Summary
Chapter 2: An Introduction to Cost Terms and Purposes
Variable cost  a cost that varies with direct production the amount
increase when production volume grows and declines when production
volume shrinks
Fixed cost  a cost that is fixed (do not change) the amount depends on
the accounting period (Month, quarter, year) rather than the number of
unit produced.
Costs and costs terminology
Actual cost: cost that we actually incurred during a period of time.
Budget cost: cost, which is predicted or forecasted cost (future cost).
Cost object: describe something to which costs are assigned.
 Product line, geographic territories, customers, departments or anything else for which
management would like to quantify.
 Example: apple (IPhone, IPad, Mac) a cost that might be assigned (cost measurement is
desired). Aya object bade ehsbo ade bkalefne  cost object.
Difference between direct and indirect costs.
Direct cost are costs that can be directly related to the production of goods and
services. To a particular cost object can be traced (product, service, or unit).by
example: for a company that produces furniture, the funds that are spent on wood,
paint, varnish the labor cost for hiring a craftsman will be direct costs. This is
because these costs can be directly associated with the production of the furniture.
Indirect cost  related to the particular cost object but cannot be traced to ma
certain cost object (not focused on just one product or service) example: utility bills,
rent, insurance, accounting expenses. Maintenance common cost.
Method of allocation
(How can I allocate an indirect cost to a particular cost object) based on uses of this
cost per object
Factors Affecting Direct/Indirect Cost Classifications
Several factors affect whether a cost is classified as direct or indirect:

The materiality of the cost in question.
The smaller the amount of a cost—that is, the more immaterial the cost is—the less likely it is
economically feasible to trace it to a particular cost object.
0.5$ small amount it does not worse to be allocated 3ala specific product Salary 45.000$ big
amount so I should find a way to allocated.

Available information-gathering technology.
Any product that include some technological improvements, research and development. I
should know that this product have a certain technological cost noting by the way kel ma ykun
technological advance aktar kel ma ken less costly. You are able to increase production in
lower cost

Design of operations.
Explain variable costs and fixed costs
Variable cost  a variable cost changes in total in proportion to changes in the related level of
total activity or volume of output produced. By example: direct material, direct labor
Fixed cost  a fixed cost remains unchanged in total for a given time period, despite wide
changes in the related level of total activity or volume of output produce
Variable cost
increase with high production
Decrease with less production
Fixed cost
does not change in high or less production
Total Costs and Unit Costs


Total Variable Cost = Number of Units Produced x Variable Cost Per Unit
Total Cost = Total Fixed cost + Total variable cost
(TC = TFC + TVC)

