Concetti di costo in contabilità | Dispense di Cost Accounting

CHAPTER 1 – COSTS CONCEPTS

In accounting, costs can be classified differently depending on the needs of management.

Costs are assigned to cost objects for

pricing, preparing profitability studies,

controlling spending. A cost object is

anything for which cost data are desired

(products, customers, divisions and so on).

Direct cost: can be easily and conveniently

traced to a specified cost object.

Indirect cost: cannot be conveniently and

easily traced to a specified cost object. To

be traced to a particular cost object, the

cost must be caused by this one.

Common cost: type of indirect cost that

supports several cost objects but cannot be

traced to them individually.

Manufacturing costs

Direct materials refer to raw materials that become an integral part of the finished product and whose costs

can be conveniently traced to the finished product (e.g., a radio installed in an automobile)

➢ raw materials refer to any components that are used in the final product; and the finished product of

one company can become the raw material of another company.

Direct labour consists of labour costs that can be easily traced to individual units of product (e.g., wages).

After these direct costs have been determined and charged to the product/work, indirect costs need to be

allocated to the several cost objectives. They’re frequently referred to as overhead, general, and

administrative expenses (rent, utilities, officers’ salaries, accounting department costs and so on).

Manufacturing overhead concerns indirect materials and indirect labour. It also includes depreciation of

manufacturing equipment, utility costs, property taxes, and insurance premiums incurred to operate a

manufacturing facility, but those indirect costs must be associated with operating the factory.

Prime cost is the sum of direct materials cost and direct labour cost.

Conversion cost is the sum of direct labour and manufacturing overhead because these costs are incurred to

convert direct materials into finished products. This concept is used in cost accounting to derive the value of

ending inventory, which is then reported in the balance sheet (= stato patrimoniale).

Example 1: James owns a small restaurant in Miami. He’s looking for an investor who can provide some capital

to turn the outdoor patio into the ideal lunch spot before next spring break. Let’s calculate his prime costs.

Direct labour:

15000 + 15000 + 40000 = 70000

James’ earnings aren’t included

in the calculation: he doesn’t

contribute to the production of

meals (he’s the owner!).

Tips (= mance) don’t count: the employees earn them at no cost to the business.

PURPOSES

COST CLASSIFICATION

Assigning costs to cost objects

• Direct costs

• Indirect costs

Accounting for costs in

manufacturing companies

Manufacturing costs

• Direct materials

• Direct labour

• Manufacturing overhead

Nonmanufacturing costs

• Selling costs

• Administrative costs

Predicting cost behaviour in

response to changes in activity

• Variable costs

• Fixed costs

• Mixed costs

Making decisions

• Relevant costs

• Irrelevant costs

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CHAPTER 1 – COSTS CONCEPTS

In accounting, costs can be classified differently depending on the needs of management. Costs are assigned to cost objects for pricing, preparing profitability studies, controlling spending. A cost object is anything for which cost data are desired (products, customers, divisions and so on). Direct cost : can be easily and conveniently traced to a specified cost object. Indirect cost : cannot be conveniently and easily traced to a specified cost object. To be traced to a particular cost object, the cost must be caused by this one. Common cost : type of indirect cost that supports several cost objects but cannot be traced to them individually.

Manufacturing costs

Direct materials refer to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product (e.g., a radio installed in an automobile) ➢ raw materials refer to any components that are used in the final product; and the finished product of one company can become the raw material of another company. Direct labour consists of labour costs that can be easily traced to individual units of product (e.g., wages). After these direct costs have been determined and charged to the product/work, indirect costs need to be allocated to the several cost objectives. They’re frequently referred to as overhead, general, and administrative expenses (rent, utilities, officers’ salaries, accounting department costs and so on). Manufacturing overhead concerns indirect materials and indirect labour. It also includes depreciation of manufacturing equipment, utility costs, property taxes, and insurance premiums incurred to operate a manufacturing facility, but those indirect costs must be associated with operating the factory. Prime cost is the sum of direct materials cost and direct labour cost. Conversion cost is the sum of direct labour and manufacturing overhead because these costs are incurred to convert direct materials into finished products. This concept is used in cost accounting to derive the value of ending inventory , which is then reported in the balance sheet (= stato patrimoniale). Example 1 : James owns a small restaurant in Miami. He’s looking for an investor who can provide some capital to turn the outdoor patio into the ideal lunch spot before next spring break. Let’s calculate his prime costs. Direct labour: 15000 + 15000 + 40000 = 70000 James’ earnings aren’t included in the calculation: he doesn’t contribute to the production of meals (he’s the owner!). Tips (= mance) don’t count: the employees earn them at no cost to the business.

