Concepts
Chapter 2
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
2-2
Learning Objective 1
2-3
Direct
Labor
The Product
Manufacturing
Overhead
2-4
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
2-5
Direct Labor
Those labor costs that can be easily
traced to individual units of product.
2-6
Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
Examples: Indirect materials and indirect labor
2-7
Nonmanufacturing Costs
Selling
Costs
Administrative
Costs
Costs necessary to
secure the order and
deliver the product.
All executive,
organizational, and
clerical costs.
2-8
Learning Objective 2
Distinguish between
product costs and period
costs and give examples
of each.
2-9
Inventory
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement
2-10
Quick Check
2-11
Quick Check
2-12
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
2-13
Learning Objective 3
Understand cost
behavior patterns
including variable costs,
fixed costs, and mixed
costs.
2-14
Mixed costs.
2-15
Variable Cost
2-16
2-17
Units
produced
A measure of what
causes the
incurrence of a
variable cost
Miles
driven
Labor
hours
2-18
Fixed Cost
2-19
2-20
Discretionary
Long-term, cannot be
significantly reduced in
the short term.
Examples
Examples
Depreciation on Buildings
and Equipment and Real
Estate Taxes
Advertising and
Research and
Development
2-21
Total Cost
Economists
Curvilinear Cost
Function
Relevant
Range
A straight line
closely
approximates a
curvilinear
variable cost
line within the
relevant range.
Accountants Straight-Line
Approximation (constant
unit variable cost)
Activity
2-22
2-23
60
Range
30
1,000
2,000
3,000
Rented Area (Square Feet)
2-24
In Total
Per Unit
Variable
Fixed
2-25
Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-26
Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-27
Mixed Costs
(also called semivariable costs)
A mixed cost contains both variable and fixed
elements. Consider the example of utility cost.
Total Utility Cost
Variable
Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly
Utility Charge
2-28
Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where:
Y
a
b
X
Variable
Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly
Utility Charge
2-29
Y = a + bX
Y = $40 + ($0.03 2,000)
Y = $100
2-30
2-31
Learning Objective 4
2-32
2-33
Y
Total Maintenance Cost
$10,000
$9,500
$9,000
$8,500
$8,000
$7,500
$7,000
400
500
600
700
Hours of Maintenance
800
900
2-34
2-35
2-36
Y = $4,700 + $6.00X
2-37
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
2-38
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
Units
Cost
b. $0.10 per unit
High level
120,000
$ 14,000
c. $0.12 per unit
Low level
80,000
10,000
d. $0.125 per unit Change
40,000
$ 4,000
$4,000 40,000 units
= $0.10 per unit
2-39
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
2-40
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
Total cost = Total fixed cost +
Total variable cost
b. $ 4,000
$14,000 = Total fixed cost +
c. $10,000
($0.10 120,000 units)
d. $12,000
Total fixed cost
= $14,000 - $12,000
= $2,000
2-41
2-42
2-43
2-44
Learning Objective 5
Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.
2-45
Used primarily by
management.
2-46
2-47
Learning Objective 6
2-48
Indirect costs
Examples: direct
material and direct
labor
Example:
manufacturing
overhead
2-49
Learning Objective 7
Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.
2-50
2-51
2-52
Opportunity Cost
The potential benefit that is
given up when one alternative
is selected over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
2-53
Sunk Costs
Sunk costs have already been incurred
and cannot be changed now or in the
future. These costs should be ignored
when making decisions.
Example: Suppose you had purchased gold for
$400 an ounce, but now it is selling for $250 an
ounce. Should you wait for the gold to reach $400 an
ounce before selling it? You may say, Yes even
though the $400 purchase is a sunk costs.
2-54
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-55
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-56
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-57
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-58
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-59
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-60
Predicting Cost
Behavior
Assigning Costs
to Cost Objects
Making Business
Decisions
Least-Squares Regression
Computations
Appendix 2A
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
2-62
Learning Objective 8
Analyze a mixed cost
using a scattergraph plot
and the least-squares
regression method.
2-63
2-64
2-65
2-66
2-67
2-68
2-69
2-70
2-71
2-72
Here is the
estimate of R2.