Chapter 3 Basic Cost Management This chapter covers the basic cost concepts that are critical to understanding the material in the chapters to come I Cost Drivers Cost Pools and Cost Objects A cost when a resources is used for some purpose B cost pool groups that costs are collected into i e types of cos departments C cost driver factor that has the effect of changing the level of total cost D cost object a product service customer activity or organizational unit that costs are assigned for management purposes II Classifying Costs A Traceability used in managerial accounting B Behavior used in managerial accounting C Function financial accounting GAAP III Classifying Costs by Traceability A Direct Costs i direct cost conveniently and economically traced directly to a cost pool or cost object i e an airline cost of a passenger s meal can be traced directly to each individual passenger ii direct materials cost cost of materials in a product iii direct labor cost labor used to manufacture the product or to provide the service B Indirect Costs i indirect cost NOT traced directly to a cost pool or cost object i e the cost of fuel in an airplane cannot be traced directly to each individual passenger ii indirect materials cost NOT a part of a product i e supplies like rags tools lubricant for equipment machinery iii indirect labor cost support role for manufacturing i e supervision quality control inspection A variable cost change in total cost associated with a change in quantity B fixed cost portion of the total cost that does not change C mixed cost total cost that includes fixed and variable costs D step cost varies with the cost driver in step III Classifying Costs by Behavior Example 1 A competing coffee shop closes which causes an expected increase demand of 20 at Coffee Shop XYZ How will this affect Coffee Shop XYZ costs What is the cost driver Which costs are variable and which are fixed cost driver number of cups coffee beans variable cost cups variable cost coffee makers fixed cost employees fixed cost could also be a mixed or step cost depending on what each additional employee adds to the company Instead of increasing efficiency an additional employee could cause no change in productivity or could even decrease productivity by taking up space condiments variable cost location fixed cost utilities mixed cost IV Classifying Costs by Function V Product Costs A Product Costs B Period Costs A product cost ONLY the costs necessary to complete the product direct materials direct labor and factory overhead B Reported as inventory and cost of goods sold i manufacturing product cost DM DL OH ii retail product cost purchase transport insurance i inventory is when dealing with work in process and finished goods is capitalized and is recorded on the balance sheet ii cost of goods sold is an expense and is recorded on the income statement VI Period Costs A period cost non product expenditures for managing the firm and selling the product selling and administrative expenses B Reported as selling and administrative expenses and are recorded on the income statement Example 2 Determine if each cost item is a product or period cost bottles of water purchased for sale to customers product bottles of water purchased for accounting personnel period selling admin electricity to light the assembly line for workers product overhead depreciation of computer equipment used in the accounting department period selling admin salaries of store associates period salaries of marketing personnel selling advertising period selling admin wages of assembly line workers product direct labor VII Inventory Accounts Manufacturing v Merchandising i Three types of inventory accounts A Manufacturing a Direct materials records the purchase and use of raw materials b Work in process records the use of DM DL and OH and the cost of goods manufactured c Finished goods records cost of goods manufactured and cost of goods sold WIP Inventory DM Inventory Beg bal Beg bal DM DM purchased DM used DL OH End bal End bal COGM FG Inventory Beg bal COGM COGS End bal B Merchandising i ONLY has one inventory account merchandising inventory Example 3 Show the date in the t accounts to calculate the cost of goods sold Direct materials beginning balance Direct materials ending balance Purchase of direct materials Direct labor Manufacturing overhead Work in process beginning balance Work in process ending balance Finished goods beginning balance Finished goods ending balance 50 40 150 140 170 30 50 80 100 FG Inventory 80 450 430 100 COGM COGM COGS WIP Inventory DM Inventory 30 50 160 150 140 170 160 450 40 50 DM purchased Use the t accounts to compute the following DM DL OH DM used 160 Cost of DM used in production 300 Total prime cost DM DL Total conversion cost DL OH 310 Total manufacturing cost DM DL OH 470 450 Cost of goods manufactured Cost of goods sold 430