...Part of the process of pricing your product is including the costs of producing that product. Those costs include the direct and indirect costs associated with producing your product. Direct Costs Direct costs are costs that can be easily traced to a particular object (also called a cost object), such as a product, the raw materials used to manufacture a product, or the labor associated with the work to produce the product. If your company produces a widget and a production manager is hired to oversee production of that widget, then the production manager's salary is a direct cost. If you own a carpet cleaning business, which is a service organization, and you hire workers just to clean carpets, their wages are direct costs. Direct costs are often, but not always, variable costs. Variable costs increase as more units of the product are manufactured. As a result, raw materials are variable and direct costs. But, if there is a supervisor overseeing the manufacturing of this particular product, their salary is probably the same regardless of how much of the product is manufactured, so it is a fixed cost. Direct Materials and Direct Labor The most common direct costs are direct materials and direct labor. Direct materials are the materials that can be specifically identified with the product. If you are a furniture maker, your direct materials would be the wood that goes into making your furniture along with the nails, varnish, and other products that you apply specifically...
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...Material Cost Classifications Consult Ch. 6 & 7 of Health Care Finance and other sources to complete the form. This worksheet requires you to match the definitions and examples of types of cost, and the types of centers where costs occur. Part 1: For each term in Column A, select the correct definition from Column B on the right. Write the corresponding letter of the definition next to the term. Column A F 1. Indirect costs A 2. Direct costs D 3. Fixed costs I E H B C G 4. Variable costs 5. Step-fixed costs 6. Responsibility centers 7. Revenue centers 8. Cost centers 9. Shadow cost centers Column B – Definitions A. Costs incurred directly as a result of providing a specific service or good B. Centers charged with controlling costs and generate revenue C. Have no revenue budget and no obligation to earn revenue D. Costs that do not vary as service volume varies E. Fixed over some range of service volume, but rise to a new level for a higher range of service volume F. Costs that cannot be tied directly to the patient’s stay in the bed G. Exist as budgets on paper only H. The places where costs occur and have budgets I. Costs that change as volume changes Part II: For each real-world example, select the correct term from the list on the left. Write the corresponding letter of the real-world example next to the term. Column A K 1. Indirect costs M 2. Direct costs P 3....
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...CLASSIFICATION OF COSTS: Manufacturing We first classify costs according to the three elements of cost: a) Materials b) Labour c) Expenses Product and Period Costs: We also classify costs as either 1 Product costs: the costs of manufacturing our products; or 2 Period costs: these are the costs other than product costs that are charged to, debited to, or written off to the income statement each period. The classification of Product Costs: Direct costs: Direct costs are generally seen to be variable costs and they are called direct costs because they are directly associated with manufacturing. In turn, the direct costs can include: Direct materials: plywood, wooden battens, fabric for the seat and the back, nails, screws, glue. Direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers Direct expense: this is a strange cost that many texts don't include; but (International Accounting Standard) IAS 2, for example, includes it. Direct expenses can include the costs of special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of buying or hiring special machinery to make a limited edition of a set of chairs. Total direct costs are collectively known as Prime Costs and we can see that Product Costs are the sum of Prime costs and Overheads. Indirect Costs: Indirect costs are those costs that are incurred in the factory but that cannot be directly associate...
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...Direct Costs vs. Indirect Costs Direct costs are any costs that are paid directly towards the material, labor, etc. of a product or service. Any cost associated with administrative needs, or ‘behind-the-scenes’ type costs, are known as indirect costs. Almost every venue of manufacturing, healthcare, or business in general has some form of indirect costs. Many times, these costs are overlooked when paying for a service or product. They are costs wrapped into the total cost of an item or service that you don’t normally think about. Direct costs are involved and associated with every service or product purchased, as are indirect costs, usually, even when you don’t think about it. Indirect costs affect the healthcare field, research, accidents, etc. Indirect costs in healthcare could be anything from administration to disability pay while a patient is off from work. “Indirect costs in published U.S. studies were based on estimates from physician panel and survey data and included loss of earnings associated with unemployment and underemployment, productivity losses, as well as loss of caregiver earnings not considered in this study” (Ivanova, Birnbaum, Kidolezi, Ying, Mallett, & Caleo, 2010). “Researchers have long been unhappy at the bite indirect costs take out of research grants, but have rarely taken direct action to control expenditures that determine those costs – indeed they may have felt powerless to do so” (Johnson, 1991). Building plans for Stanford University were...
