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Module 2 Basic Cost Management Concept

This document discusses basic cost management concepts including measuring resource costs, eliminating non-value added costs, determining efficiency, and identifying new activities to improve performance. It defines product costs, period costs, and expenses and how they are classified on financial statements. Various cost classifications like direct and indirect costs, variable and fixed costs, and manufacturing costs are also explained.

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83 views12 pages

Module 2 Basic Cost Management Concept

This document discusses basic cost management concepts including measuring resource costs, eliminating non-value added costs, determining efficiency, and identifying new activities to improve performance. It defines product costs, period costs, and expenses and how they are classified on financial statements. Various cost classifications like direct and indirect costs, variable and fixed costs, and manufacturing costs are also explained.

Uploaded by

Wendry
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Basic Cost Management Concept

Cost Management Systems


Objectives
Measure the cost of resources
consumed.
Identify and eliminate non-value-
added costs.
Determine efficiency and
effectiveness of major activities.
Identify and evaluate new Cost
activities that can improve Management
performance. System
Process of Management
Strategy Planning
Formulation

Managers need cost information to


perform each of these functions.

Control Directing
Decision
Making
Learning Objective 01
Product Costs, Period Costs and Expenses

Product costs are costs associated with goods for


sale until the time period during which the
products are sold, at which time the costs
become expenses.

Period costs are costs that are expensed during


the time period in which they are incurred.

Expenses are the consumption of assets for the


purpose of generating revenue.
Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
◦ Cash  Cash
◦ Receivables  Receivables
◦ Prepaid Expenses  Prepaid Expenses
◦ Merchandise Inventory  Inventories
Raw Materials
Work in Process
Finished Goods
Manufacturing Costs

Direct Direct Manufacturing


Materia Labor Overhead
l

The
Product
Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:

Direct Direct Manufacturing


Material Labor Overhead

Prime Conversion
Cost Cost
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold
Activities that cause costs to be incurred are
called COST DRIVERS
Cost Driver Examples
Activity Cost Driver
Machining operations Machine hours
Setup Setup hours
Production scheduling Manufacturing orders
Inspection Pieces inspected
Purchasing Purchase orders
Shop order handling Shop orders
Valve assembly support Customer
Requisitions
Cost Classifications

Summary of Variable and Fixed Cost Behavior


Cost In Total Per Unit

Total variable cost changes Variable cost per unit


Variable as activity level changes. remains the same over
wide ranges of activity.
Total fixed cost remains Fixed cost per unit
Fixed the same even when the goes down as activity
activity level changes. level goes up.
Various Costs
Direct costs: Costs that can be easily and conveniently traced to a product or
department.
Indirect costs: Costs that must be allocated in order to be assigned to a product
or department.
Controllable and Uncontrollable Costs: A cost that can be significantly
influenced by a manager is a controllable cost.
Opportunity Costs: The potential benefit that is given up when one alternative
is selected over another.
Sunk Costs: All costs incurred in the past that cannot be changed by any
decision made now or in the future are sunk costs. Sunk costs should not be
considered in decisions.
Differential Costs: Costs that differ between alternatives.
Marginal Cost: The extra cost incurred to produce one additional unit.
Average Cost: The total cost to produce a quantity divided by the
quantity produced.
Costs and Benefits of Information

Costs Benefits

More information does not mean more


benefits if information overload results.

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