• Cost – resource sacrificed to achieve a specific objective
• Actual cost – a cost that has occurred
• Budgeted cost – a predicted cost
• Cost object – anything of interest for which a cost is desired

Direct
Materials
Direct
Labor
Manufacturing
Overhead
The Product

Idle Time
Treated as manufacturing overhead cost
Overtime
Premium of
Factory Workers
Treated as manufacturing overhead cost
Labor Fringe
Benefits
Treated as manufacturing overhead or direct labor

Marketing and
Selling Cost
Administrative
Cost
R&D
Costs necessary to get the order and deliver the product.
All executive, organizational, and clerical costs.

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

Product costs include direct materials, direct labor, and manufacturing overhead.
Inventory Cost of Good Sold
Period costs are not included in product costs. They are expensed on the income statement.
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement

Merchandiser Manufacturer
Current assets
– Cash
– Receivables
– Prepaid expenses
– Merchandise inventory
Current Assets
 Cash
 Receivables
 Prepaid Expenses
 Inventories
Raw Materials
Work in Process
Finished Goods

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
+ Purchases
Goods available
for sale
- Ending
merchandise
inventory
= Cost of goods
sold
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.
+ Cost of goods
manufactured
Goods available
for sale
- Ending
finished goods
inventory
= Cost of goods
sold
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250

Cellular Products
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2007 (in thousands)
Direct Materials:
Beginning Inventory, January 1 $ 11,000
Add: Purchases
Cost of Direct Materials Available for Use
Less: Ending Inventory, December 31
73,000
84,000
8,000
Direct Materials Used
Direct Labor
Manufacturing Overhead:
Indirect Labor
Supplies
Heat, Light & Power
Depreciation - plant building
Depreciation - plant equipment
Miscellaneous
Total Manufacturing Overhead Costs
Manufacturing costs incurred during 2007
Add: Beginning WIP, January 1
Total Manufacturing Costs to account for
Less: Ending WIP, December 31
Cost of Goods Manufactured
7,000
2,000
5,000
2,000
3,000
1,000
76,000
9,000
20,000
105,000
6,000
111,000
7,000
$ 104,000
Calculates the cost of Direct
Materials Used
Accumulates the three product costs for the current period
Adjusts the current period manufacturing costs to account for units actually completed

Cost of Goods Available for sale
Ending Finished Goods, December 31
Cost of Goods Sold
Gross Profit
Cellular Products
Income Statement
For the Year Ended December 31, 2007 (in thousands)
Revenues
Cost of Goods Sold
Beginning Finished Goods, January 1
Cost of Goods Manufactured
22,000
104,000
126,000
18,000
Operating Costs:
Marketing, distribution, and customer-service
Total operating costs
Operating Income
70,000
$210,000
108,000
102,000
70,000
$32,000
Figure carries forward from the
Schedule of Cost of Goods
Manufactured
Period Costs are expensed as incurred

• Variable costs – changes in total in proportion to changes in the related level of activity or volume
• Fixed costs – remain unchanged in total regardless of changes in the related level of activity or volume
• Costs are fixed or variable only with respect to a specific activity or a given time period

• Variable costs – are constant on a per-unit basis. If a product takes 5 pounds of materials each, it stays the same per unit regardless of one, ten or a thousand units are produced
• Fixed costs – change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit

Variable Costs
Total Variable Cost Graph
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Unit Variable Cost Graph
0
10 20 30
Units Produced (000)
Units Total Cost
Produced Cost per Unit
5,000 $ 50,000 $10
10,000 100,000 10
15,000 150,000 10
20,000 200,000 10
25,000 250,000 10
30,000 300,000 10
$20
$15
$10
$5
0
10 20 30
Units Produced (000)

Fixed Costs
Total Fixed Cost Graph
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
Unit Fixed Cost Graph
$1.50
$1.25
$1.00
$.75
$.50
$.25
0
100 200 300
Units Produced (000)
Units Total Cost
Produced Cost per Unit
50,000 $75,000 $1.500
100,000 75,000 .750
150,000 75,000 .500
200,000 75,000 .375
250,000 75,000 .300
300,000 75,000 .250
0
100 200 300
Units Produced (000)

Committed
Long-term, cannot be significantly reduced in the short term.
Examples
Depreciation on
Equipment and
Real Estate Taxes
Discretionary
May be altered in the short-term by current managerial decisions
Examples
Advertising and
Research and
Development

• Unit costs should be used cautiously. Since unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis.
– Unit costs that include fixed costs should always reference a given level of output or activity
– Unit Costs are also called Average Costs

Bicycles by the Sea incurs variable costs of
$52 for each of its bicycles.
Bicycles by the Sea also incurs $94,500 in fixed costs per year

What is the unit cost when Bicycles assembles 1,000 bicycles in a year?

Assume that Bicycles management uses a unit cost of $146.50
Management is budgeting costs for different levels of production.
What is their budgeted cost for an estimated production of 600 bicycles?
600
×
$146.50 = $87,900?

What is their budgeted cost for an estimated production of 3,500 bicycles?
3,500
×
$146.50 = $512,750?

• Direct costs – can be conveniently and economically traced (tracked) to a cost object
• Indirect costs – cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner

• Cost accumulation – a collection of cost data in an organized manner
• Cost assignment – a general term that includes associating accumulated costs with a cost object. This includes:
– Tracing accumulated costs with a direct relationship to the cost object and
– Allocating accumulated costs with an indirect relationship to a cost object

Direct or Indirect?
Consider a supervisor’s salary in the canning department of
Campbell Soup Company.
If the cost object is the department, the supervisor’s salary is a direct cost.
If the cost object is a can of soup (the “product” of the company), the supervisor’s salary is an indirect cost.

Direct
Variable Fixed
Indirect

• Pricing and product-mix decisions – may use a
“super” cost approach (comprehensive)
• Contracting with government agencies – very specific definitions of cost for “cost plus profit” contracts
• Preparing external-use financial statements –
GAAP-driven product costs only

• Variable Costs – costs that change in total in relation to some chosen activity or output
• Fixed Costs – costs that do not change in total in relation to some chosen activity or output
• Mixed Costs – costs that have both fixed and variable components; also called semivariable costs

La Playa Hotel offers an airline three alternative cost structures to accommodate its crew overnight:
1. $60 per night per room usage y = $60 x
The slope of the cost function is $60.

$20,000
$15,000
$10,000
$5,000
$0
0 100 200 x = Number of rooms
300

2. $8,000 per month y = $8,000
$8,000 is called a constant or intercept.
The slope of the cost function is zero.

$20,000
$15,000
$10,000
$5,000
$0
0 100 200 x = Number of rooms
300

3. $3,000 per month plus $24 per room
This is an example of a mixed cost.
y = $3,000 + $24 x y = a + bx

$20,000
$15,000
$10,000
$5,000
$0
0 100 200 x = Number of rooms
300

y = a + bX
The Dependent
Variable:
The cost that is being predicted
The Independent
Variable:
The cost driver
The Intercept:
Fixed Cos ts
The slope of the line: variable cost per unit