1a Cost Classification form Manufacturing Pt of View and Predicting Cost Behaviour_17_10_2020.pdf

Engineering Accouting

1. 2-1
2-1
Cost Accounting and Cost Concepts
Lecture by :
Hosne Jahan
BUET
2-2
Cost Classification from Manufacturing
Point of View
A.Manufacturing Cost
B.Non-Manufacturing Cost
Identify and give examples of
manufacturing cost & non-
manufacturing cost categories.
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2

2. 2-2
2-3
The Product
Direct
Materials
Direct
Labor
ManufacturingManufacturing
Overhead
A. Classifications of Manufacturing Costs
2-4
Direct Materials
Raw materials that become an
integral part of the product and
that can be physically and
conveniently traced directly to
it. This cost can be identifiable
to a cost unit easily.
Examples:
•A radio installed in an automobile
•Four wheels installed in an automobile
The materials that go
into the final product are
called raw materials.
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3. 2-3
2-5
Direct Labor/Wages
Those labor costs that can be easily
identifiable and traceable to individual
cost unit of a product. It is called as
touch labor. Direct labor workers
typically touch the product where it is
being made.
Example:Wages paid to automobile assembly workers
Labor cost is the
remuneration of the
workers.
Examples for other organization: Carpenter, machine operator, productive workers etc.
2-6
Manufacturing Overhead
Manufacturing costs that cannotbe easily
identifiable and traceable directly to specific unit of a product.
(Overhead means all the indirect costs)
Examples:Indirect materials and indirect labor
Wagespaid to workers who are not
directly involved in production work
and cannot be easily identifiable to
a cost unit.
Examples: wages of maintenance
workers, janitors/cleaners, and
security guards, lift operators,
material handlers etc.
Materials used to support the
production process and cannot be
easily identifiable to a cost unit.
Examples: lubricants and cleaning
supplies used in the automobile
assembly plant.
Other Examples: cost of glue used in a
lather bag or shoe, thread used in a bag
etc.
Other Examples of Manufacturing Overheads:
Factory rent, supervisor’s salary, repairing cost on the production equipment, utilities
(elect. Gas, heat light, water bill), phone bill, transportation cost, property taxes,
depreciation, insurance or manufacturing facilities etc. All other costs occurring in the
production process.
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4. 2-4
2-7
B. Non-manufacturing Costs
Marketing/Selling
and distribution
Costs
All costs necessary to secure
the customer’s orders and
deliver the product or services
to the customers
Administrative
Costs
All executive,
organizational, and clerical
costs associated with
general management.
Examples: Order receiving and order filing
cost, advertisement, shipping and
transportation cost, rent for the showroom,
wages of cleaners, guard, lift operator of the
showroom, utilities (elect. gas, heat light,
water bill), phone bill, transportation cost,
salesman salary and commission etc.
Examples: Salaries of executives,
officers, accountants, support staffs, rent
for the office, wages of cleaners, guard,
lift operator of the office. utilities (elect.
gas, heat light, water bill), transportation
cost, phone bill, public relation related
cost etc.
2-8
* Non-manufacturing Costs
Marketing/selling & Distribution cost and Administrative costare
completely indirect costin nature, because they cannot be easily
traceable or identifiable to a cost unit of a product.
That is why these costs are called as overhead cost, namely
Marketing/selling & Distribution Overhead
and
Administrative overhead.
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5. 2-5
2-9
Product costs and period costs
Distinguish between product costs and
period costs and give examples of each.
2-10
Product Costs Versus Period Costs
Product costs include direct materials, direct labor,
and manufacturing overhead.
For example:
Units Produced= 10,000 units
Units Sold (Cost of goods sold) = 8,000 units
Units at hand (Inventory) = 2000 units
All other costs that are not included in
the Product costs
Period costsinclude all selling costs and
administrative costs.These are treated
as expenses in the period in which they
are incurred.
Inventory
(2000 units)
Cost of Goods Sold
(8000 unit)
Balance
Sheet
(As asset)
Income
Statement