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...Solution of 2012 Mid Term Exam Cost Accounting- Third Year Question No. One: 1- ABC Company Schedule of Cost of Goods Manufactured For October Direct material costs Beginning inventory of Direct Materials 4,000 Direct materials purchased ………………………135,000 =Cost of direct materials available for use………..139,000 (-)Ending inventory of Direct Materials………….. (5,000) Direct materials used…………………………………………………………….…134,000 Direct manufacturing labor costs………………………………………………….…50,000 Manufacturing overhead costs Salaries of factory supervisors………………….....15,000 Salaries of factory managers ……………………...10,000 Factory supplies (3000+8000-2500)……………......8,500 Factory rent…………………………………………9,500 Factory depreciation……………………………....25,000 Total Manufacturing overhead costs …………………………………………….…...68,000 Total Manufacturing costs………………………………………………………….252, 000 Add beginning work-in-process inventory, ……………………………………….…13,000 Deduct ending work-in-process inventory, ………………………………………… (15000) Cost of goods manufactured (to income statement) ………………………………$ 250,000 2- ABC Company Income Statement For March 2011 Revenues ( 8000* 50)………………………………………………………………400,000 Cost of units sold: Beginning finished goods, ……………………………… 0 Cost of goods manufactured ………………………….250,000 Cost of goods available for sale……………………….250, 000 Ending finished goods (2000 units* $25)………....... (50,00) Cost of Units sold…………………………………………………………………….(200,000) Gross margin…………………………………………………………………………...
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...five-step decision process in order: A = Make predictions about future costs B = Evaluate performance to provide feedback C = Implement the decision D = Choose an alternative a. D C A B b. C D A B c. A D C B d. D C B A Answer: c Difficulty: 2 Objective: 1 44. The formal process of choosing between alternatives is known as a. a relevant model. b. a decision model. c. an alternative model. d. a prediction model. Answer: b Difficulty: 1 Objective: 1 45. Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept? Currently Proposed Required machine operators 5 4.5 Materials-handling workers 1.25 1.25 Employee average pay $8 per hour $9 per hour Hours worked per employee 2,100 2,000 a. Do not change the production floor. b. Rearrange the production floor. c. Either, because it makes no difference to the employees. d. It doesn't matter because the costs incurred will remain the same. Answer: b Difficulty: 2 Objective:...
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...Question 1. Costs may be broadly classified as: Selling and administrative Product and marginal Fixed and variable Fixed and indirect Question 2. For a hot bread shop, which of the following costs would most likely be classified as variable rather than fixed? Flour Advertising Equipment lease payments Rent of premises Question 3. Which statement is correct in relation to fixed costs per unit of output? They stay the same irrespective of the level of activity They increase as the level of activity increases They decline as the level of activity declines None of the above Question 4. A total cost line is non-linear and of a convex nature, when it is: A fixed cost A linear variable cost Expenses involving economy of scale benefits Expenses where a high level of demand caused supply shortages Question 5. Which of the following would not normally represent an example of a semi-variable (semi-fixed) cost? Spare parts-vehicle service centre Electricity-hairdresser Telephone-butcher Depreciation of equipment Question 6. What does the point where the total cost line cuts the revenue line represent? Break-even point Relevant range The margin of safety Total fixed cost Question 7. What statistical technique can be used to determine the fixed and variable components of different cost types? Probability analysis Regression analysis Correlation Factor analysis Question...
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...CHAPTER 2 QUANTITY TAKE-OFF The quantity “takeoff” is an important part of the cost estimate. It must be as accurate as possible and should be based on all available engineering and design data. Use of appropriate automation tools is highly recommended. Accuracy and completeness are critical factors in all cost estimates. An accurate and complete estimate establishes accountability and credibility of the cost engineer, therefore, providing greater confidence in the cost estimate. The estimate contingencies for programming purposes reflect the estimate confidence. 2.1 Importance of Quantity Takeoff and Required Documents The quantity of material in a project can be accurately determined from the drawings. The estimator must review each sheet of the drawings, calculate the quantity of material and record the amount and unit of measure. Each estimator must develop a system of quantity takeoff that ensures that a quantity is not omitted or calculated twice. A wellorganized check-list of work will help reduce the chances of omitting an item. The estimator must, also, add an appropriate percentage for waste for those items where waste is likely to occur during construction. The material quantity takeoff is extremely important for cost estimating because it often establishes the quantity and unit of measure for the costs of labor and contractor’s equipment. 2.1.1 Contract documents The contract is defined by the contract documents, which are developed from...
