An Introduction to Cost
Terms and Purposes
Chapter 2
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 4
Interpret unit costs cautiously.
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Total Costs and Unit Costs Example
What is the unit cost (leasing and handlebars)
when Bicycles assembles 1,000 bicycles?
Total fixed cost $94,500
+ Total variable cost $52,000 = $146,500
$146,500 ÷ 1,000 = $146.50
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Total Costs and Unit Costs
Example
$146,500
Total Costs
200000
150000
$94,500
100000
50000
0
0
500
1000
1500
Volume
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Use Unit Costs Cautiously
Assume that Bicycles management uses a
unit cost of $146.50 (leasing and wheels).
Management is budgeting costs for
different levels of production.
What is their budgeted cost for an
estimated production of 600 bicycles?
600 × $146.50 = $87,900
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Use Unit Costs Cautiously
What is their budgeted cost for an estimated
production of 3,500 bicycles?
3,500 × $146.50 = $512,750
What should the budgeted cost be for an
estimated production of 600 bicycles?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Use Unit Costs Cautiously
Total fixed cost
$ 94,500
Total variable cost ($52 × 600)
31,200
Total
$125,700
$125,700 ÷ 600 = $209.50
Using a cost of $146.50 per unit would
underestimate actual total costs if output
is below 1,000 units.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Use Unit Costs Cautiously
What should the budgeted cost be for an
estimated production of 3,500 bicycles?
Total fixed cost
$ 94,500
Total variable cost (52 × 3,500) 182,000
Total
$276,500
$276,500 ÷ 3,500 = $79.00
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Period Costs
Period costs are all costs in the income
statement other than cost of goods sold.
Period costs are recorded as expenses of the
accounting period in which they are incurred.
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Flow of Costs Example
Bicycles by the Sea had $50,000 of direct
materials inventory at the beginning of the period.
Purchases during the period amounted to
$180,000 and ending inventory was $30,000.
How much direct materials were used?
$50,000 + $180,000 – $30,000 = $200,000
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Flow of Costs Example
Direct labor costs incurred were $105,500.
Indirect manufacturing costs were $194,500.
What are the total manufacturing costs incurred?
Direct materials used
Direct labor
Indirect manufacturing costs
Total manufacturing costs
$200,000
105,500
194,500
$500,000
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2 - 11
Flow of Costs Example
Assume that the work in process inventory
at the beginning of the period was $30,000,
and $35,000 at the end of the period.
What is the cost of goods manufactured?
Beginning work in process
Total manufacturing costs
Ending work in process
Cost of goods manufactured
$ 30,000
500,000
35,000
$495,000
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Flow of Costs Example
Assume that the finished goods inventory
at the beginning of the period was $10,000,
and $15,000 at the end of the period.
What is the cost of goods sold?
Beginning finished goods
Cost of goods manufactured
Ending finished goods
Cost of goods sold
$ 10,000
495,000
15,000
$490,000
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Flow of Costs Example
Beg. Balance
Direct mtls. used
Direct labor
Indirect mfg. costs
Ending Balance
Work in Process
30,000 495,000
200,000
105,500
194,500
35,000
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Flow of Costs Example
Work in Process
495,000
Finished Goods
10,000 490,000
495,000
15,000
Cost of Goods Sold
490,000
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Prime Costs
Direct
Materials
+
Direct
Labor
=
Prime
Costs
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Prime Costs
What are the prime costs for Bicycles by the Sea?
Direct materials used
+ Direct labor
=
$200,000
105,500
$305,000
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Conversion Costs
Direct
Labor
+
Manufacturing
Overhead
Indirect
Labor
Indirect
Materials
=
Conversion
Costs
Other
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Conversion Costs
What are the conversion costs for
Bicycles by the Sea?
Direct labor
$105,500
+ Indirect manufacturing costs
194,500
=
$300,000
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