(As expenses)
Expense
Income
Statement
Cost of producing or acquiring a
product
Product Cost Period cost
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6. 2-6
2-11
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
2-12
Cost classification for predicting cost
behaviour
Understand cost
behavior patterns
including variable costs,
fixed costs, and mixed
costs.
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7. 2-7
2-13
Cost Classifications for Predicting Cost Behavior
Cost behavior means how a cost will react to the
changes in the level of businessactivity.
Different organization may have different types of business activity.
•In manufacturing organizations –unit produced,
•in hospital –number of bed or patient,
•in transportation organization –mile driven etc.
Nature of cost behaviour:
With the increase or decrease in the level of activity some cost will
increase or decrease directly, some cost will remain unaffected while
others will change but not in direct proportion to the changes in the
level of activity. On the basis of these cost behavior, cost can be
classified as :
•Variable cost
•Fixed cost and
•Mixed cost
2-14
Variable Cost
Which have a tendency to vary in total in direct
proportion to the change in the level of activity.
Example: Direct Materials, Direct Labour ( which can be
easily identifiable to a cost unit). Other cost which vary in
total in direct proportion but cannot be easily identifiable
to a cost unit.
Example: cost of glue etc.
X
Y
O
Characteristics of Variable cost:
•Variable cost vary in total in direct proportion
•Per unit variable cost remains constant
•(other cost remaining the same)Level of activity
cost
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8. 2-8
2-15
Fixed Cost
That remains constant in total regardless of changes in
the level of activity. Fixed costs are not affected by the
changes in the level of activity.
(Within the given level of time and activities, these costs
will normally remain fixed.)
Example:Rent, Property taxes, Supervisor salary, depreciation etc.
X
Y
O
Characteristics of Fixed cost:
•Remain fixed in total
•Per unit fixed cost vary with
the change in activity –with
the increase in level of activity
per unit fixed cost decreases
and vice versa.
Level of activity
Cost
Fixed cost line
2-16
Characteristics of Variable Cost and Fixed Cost
at a Glance
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9. 2-9
2-17
Fixed Cost
Variable
Cost
Activity
Cost
X
Y
A mixed cost contains both variable and fixed
elements. Consider the example of utility cost like
telephone bill, electricity bill etc.
Mixed Costs
(also called semivariable costs)
2-18
Linear cost equation to predict total mixed
cost at different level of activity
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10. 2-10
2-19
Mixed Costs –An Example
If your fixed monthly utility charge is Tk. 40, your
variable cost is Tk. 0.03 per hour, and your monthly
activity level is 2,000 hours, what is the amount of
your utility bill?
Y =a +bX
Y = Tk. 40 + (Tk0.03 ×2000)
2,000)
Y =Tk.100
This cost equation can also be applied to predict the total cost of production
at different level of activity.
2-20
Determination of Fixed Cost and Variable Cost Elements
from a mixed cost for the preparation of linear cost
equation by using the high and low point method:
According to the high and low point method:
Cost Difference
Variable cost per unit =
Activity Difference
Fixed cost in total = Total cost –Total variable cost
= TC –VC per unit x level of activity
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11. 2-11
2-21
The High-Low Point Method: Example
The variable cost
per hourof
maintenance is
equal to the change
in cost divided by
the change in hours.
= $6.00/hour
$2,400
400
2-22
The High-Low Method –An Example
Total Fixed Cost = Total Cost –Total Variable Cost
Total Fixed Cost = $9,800 –($6/hour ×850 hours)
Total Fixed Cost = $9,800 –$5,100
Total Fixed Cost = $4,700
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12. 2-12
2-23
The High-Low Method –An Example
Total Fixed Cost = Total Cost –Total Variable Cost
Total Fixed Cost = $7,400 –($6/hour ×450 hours)
Total Fixed Cost = $7,400 –$2,700
Total Fixed Cost = $4,700
You can get
the same
result with
any other
level of
activity also.
Here is the
example.
2-24
Y= $4,700 + $6.00X
The Linear Cost Equation for Maintenance
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