Unit cost or ( Average Cost ) =

Average Fixed Cost ( AFC ) =

Average Variable Cost (AVC) =

production increase or decrease
Average total cost (ATC) = AFC + AVC
Example: in the book Page 59-60
Total cost = $40.000.000
Total Quantity = 500.000 Units
𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕(𝑻𝑪)
𝑻𝒐𝒕𝒂𝒍 𝑸𝒖𝒔𝒏𝒕𝒊𝒕𝒚(𝑻𝑸)
𝑻𝒐𝒕𝒂𝒍 𝐹𝑖𝑥𝑒𝑑 𝑪𝒐𝒔𝒕(𝑻𝑭𝑪)
 Quantity increase ,AFC decrease ,vice versa
𝑻𝒐𝒕𝒂𝒍 𝑸𝒖𝒔𝒏𝒕𝒊𝒕𝒚(𝑻𝑸)
𝑻𝒐𝒕𝒂𝒍 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝐶𝒐𝒔𝒕(𝑻𝑽𝑪)
𝑻𝒐𝒕𝒂𝒍 𝑸𝒖𝒔𝒏𝒕𝒊𝒕𝒚(𝑻𝑸)
will always remain the same no matter if
Unit cost =
40.000.000
500.000
= $80
Sales = 480.000
Cost of Good Sold = Total Quantity Sold * Unit Cost
= 480.000 * 80 = 38.400.000
Ending inventory balance = (Beginning Inventory – Cost of Goods Sold) * 80 = $1.600.000
Ending Inventory (EI) = Beginning Inventory (BI) + purchases - Cost of Goods Sold (COGS)
Business Sectors, Types of Inventory, Inventiorable Costs, and Period Costs
Manufacturing-, Merchandising-, and Service-Sector Companies
1. Manufacturing-sector companies purchase materials and components and convert them into
various finished goods. Includes types of inventory Raw material. Work in process , Finished
Good “Ending Product”
2. Merchandising-sector companies purchase and then sell tangible products without changing
their basic form. Only purchase fixed or finished goods “Retail Store “
3. Service-sector companies provide services (intangible products)—for example, legal advice or
audits—to their customers. Hotel , transportation companies as Middle east airlines
Types of Inventory
1.
Direct materials inventory. Direct materials in stock that will be used in the manufacturing
process (for example, computer chips and components needed to manufacture cellular phones).
2. Work-in-process inventory. Goods partially worked on but not completed (for example, cellular
phones at various stages of completion in the manufacturing process). This is also called work in
progress.
3. Finished goods inventory. Goods (for example, cellular phones) completed but not sold.
Inventoriable costs
Inventoriable costs is the cost of inventories that is capitalized as current assets in the balance
sheet
Manufacturing include all manufacturing cots like direct material , direct labor , direct
overhead
Merchandising include all costs incurred until you ger the inventory ready for sale like purchase
price , freight , charges , taxes…
Service-sector companies have no inventorial costs.
Period Costs
Period costs is a cost that is expenses as incurred like marketing expense, selling
expense…
Manufacturing-Sector Example
DM Used = BDM + New Purchase of DM – EDM
Direct
Material
used
Beginning
direct
material
Ending
direct
material
TMC = DM Used + DL + OHC
Total
Manufacturing
Cost
Direct
labor
Overhead
cost
Gross margin = Revenues - Cost of goods sold (Income Statement )
Total Operating income (TOI) = Gross margin (GM OR GP) – Total operating costs (expenses) (OE)
Finished good = Beginning inventory + Cost of new manufacturing inventory- Ending finished inventory
Prime Costs and Conversion Costs
Are all direct
Prime costs = Direct material costs + Direct manufacturing
labor costs
manufacturing
costs.
Represent all manufacturing
costs incurred to convert direct
materials
Conversion costs = Direct manufacturing labor costs + Manufacturing overhead
costs into finished goods.
MC = DM+DL+MOH
CC = DL + MOH
MC = DM + CC
Direct Labor Include the cost of labors that re directly related to the production process Indirect Labor
Cost include cost of labors that are not directly related to the manufacturing process.
2-26 Total costs and unit costs. The Big Event (TBE) recently started a business organizing food
and music at weddings and other large events. In order to better understand the profitability
of the business, the owner has asked you for an analysis of costs—what costs are fixed, what
costs are variable, and so on, for each event. You have the following cost information:
Music costs: $10,000 per event Fixed cost
Catering costs:
Food: $65 per guest Variable Cost
Setup/cleanup: $15 per guest Variable Cost
Fixed fee: $4,000 per event Fixed Cost
The Big Event has allowed the caterer, who is also new in business, to place business cards on
each table as a form of advertising. This has proved quite effective, and the caterer gives TBE a
discount of $5 per guest in exchange for allowing the caterer to advertise. Required:
1. Draw a graph depicting fixed costs, variable costs, and total costs for each event versus the
number of guests.
Total cost = TFC + TVC
Its start from the TFC and it will
increase with your TVC
Total fixed cost =
10.000+4.000=14.000
Total variable cost (varies with the
number of guest) it will start from
zero and it goes up. As the number
of guest increase this total variable
cost increase
2. Suppose 150 persons attend the next event. What is TBE’s total net cost and the cost per
attendee?
Discount $5
Variable cost per guest = (65-5) +15 = $75
TVC = number of guests × variable cost per guest = 150 × 75 =$ 11.250
TC = TFC + TVC =14.000+11.250 = $25.250
25.250
150 persons
Cost per attendee = 150 = $168.33
For 150 attendees the total cost will be $25,250, and the cost per attendee will be $168.33.
3. Suppose instead that 200 persons attend. What is TBE’s total net cost and the cost per
attendee?
Variable cost per guest = (65-5) +15 = $75
TVC = number of guests × variable cost per guest = 200 × 75 =$ 15.000
TC = TFC + TVC =14.000+15.000= $29.000
29.000
200 persons
Cost per attendee =
= $145
200
For 200 attendees, the total cost will be $29,000, and the cost per attendee will be $145.
4. How should TBE charge customers for its services? Explain briefly.
Cost per attendee + markup
Profit margin
TBE should charge customers based on the number of guests. As the number of guests increase, TBE
could offer price discounts because its fixed costs would be spread over a larger number of guests.