Costing and Pricing Chapter 1 Part 1 PDF

Costing and Pricing LESSON 1 Nature, classification and purposes of cost What is COST? Cost is the expenditure required to create and sell products and services, or to acquire assets. When sold or consumed, a cost is charged to expense. Costing and Pricing 1....

Costing and Pricing LESSON 1 Nature, classification and purposes of cost What is COST? Cost is the expenditure required to create and sell products and services, or to acquire assets. When sold or consumed, a cost is charged to expense. Costing and Pricing 1. Manufacturing costs. These costs are incurred to make a product. Manufacturing costs are usually grouped into three main categories: direct materials, direct labor,  Costing and Pricing s. 1. Manufacturing costs. A. Direct materials. Direct materials consist of those raw material inputs that become an integral part of a finished product and can be easily traced into it. B. Direct Labor. Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as “touch labor” since it consists of the costs of workers who “touch” the product as it is being made. C. Manufacturing Overhead. Manufacturing overhead consists of all manufacturing costs other than direct materials and direct labor. These costs cannot be easily and conveniently traced to products. Costing and Pricing 2. Non-manufacturing costs. A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes most of these other costs are typically classified as selling (marketing) costs and administrative costs. Marketing and administrative costs are incurred in both manufacturing  Costing and Pricing. Non-manufacturing costs. a. Marketing Costs. These costs include the costs of making sales, taking customer orders, and delivering the product to customers. These costs are also referred to as order-getting and order filling costs. b. Administrative Costs. These costs include all executive, organizational, and clerical costs that are not classified as production or marketing costs.  Costing and Pricing Period Cost vs Product Cost a. Period Costs. Period costs are expensed in the time period in which they are incurred. All selling and administrative costs are typically considered to be period costs. b. Product Costs. Product costs are added to units of product (i.e., “inventoried”) as they are incurred and are not treated as expenses until the units are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement.  Costing and Pricing Cost Classifications for Decision-Making A. Differential Costs. A differential cost is a cost that differs between alternatives. The cost may exist in only one of the alternatives or the total amount of the cost may differ between the alternatives. In the latter case, the differential cost would be the difference between the cost under one alternative and the cost under the other Costing and Pricing For Example: if you have a decision to run a fully automated operation that produces 100,000 Donuts per year at a cost of $1,200,000, or of using direct labor to manually produce the same number of Donuts for $1,400,000 then the differential cost between the two alternatives is $200,000.  B. Opportunity Costs. An opportunity cost is the potential benefit that is given up by selecting one alternative over another. For example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. C. Sunk Cost. A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Since sunk costs cannot be changed and therefore cannot be differential costs, they should be ignored in decision making