AUSSIE PIES (A)
Cost Classifications
Cost Classifications
 External reporting
 Predicting cost behavior
 Assigning costs to cost objects
 Decision making
Cost Classifications
 External reporting
 Product vs. period costs
 Predicting cost behavior
 Variable vs. fixed costs
 Assigning costs to cost objects
 Direct vs. indirect costs
 Decision making
 Relevant vs. irrelevant costs
LET’S DEFINE ALL OF THE COSTS
MENTIONED IN THE CASE.
WHO CAN GIVE ME ONE COST MENTIONED IN THE CASE?
Aussie Pies’ Costs









Ingredients
Utilities for cooking
Utilities for lighting the store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Let’s start by looking at these costs from an
external reporting perspective.
Cracker Barrel
The Cheesecake Factory
The Cheesecake Factory
Cost Classification Summary
Product
Ingredients
Utilities for cooking
Utilities for lighting in
store
Pie boxes
Rent on store
Rent on cooking
equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Period
Variable
Fixed
Direct
Indirect
Relevant
Irrelevant
Product vs. Period Costs
(external reporting)
Product
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Period
Product vs. Period Costs
(external Reporting)
Product
Ingredients
Period
√
Utilities for cooking
√
Utilities for lighting in store
√
Pie boxes
√
Rent on store
√
Rent on cooking equipment
√
Rent on fixtures
√
Chefs salaries
√
Sales assistant salary
√
What are the profit implications of treating
a cost such as utilities for cooking as a
period cost rather than a product cost?
Product Costs
(excluding raw materials inventory)
Product Costs
(excluding raw materials)
Ending work in process
inventory or ending
finished goods inventory
Balance Sheet
Period Costs
Cost of goods sold
Selling & Admin.
expense
Income Statement
Does a restaurant have work in process or
finished goods inventory?
A Matching Perspective
 Why not include the rental cost of cooking
equipment in COGS?
A Matching Perspective
 Why not include the rental cost of cooking
equipment in COGS?
 A manufacturer treats manufacturing equipment
depreciation as a product cost because some units
may be produced in the current period but not
sold until a later period.
A Matching Perspective
 Why not include the rental cost of cooking
equipment in COGS?
 A manufacturer treats manufacturing equipment
depreciation as a product cost because some units
may be produced in the current period but not
sold until a later period.
 A software developer incurs costs to develop
products that will be sold in a later period.
 So in these two instances there is a need to match
costs with revenues.
A Matching Perspective
 Why not include the rental cost of cooking
equipment in COGS?
 A manufacturer includes equipment depreciation in
product cost because some units may be produced in
the current period but not sold until a later period.
 A software developer incurs costs to develop products
that will be sold in a later period.
 So in these two instances there is a need to match costs
with revenues.
 There is no such matching concern with a restaurant.
Furthermore, cost of goods sold is more useful if not
confounded with various non-food costs.
From an external reporting perspective, what would be
Aussie Pie’s unit product cost?
Unit Product Cost
Amount
Ingredients
Pie boxes
Unit product cost
Unit Product Cost
Amount
Ingredients
$1.20
Pie boxes
$0.02
Unit product cost
$1.22
Let’s look at Aussie Pies’ costs from a cost
behavior standpoint.
Variable vs. Fixed Costs
(with respect to the number of pies produced)
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Variable
Fixed
Variable vs. Fixed Costs
(with respect to the number of pies produced)
Variable
Ingredients
√
Utilities for cooking
√
Utilities for lighting in store
Pie boxes
Fixed
√
√
Rent on store
√
Rent on cooking equipment
√
Rent on fixtures
√
Chefs salaries
√
Sales assistant salary
√
WHAT ARE AUSSIE PIE’S FIXED
COST PER MONTH?
Fixed Costs
Amount
Utilities for lighting in store
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Total fixed costs
Fixed Costs
Amount
Utilities for lighting in store
Rent on store
$300
11,900
Rent on cooking equipment
8,000
Rent on fixtures
5,000
Chefs salaries
3,600
Sales assistant salary
1,200
Total fixed costs
$30,000
WHAT ARE AUSSIE PIE’S
VARIABLE COSTS PER PIE?
