UNIT 9MANAGEMENT ACCOUNTING

Session 2

TYPES OF COSTS AND

CLASSIFICATIONUnit 9

Management Accounting

LEARNING OUTCOME

Classify different Types of Costs

TOPICSReview of Last session

Test of baseline knowledge

Types of Costs

REVIEW OF LAST SESSION

TEST OF BASELINE KNOWLEDGEWhat are direct costs?

Name 5 direct costsWhat are indirect costs?

Name 5 indirect costs

DIRECT COSTS A price that can be completely attributed to the production of specific goods or services. Direct costs refer to materials, labor and expenses related to the production of a product.

INDIRECT COSTS Costs which cannot be accurately attributed to specific cost objects are called indirect costs. These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual products, activities or departments etc.

SEATWORK: CLASSIFY AND EXPLAIN

1.Laborers' wages 2.Synthetic wood 3.Power consumption

4.Glass 5.Nails and screws 6.Factory insurance

• 7.Handles, locks and hinges

• 8.Wood• 9.Supervisors' salaries• 10.Factory

depreciation• 11.Varnish, glue,

paints• 12.Factory manager's

salary

DIRECT MATERIALS, DIRECT LABOR, AND OVERHEAD

DIRECT MATERIALS things that are used in making a product that become a part of that product when it is finished (Cambridge)

All of the materials that go into making a product. (Regis)

MAKES YOU THINK... In order for a raw material to be classified as a

direct material, the amount of raw material must be easily counted or kept track of. 

Here is an example.  When making grocery bags, it is pretty easy to keep track of the amount of paper being used for each bag, but it is very difficult to know exactly how much glue is being used to hold the paper bag together. 

In a nutshell, direct materials are those materials that become part of the finished product...  providing it is possible and worth the effort to keep track of those materials on a per product basis.

MIND EXERCISE In what Industry (ies) do these

materials classified as direct/indirect materials: (Name at least 5 each – 5 direct; 5 indirect)

Paper Rubber Land Building Hairbrush

DIRECT LABOUR Employees or workers who are directly involved in the production of goods or services. (accounting coach)

 Direct labor represents the people who do the core work of the business. (Regis)

SAMPLE Construction company, - people actually constructing the building. 

Retail store- people helping on the sales floor doing the basic work that takes place serving the customers. 

Grocery bag factory- people running the machines actually making the bags. 

MAKES YOU THINK... In a Job order businesses.  Almost any time a

product is customized for a customer, the company will operate on a "job order" basis. 

The labor must clearly be associated with a particular job, in order for the labor to be called "direct labor."      

One last thought...  If a person's labor cannot be easily linked to a specific customer's order or the person does not directly build the product, the person's labor is called "indirect labor."

MIND EXERCISE In what Industry (ies) do these Labor

classified as direct/indirect labor : (Name at least 5 each – 5 direct; 5 indirect)

Secretary Inspector Accountant Lawyer Carpenter

OVERHEADSIf a cost is not direct labor or direct materials,

the cost is overhead. (Regis)

Direct Overhead- Expense directly associated with the production of goods or services, such as for lighting, maintenance, and rent of a business premises.

Indirect Overhead - Overhead not directly associated (such as office expenses, telephone expenses, R&D) with the production of goods or services.

Fixed, Variable and Semi-Variable

FIXED A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity.

EXERCISE A mobile phone manufacturing company rents a building for its factory for $5,000 per month, it will have to pay $5,000 for every month even no mobile phone is produced during the month.

Required: Draw a graph of expense per production level 1, 50, 100, 150, 200, 250, 300 units and explain

VARIABLE A corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases.

EXERCISE A mobile phone manufacturing company purchases speakers from another company at a cost of $2 per speaker.

The speaker is a direct materials cost for mobile phone manufacturing company.

One speaker is used to complete a mobile phone.

THE TOTAL AND PER UNIT COST OF SPEAKERS AT VARIOUS LEVELS OF ACTIVITY IS GIVEN BELOW:

No. of mobilephones produced

Cost of 1speaker

Total costof speakers

1 $2.00 $2

50 $2.00 $100

100 $2.00 $200

150  $2.00  $300

200 $2.00 $400

250 $2.00 $500

300 $2.00 $600

Required: Draw a graph and explain

EXERCISE

Compute the fixed cost on a per unit basis (per level of production)

Compute the variable cost per unit basis (per level of production)

Explain your findings

SEMI-VARIABLE A cost composed of a mixture of fixed and variable components. Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded. 

Sample: Labor cost on regular and overtime

TOTAL COST

Total Cost = Direct Materials + Direct Labor + Overhead

Total Cost = Total Fixed Cost + Total Variable Cost + Total Semi-Variable Cost

TOPICS FOR RESEARCH

Costing methods: job costing; batch costing; process costing; contract costing; service costing

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REQUIRED

Use different costing methods

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END OF SESSION