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...Cost Descriptions Paper Cost Descriptions One of the most common terms heard in the business world is fixed cost. Fixed costs do not depend on the amount of sales or the current level of production of a company. A fixed cost does not vary it remains the same every month. “By installing modern, sophisticated equipment, you can virtually eliminate labor in the production of inventory. At high volume, you will do quite well, as most of your costs are fixed. At low volume, however, you could face difficulty in making your fixed payments for plant and equipment” (Block & Hirt, 2004, p. 114). The lease payments on the building that houses a company is a fixed cost, always costing a set amount each month or quarter. Another common cost term is variable cost. Variable costs depending upon quantity produced or the amount of material used. An example of this would be a firm paying for its raw materials if they slow production less raw material is purchased lowering the variable cost. On the other hand if production speeds up more material must be purchased raising the variable costs. Combined fixed and variable costs make up total cost. Total cost is, simply put, the total economic cost of production. A mixture of fixed and variable costs is termed semi-variable costs. These costs are fixed up to a certain amount and once that amount has been reached the costs become variable. The greater the level of production the higher a semi-variable cost. An example of a semi-variable cost...
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...Material Cost Classifications Consult Ch. 6 & 7 of Health Care Finance and other sources to complete the form. This worksheet requires you to match the definitions and examples of types of cost, and the types of centers where costs occur. Part 1: For each term in Column A, select the correct definition from Column B on the right. Write the corresponding letter of the definition next to the term. a f 1. Indirect costs a 2. Direct costs d 3. Fixed costs i e h b c g 4. Variable costs 5. Step-fixed costs 6. Responsibility centers 7. Revenue centers 8. Cost centers 9. Shadow cost centers Column B – Definitions A. Costs incurred directly as a result of providing a specific service or good B. Centers charged with controlling costs and generate revenue C. Have no revenue budget and no obligation to earn revenue D. Costs that do not vary as service volume varies E. Fixed over some range of service volume, but rise to a new level for a higher range of service volume F. Costs that cannot be tied directly to the patient’s stay in the bed G. Exist as budgets on paper only H. The places where costs occur and have budgets I. Costs that change as volume changes Part II: For each real-world example, select the correct term from the list on the left. Write the corresponding letter of the real-world example next to the term. Column A m 1. Indirect costs q 2. Direct costs p 3. Fixed costs n r ...
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...Assignment: Cost Accounting Applied By George T. Neale Professor Bryan Womack Course Title ACC 350012VA016-1122-001 Cost Accounting February 26, 2012 Companies that are successful financially know what their costs are and how those costs are being spent. The company I have chosen wants to change from a general accounting system where costs are put in general categories and they currently do not have any allocation of costs. I would like to explain the success my company could have when they implement using cost accounting in their operations. Artis is a research and development company as well as a manufacturing company. Artis designs Active Protection Systems (APS) for vehicles. Their main purpose is to design and engineer a product that will protect vehicles from the threat of missiles. These Active Protection Systems are constantly being engineered and re-engineered as new threats and potential threats arise. Artis has to research, design and engineer the product continuously. There developed different models version that can then be manufactured and sold based on the customer’s demand on the sale contracts. The major costs associated with the engineering of the Active Protection System are the costs of the labor (both labor spent on their facility and labor spent at government sites), the costs of the various specialized subcontractors, the costs of the materials...