Variable Costs
Amount
Ingredients
$1.20
Utilities
0.03
Packaging
0.02
Total variable cost per pie
$1.25
Cost Behavior
Total VC
5,000 units
10,000 units
15,000 units
20,000 units
25,000 units
30,000 units
VC/Unit
Total FC
FC/Unit
Cost/Unit
Cost Behavior
Total VC
VC/Unit
5,000 units
$1.25
10,000 units
$1.25
15,000 units
$1.25
20,000 units
$1.25
25,000 units
$1.25
30,000 units
$1.25
Total FC
FC/Unit
Cost/Unit
Cost Behavior
Total VC
VC/Unit
Total FC
5,000 units
$1.25
$30,000
10,000 units
$1.25
$30,000
15,000 units
$1.25
$30,000
20,000 units
$1.25
$30,000
25,000 units
$1.25
$30,000
30,000 units
$1.25
$30,000
FC/Unit
Cost/Unit
Cost Behavior
Total VC
VC/Unit
Total FC
5,000 units
$6,250
$1.25
$30,000
10,000 units
$12,500
$1.25
$30,000
15,000 units
$18,750
$1.25
$30,000
20,000 units
$25,000
$1.25
$30,000
25,000 units
$31,250
$1.25
$30,000
30,000 units
$37,500
$1.25
$30,000
FC/Unit
Cost/Unit
Cost Behavior
Total VC
VC/Unit
Total FC
FC/Unit
5,000 units
$6,250
$1.25
$30,000
$6.00
10,000 units
$12,500
$1.25
$30,000
$3.00
15,000 units
$18,750
$1.25
$30,000
$2.00
20,000 units
$25,000
$1.25
$30,000
$1.50
25,000 units
$31,250
$1.25
$30,000
$1.20
30,000 units
$37,500
$1.25
$30,000
$1.00
Cost/Unit
Cost Behavior
Total VC
VC/Unit
Total FC
FC/Unit
Cost/Unit
5,000 units
$6,250
$1.25
$30,000
$6.00
$7.25
10,000 units
$12,500
$1.25
$30,000
$3.00
$4.25
15,000 units
$18,750
$1.25
$30,000
$2.00
$3.25
20,000 units
$25,000
$1.25
$30,000
$1.50
$2.75
25,000 units
$31,250
$1.25
$30,000
$1.20
$2.45
30,000 units
$37,500
$1.25
$30,000
$1.00
$2.25
Let’s look at the topic of assigning costs to cost
objects.
Direct vs. Indirect Costs
 If Aussie Pies eventually opened a second
store and hired two additional chefs for that
store, then what would be the direct and
indirect costs with respect to a specific store?
Direct vs. Indirect Costs
Direct
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Indirect
Direct vs. Indirect Costs
Direct
Ingredients
√
Utilities for cooking
√
Utilities for lighting in store
√
Pie boxes
√
Rent on store
√
Rent on cooking equipment
√
Rent on fixtures
√
Chefs salaries
√
Sales assistant salary
Indirect
√
Let’s look at the topic of cost classifications for
decision making.
Relevant vs. Irrelevant Costs
 Assume the Aussie Pies’ owners claimed that
the cost per Aussie Pie (at a volume of 30,000
units sold) is $2.25 per pie.
Relevant vs. Irrelevant Costs
 Assume the Aussie Pies’ owners claimed that
the cost per Aussie Pie (at a volume of 30,000
units sold) is $2.25 per pie.
 Assume that Aussie Pies turned down a
corporate client that wanted to buy 1,000
pies at $2.00 each because the price was
below $2.25 per pie.
 Comment on the wisdom of this decision.
Relevant vs. Irrelevant Costs
 Assume the Aussie Pies’ owners claimed that
the cost per Aussie Pie (at a volume of 30,000
units sold) is $2.25 per pie.
 Assume that Aussie Pies turned down a
corporate client that wanted to buy 1,000
pies at $2.00 each because the price was
below $2.25 per pie.
 Comment on the wisdom of this decision.
 Does the concept of “opportunity cost” affect
your answer?
Relevant vs. Irrelevant Costs
 If Aussie Pies is considering staying open 2
additional hours everyday, what costs on the
next slide would be potentially relevant to
this decision?
