
Using the data for 200 units would be:
=
Units produced per week Line
Fit Plot
Y = .......... x + .........
Total cost per week - £’s
12000
10000
Total cost per week £’s
8000
6000
Predicted Total cost
per week - £’s
4000
2000
Линейная
(Predicted Total cost
per week - £’s)
0
0
200
400
600
800
1000
Units produced per week
Eg 2:
Month
Utility cost for month
Number of cake made
Jan
$5,100
75,000
Feb
$5,300
78,000
Mar
$5,650
80,000
April
$6,300
92,000
May
$6,400
98,000
June
$7,035
118,000
August
$7,000
112,000
Sep
$6,200
95,000
Oct
$6,100
90,000
Nov
$5,600
85,000
Dec
$5,900
90,000
High/Low (Range) Method
High/Low (Range) Method
Difference between the costs corresponding
Variable cost
per unit
=
to the highest and lowest activities levels
Difference between the highest and lowest
activity levels
=
=
High/Low (Range) Method
Fixed cost = ???
Using the data for 75,000 units would be:
=
Units produced per week Line
Fit Plot
Y = .......... x + ........
Total cost per week - £’s
12000
10000
Total cost per week £’s
8000
6000
Predicted Total cost
per week - £’s
4000
2000
Линейная
(Predicted Total cost
per week - £’s)
0
0
200
400
600
800
1000
Units produced per week
2. LEASE SQUARE REGRESSION METHOD
2. LEASE SQUARE REGRESSION METHOD
2. LEASE SQUARE REGRESSION METHOD
2. LEASE SQUARE REGRESSION METHOD
End of Chapter 1
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