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...Project #2 – Cost Accounting Classifications The first business I observed was Little Caesars. Little Caesars is a pizza chain, similar to Pizza Hut and Dominos. I met up with the store manager, Norma, so that she could show me around the store. We started at the back of the store where she introduced me to Omar and Miguel who have the very important job of making the dough every morning. We walked towards the front of the store where Paula was prepping toppings for the pizza and getting ready to dress some pizzas. Joseph was at the very front of the store and has a heavy work load. He is responsible for taking pizza orders, putting pizzas into the oven and taking them out, boxing the pizzas and ringing up customers. At this business, three direct materials in the product were dough, sauce and cheese. The dough maker and the pizza dresser are two people whose job function is classified as direct labor costs. Three manufacturing overhead costs that were clear to me from my direct observation were wages for the store manager, electricity to run the oven and the boxes used for the pizzas. Two manufacturing overhead costs that were not clear from my observation included the marketing of the pizza and the maintenance on the equipment. I believe this company would use process costing because they are producing the same product in large quantities on a daily basis. Based on my observation, the cost drivers for the overhead costs at this business would be the number of employees...
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...ANNUAL COST PURPOSE For investments (purchases) of buildings and equipment, which are expected to last several years, it is reasonable to place their cost on an annual basis over several years, rather than a single year. Viewing cost on an annual basis allows easy comparison to anticipated changes in income or productivity that will be required to pay for the item. For instance, if annual cost of a mix wagon is $3,000, then an equivalent increase in net milk income will cover its cost. For 100 cows at a n of $8/cwt of milk, that would et 350lbs/cow/year or slightly more than 1 lb/cow/day in milk. Furthermore, annual costs allows comparison or joint consideration of items having differing lengths of life. CALCULATION CONCEPT The annual cost includes charges for depreciation (purchase price minus salvage value), interest on the money invested, repairs for normal use, property taxes, and insurance. Repairs, property taxes, and insurance are usually rough estimates by percentage of price, with increases in repairs assumed to offset decreases in the other two. Interest is often loosely accounted for multiplying an average value of the item by an interest rate (discount, opportunity, MARR). This is crude and can be improved by using time value of money to convert price and salvage to an annual cost, which includes automatically both depreciation and interest. INFORMATION TO BE I NCLUDED 1. Purchase Price – to be annualized 2. Salvage Value – also to be annualized. Can be figured several...
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...College Costs Introduction It's no secret that financing a college education is getting tougher. College costs have skyrocketed over the past decade or so, and there's no relief in sight. Average tuition at four-year colleges will increase 7 percent this school year, double the rate of inflation. Student aid is not increasing fast enough to plug the growing gap between tuition and family finances. In addition, there is a growing number of older students entering college today. These students have families that they need to support. I know, because I am a family man who has returned to school. I wish to finish my degree at the Rochester Institute of Technology. The only problems I face are financial in nature. It is with this in mind that I set about this research. The not so simple question: Is financial aid available to older students, and if so, how do they go about obtaining it? The Cost Of Education The cost of higher education varies by type of institution. Tuition is highest at private 4-year institutions, and lowest at public 2-year institutions. The private 4-year colleges nearly quadrupled their average tuition rates between 1975 and 1996. For private 4-year colleges, tuition and fees for the 1995-96 academic year averaged about $15,400, compared with about $5006 at public 4-year colleges. The cost of attending an institution of higher education includes not only tuition and fees, however, but also books and supplies, transportation...
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...growing, you’re dying. But companies also need to focus on controlling costs. Without constant vigilance, companies can find themselves in an uncompetitive situation with bloated overhead. The episodic slashing and burning that then becomes necessary can significantly damage a company. These efforts risk producing exceptions on the financial statements, drive “one-time” charges, and hurt company culture. The better way to maintain the appropriate cost structure is to control them in a sustained fashion. Here are 5 ways to control costs. 1) Renegotiate all contracts annually. For whatever reason, American businesses presume that multiple year contracts will result in lower costs. Maybe sometimes, but not always. A smart company policy is not to have the life of a contract exceed one year. This forces annual bidding or at least renewal discussions with the current suppliers. Almost always these discussions will result in lower cost of goods. A multi-year contract will usually favor the vendor. Of course this is a lot of work. But it sure pays out. 2) Ask your customers. Annual planning sessions with customers have many benefits. Naturally these discussions primarily should focus on ways to grow the business. But too often these discussions fail to address costs. By discussing costs holistically up and down the combined supply chains, customers often can recommend ways to reduce costs. For example, how to take wasted steps out of the process, or how to...
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