Relevant vs. Irrelevant Costs
Relevant
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Irrelevant
Relevant vs. Irrelevant Costs
Relevant
Ingredients
√
Utilities for cooking
√
Utilities for lighting in store
√
Pie boxes
√
Irrelevant
Rent on store
√
Rent on cooking equipment
√
Rent on fixtures
√
Chefs salaries
Sales assistant salary
√
√
Assumes that Chefs would demand an increase in salary to work two extra
hours everyday.
Cost Classification Summary
Product
Ingredients
Period
√
Utilities for cooking
√
Utilities for lighting in
store
√
Pie boxes
√
Variable
Fixed
Direct
Indirect
Relevant
√
√
√
√
√
√
√
√
√
√
√
√
Irrelevant
Rent on store
√
√
√
√
Rent on cooking
equipment
√
√
√
√
Rent on fixtures
√
√
√
√
Chefs salaries
√
√
√
Sales assistant salary
√
√
√
√
√
Let’s take a closer look at the value of
understanding cost behavior.
HOW MANY AUSSIE PIES HAVE
TO BE SOLD TO BREAKEVEN?
Equation Method
(P)(Q) ̶ (V)(Q) ̶ F = Profit
Equation Method
($3.25)(Q ) ̶ ($1.25)(Q) ̶ $30,000 = 0
2Q = $30,000
Q = 15,000 pies
What is the breakeven point in sales
dollars?
Equation Method
($3.25)(Q ) ̶ ($1.25)(Q) ̶ $30,000 = 0
2Q = $30,000
Q = 15,000 pies
15,000 pies × $3.25 = $48,750
HOW MANY AUSSIE PIES HAVE
TO BE SOLD TO EARN A 20%
RETURN ON SALES?
Equation Method
($3.25)(Q) ̶ ($1.25)(Q) ̶ $30,000 = ($0.65)Q
1.35Q = $30,000
Q = 22,223 pies
WHAT PROFIT WOULD AUSSIE PIES
EARN IF IT RAISED INGREDIENTS
COST BY $0.50, INVESTED $5,000
IN A MONTHLY ADVERTISING
CAMPAIGN AND WAS ABLE TO SELL
25,000 UNITS AT $3.25 PER
UNIT?
Equation Method
($3.25)(25,000) ̶ ($1.75)(25,000) ̶ $35,000 = Profit
Profit = $2,500
AUSSIE BELIEVES IT CAN SELL
20,000 PIES AT A PRICE OF
$3.25. HOWEVER, BASED ON
MARKET RESEARCH IT BELIEVES
FOR EACH $0.25 SHIFT IN PRICE,
DEMAND WILL SHIFT BY 1,500
PIES. WHAT IS THE OPTIMAL
PRICE?
Optimal Price
Volume
20,000 units
Price
$3.25
VC per CM per
Unit
Unit
Total
CM
Fixed
Costs
Profit
Optimal Price
Volume
Price
26,000 units
$2.25
24,500 units
$2.50
23,000 units
$2.75
21,500 units
$3.00
20,000 units
$3.25
18,500 units
$3.50
17,000 units
$3.75
15,500 units
$4.00
14,000 units
$4.25
VC per CM per
Unit
Unit
Total
CM
Fixed
Costs
Profit
Optimal Price
Volume
Price
VC per CM per
Unit
Unit
26,000 units
$2.25
$1.25
24,500 units
$2.50
$1.25
23,000 units
$2.75
$1.25
21,500 units
$3.00
$1.25
20,000 units
$3.25
$1.25
18,500 units
$3.50
$1.25
17,000 units
$3.75
$1.25
15,500 units
$4.00
$1.25
14,000 units
$4.25
$1.25
Total
CM
Fixed
Costs
Profit
Optimal Price
Volume
Price
VC per CM per
Unit
Unit
26,000 units
$2.25
$1.25
$1.00
24,500 units
$2.50
$1.25
$1.25
23,000 units
$2.75
$1.25
$1.50
21,500 units
$3.00
$1.25
$1.75
20,000 units
$3.25
$1.25
$2.00
18,500 units
$3.50
$1.25
$2.25
17,000 units
$3.75
$1.25
$2.50
15,500 units
$4.00
$1.25
$2.75
14,000 units
$4.25
$1.25
$3.00
Total
CM
Fixed
Costs
Profit
Optimal Price
Volume
Price
VC per CM per
Unit
Unit
Total
CM
26,000 units
$2.25
$1.25
$1.00
$26,000
24,500 units
$2.50
$1.25
$1.25
$30,625
23,000 units
$2.75
$1.25
$1.50
$34,500
21,500 units
