Agenda
• Review: Some vocabulary, cost behavior,
simple (traditional) product costing, the
flow of costs through a manufacturer’s
accounts
• Overview of Tuesday’s class.
• Quiz: Learning with Cases
• Group exercise: product costing, cost flow,
cost behavior
Cost Concepts
• Important vocabulary
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resources
costs
cost object
direct costs
indirect costs
fixed costs
variable costs
product costs
overhead
Costing inventory and sales
• Resources = assets
• Costs = use or sacrifice of resources
• Product costs = manufacturing costs
(GAAP)
– direct (e.g., DM and DL)
• variable or fixed
• traceable
– indirect (overhead - O/H)
• variable
• fixed
Components of Product Costs
• Direct material
• Direct labor
• Indirect manufacturing costs (O/H)
– Cost pool/s
– Factory costs
– May vary, but not always with units of
production
Direct vs. Indirect Costs
• Cost object: The item we are trying to
determine a cost for (product, factory,
headquarters, CEO)
• A cost can be categorized as direct or
indirect only after the cost object has been
defined.
• A cost that is a direct factory cost may be
an indirect product cost.
Direct vs. Indirect Costs
• Direct costs can be either fixed or variable.
• Indirect costs can be either fixed or
variable
Fixed cost behavior
• Example: Variable cost/unit = $1
Total Cost
• Fixed costs are budgeted at $100,000
• Production volume = 1
• Production volume = 100,000
Fixed mfg.
costs = $100,000
Production Volume
Fixed manufacturing cost behavior
Unit costs
• Example: Fixed manufacturing
costs = $100,000
• Production volume = 1, or
• Production volume = 100,000
Unit fixed manufacturing
costs vary with production
volume
Production Volume
• Example:
Variable cost/unit = $1
• Production volume = 1
• Production volume = 100,000
Total cost
Variable costs
Total variable costs
increase with
production volume
Production volume
• Example:
Variable cost/unit = $1
• Production volume = 1
• Production volume = 100,000
Unit cost
Variable costs
Unit variable costs do not
change with production
volume.
$1
Production volume
Home Entertainment Center operates a large store in San
Francisco. The store has both a video section and a musical
section. HEC reports revenues for the video section separately
from the musical section. Classify direct and indirect and
variable and fixed costs with respect to the video section.
D or I
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Retainer paid to video distributor
Electricity costs of the HEC store
Cost of videos purchased
Subscription to Video Trends
Computer leased for HEC store
Cost of free popcorn for customers
Earthquake insurance for store
Freight-in costs of videos
D
I
D
D
I
I
I
D
V or F
F
F
V
F
F
V
F
V
Other cost concepts
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Outlay costs
Opportunity costs
Differential costs
Sunk costs
Traditional Overhead Allocation
• Budgeted, actual and applied overhead
• Budgeted overhead costs = $500,000
• Denominator volume of the cost driver =
500,000 direct labor hours
• Predetermined overhead rate = $1 per hour
• Actual overhead costs were $495,000
Traditional Product Costing
• DL = $3 per unit, DM = $2 per unit
• Labor costs $3 per hour, 500,000 units are
manufactured; 505,000 DL hours are used.
• What is a unit of product expected to cost?
• How much did the company spend
building 500,000 units?
• How much would would we expect them
to spend building 400,000 units?
Traditional Product Costing
• How much overhead was applied?
• Over- or underapplied overhead = Actual
overhead spending - Overhead applied.
• By how much was overhead over- or
underapplied?
• Efficiency variance = 5,000 DL hours x $1
per hour = $5,000
• Budget variance = $500,000 - $495,000
Flow of costs through a manufacturer’s accounts:
Materials inv.
BI
Purchases
EI
to WIP
Mfg. Overhead
Actual
Applied
to WIP
Work in process
Finished goods
BI
COGM
DM
to FG
DL
O/H
EI
Wages Payable
BI
From
WIP
EI
Paydays
BB
to WIP
EB
To COGS
Cost of Goods Sold
From FG
Other important concepts
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Contribution margin
Gross margin
What is the difference between the two?
Which one would you look at to decide
what product to manufacture?
• Which one would you expect to see on an
income statement?
Who uses cost accounting
information?
• Cost of goods sold, inventories  financial
statements.
• Bids, product pricing managers
• Budgeting, production scheduling 
managers
• Can the same cost system serve both
masters? Should it?
Tuesday
• Cost-Volume-Profit analysis - a simple
decision model.
• Lecture and demonstration problems
• Group exercise that is a little tough.
• Cost-Volume-Profit analysis is required for
the Prestige Telephone Company case next
Thursday.
Learning with cases:
How do instructors’ and students’ roles differ
between case/experiential and traditional
approaches to learning?
Name one advantage and one disadvantage to
case learning.