PURPOSES COST CLASSIFICATION

Assigning costs to cost objects • Direct costs

Indirect costs Accounting for costs in manufacturing companies Manufacturing costs
Direct materials
Direct labour
Manufacturing overhead Nonmanufacturing costs
Selling costs
Administrative costs Predicting cost behaviour in response to changes in activity
Variable costs
Fixed costs
Mixed costs Making decisions • Relevant costs
Irrelevant costs

Direct material used: Beginning Inventory + Purchases – Ending Inventory = 15000 + 395000 – 10000 = 400000 Prime costs = 70000 + 400000 = 470000 Example 2: Samsung has a cell phone production unit with a production capacity of 10000 daily. It incurs day- to-day expenses to keep its business running. The company wants to know its conversion costs. Direct labour: 300000 (direct wages) Manufacturing overheads: 10000 (equipment depreciation) + 5000 (factory insurance) + 80000 (indirect material) + 20000 (factory rent) + 90000 (electricity) + 100000 (maintenance) + 5000 (inspection expense) = 310000 Conversion costs = 310000 + 300000 = 610000 Conversion cost per unit = 610000/10000 = 610

Non-manufacturing costs

They are often divided into two categories: Selling costs are incurred to secure customer orders and get the finished product to the customer.

Direct costs (e.g., an advertising campaign dedicated to a specific product, sales commissions…)
Indirect costs (e.g., the cost of the salary of a marketing manager who oversees numerous products). Administrative costs are associated with the general management of an organization. Examples are executive compensation, general accounting, legal counsel, secretarial, public relations…
Direct costs (e.g., the salary of an accounting manager which supervises a company’s specific area)
Indirect costs (e.g., the salary of a chief financial officer who oversees all the company’s regions) It is often necessary to predict how a certain cost reacts in response to a change in activity. To estimate the costs’ behaviour , managers often distinguish them in three main categories: variable, fixed and mixed. The relative proportion of each type of cost in an organization is known as its cost structure. Variable costs vary, in total, in direct proportion to changes in the level of activity (e.g., direct labour, direct and indirect materials, variable commissions and shipping costs). A variable cost per unit is constant. ➢ An activity base is a measure of whatever causes the incurrence of a variable cost, and sometimes is referred to as a cost driver (e.g., direct labour-hours, machine-hours, units produced/sold). The activity base we considerate is the total volume of goods and services provided by the organization. Fixed costs remain constant, in total, regardless of changes in the level of the activity. A fixed cost per unit varies inversely with changes in activity. Examples: depreciation, insurance, property taxes, rent, and so on. Economies of scale occur when companies can increase the production volume, to split fixed costs better: consequently, they will be more efficient (because of the lower average fixed cost per unit) and profitable.

The relevant range of activity pertains to both fixed and variable costs. Example: assume office space is available at a rental rate of $30000 per year in increments of 1000 square feet (cost driver). Fixed costs would increase in a step fashion at a rate of $ for each additional 1000 square feet (i.e., the relevant range). Exercise 1) Which of the following costs would be variable with respect to the number of ice scream cones sold? a. The cost of lighting the store  b. The wages of the store manager  c. The cost of ice scream d. The cost of napkins (=salviette) for customers Exercise 2) Note: the average fixed manufacturing overhead cost per unit of $5 is valid for only one level of activity (i.e., the relevant range ) → 2000 0 units

Mixed (semivariable) costs contain both variable and fixed element. Example: if your fixed cost monthly utility charge is $40 (a), your variable cost is $0. per kilowatt hour (b), and your monthly activity level is 2000 kilowatt hours (X), the amount of the utility bill (Y) in dollars is Y = 40 +0.03*2000 = 100 Finally (to complete the costs’ classification) we have to know that companies, when making decisions , must understand which costs are relevant (should be considered) and irrelevant costs (should be ignored).

Income statement: the traditional and the contribution formats

Merchandising companies don’t manufacture the products that they sell to customers: contrasting these types of income statements enables us to illustrate the purposes they are used for, which show the most important distinguish between financial and managerial accounting (mentioned in the introduction part). The traditional format represents the financial consequences of past transactions; the contribution format instead is used to better inform decisions affecting the future. Cost of goods sold (costo del venduto) = beginning inventory + purchases – ending inventory → it’s the same formula with which we have calculated the direct materials used Contribution margin = selling price (per unit) – variable costs (per unit). → it provides one way to show the profit potential of a particular product offered by a company and shows the portion of sales that helps to cover the fixed costs. Any remaining revenue left is the profit generated. Low contribution margins are present in labour-intensive companies with few fixed expenses, while capital- intensive (industrial companies) have higher fixed costs and thus, higher contribution margins.

Concetti di costo in contabilità, Dispense di Cost Accounting

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CHAPTER 1 – COSTS CONCEPTS

Manufacturing costs

PURPOSES COST CLASSIFICATION

Non-manufacturing costs

Income statement: the traditional and the contribution formats