$3.00
$1.25
$1.75
$37,625
20,000 units
$3.25
$1.25
$2.00 $40,000
18,500 units
$3.50
$1.25
$2.25
$41,625
17,000 units
$3.75
$1.25
$2.50
$42,500
15,500 units
$4.00
$1.25
$2.75
$42,625
14,000 units
$4.25
$1.25
$3.00 $42,000
Fixed
Costs
Profit
Optimal Price
Volume
Price
VC per CM per
Unit
Unit
Total
CM
Fixed
Costs
26,000 units
$2.25
$1.25
$1.00
$26,000
$30,000
24,500 units
$2.50
$1.25
$1.25
$30,625
$30,000
23,000 units
$2.75
$1.25
$1.50
$34,500
$30,000
21,500 units
$3.00
$1.25
$1.75
$37,625
$30,000
20,000 units
$3.25
$1.25
$2.00 $40,000
$30,000
18,500 units
$3.50
$1.25
$2.25
$41,625
$30,000
17,000 units
$3.75
$1.25
$2.50
$42,500
$30,000
15,500 units
$4.00
$1.25
$2.75
$42,625
$30,000
14,000 units
$4.25
$1.25
$3.00 $42,000
$30,000
Profit
Optimal Price
Volume
Price
VC per CM per
Unit
Unit
Total
CM
Fixed
Costs
Profit
26,000 units
$2.25
$1.25
$1.00
$26,000
$30,000 $(4,000)
24,500 units
$2.50
$1.25
$1.25
$30,625
$30,000
$625
23,000 units
$2.75
$1.25
$1.50
$34,500
$30,000
$4,500
21,500 units
$3.00
$1.25
$1.75
$37,625
$30,000
$7,625
20,000 units
$3.25
$1.25
$2.00 $40,000
$30,000
$10,000
18,500 units
$3.50
$1.25
$2.25
$41,625
$30,000
$11,625
17,000 units
$3.75
$1.25
$2.50
$42,500
$30,000
$12,500
15,500 units
$4.00
$1.25
$2.75 $42,625 $30,000 $12,625
14,000 units
$4.25
$1.25
$3.00 $42,000
$30,000
$12,000
Assume that Aussie Pies decides to pay its
sales assistant a commission of $0.06 per
pie sold instead of a salary and each chef
is paid a salary of $1,000 plus a
commission of $0.04 per pie sold. If Aussie
Pies sells 22,000 units, how would it
prepare an income statement for external
reporting purposes?
Traditional Income Statement
Amount
Sales
Cost of goods sold
Gross margin
Operating expenses:
Chefs compensation
Utilities expense
Rent expense
Selling expense
Total operating expenses
Net operating income
Traditional Income Statement
Amount
Sales (22,000 × $3.25)
$71,500
Cost of goods sold (22,000 × $1.22)
26,840
Gross margin
44,660
Operating expenses:
Chefs compensation (($2,000 + (22,000 × $0.04 × 2))
$3,760
Utilities expense ($300 + (22,000 × $0.03))
$960
Rent expense ($11,900 + $8,000 + $5,000)
$24,900
Selling expense (22,000 × 0.06)
$1,320
Total operating expenses
$30,940
Net operating income
$13,720
Given the same assumptions, how would
Aussie Pies prepare a contribution format
income statement?
Contribution Margin Income Statement
Amount
Sales
Cost of goods sold
Chefs commission
Cooking utilities
Selling commission
Total variable cost
Contribution margin
Chefs salaries
Utilities expense
Rent expense
Total fixed cost
Net operating income
Contribution Margin Income Statement
Amount
Sales (22,000 × $3.25)
$71,500
Cost of goods sold (22,000 × $1.22)
26,840
Chefs commission (22,000 × $0.04 × 2)
Cooking utilities (22,000 × $0.03)
Selling commission (22,000 × $0.06)
1,760
660
1,320
Total variable cost
30,580
Contribution margin
40,920
Chefs salaries
Utilities expense
2,000
300
Rent expense
24,900
Total fixed cost
27,200
Net operating income
$13,720