3.cost control concept, theory, and its practice

8/3/2019 3.Cost Control Concept, Theory, And Its Practice

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COST CONTROL: CONCEPT,THEORY, AND ITS PRACTICE

Dr. Wiwiek M. Daryanto SE.Ak., MM, CMA


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Educational background Accountant (1981), cum-laude, UGM Registered Indonesian Accountant:D.2794 Master of Management (1988), College of

Economics and Management, University of thePhilippines

Doctor of Philosophy (2004), IPB Certified Management Accountant (2000),

Australia

HP: 0811-89-42-73 Email:[email protected]


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OUTLINE COST CONCEPT

THE CLASSIFICATION OF COSTS

DIFFERENT COST FOR DIFFERENTPURPOSES

THE BEHAVIOR OF COSTS

BREAK EVEN POINT ANALYSIS


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COST CONCEPTS Four terms: cost, expenditure, expense, and

disbursement

Cost is a monetary measurement of theamount of resources used for some purpose.

An expenditure is a decrease in an asset(usually cash) or an increase in a liability(often accounts payables) associated with theincurrence of a cost.


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The expenditures in an accounting periodequal the cost of all the goods and

services acquired in that period.An expense is an item of cost applicable to

the current accounting period.

An expense represents resourcesconsumed by the entitys earningsactivities during the current period.

COST CONCEPT


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COST CONCEPTS When an expenditure is made, the

related cost is either an asset or an

expense.

If the cost benefits future periods, it isan increase in an asset.

If not, it is an expense a reduction inretained earnings of the currentperiod.


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COST CONCEPTSA disbursement is the payment of cash.

A cash expenditure is a disbursement;but so is any cash payment, such aspaying an account payable, repaying aloan, or paying a cash dividend to

shareholders.


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Matching Concept

Cost

Expenditures

Cash Payable

Disbursement=

Cash Payment

Capital

/Investment

Expenditures

CAPEX

Operating /

Revenue

Expenditures

OPEX =Expenses

Amortization :

1) Depreciation

Tangible FA2)Depletion

Natural resources

3) Amortization

Intangible FA


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CLASSIFICATION OF COST Concept of Different Cost for Different

Purposes

Classification of Cost, based on: Nature

Main Functions (Production; Marketing;

General and Administration) Cost Object (Direct and Indirect Costs)

Behavior of Costs (Fixed & Variable Costs)


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EXPENSES

Prodn Exp.

Marketing

Exp.

Gen & Adm

Exp.

Direct Labor

Exp.

RawMaterial

Exp.

Factory

Overhead

Exp.

Commercial

Expenses

Conv.

Exp.

Primary

Exp.

CLASSIFICATION OF COST

BASED ON MAIN FUNCTIONS

C t Cl ifi ti


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Cost Classification

The Overlap of Cost ClassificationApproaches

The Financial Accounting-Management Accounting Cost Classification Link

Materials Labour Overhead

Production Raw Materials e. .

steel), Purchased

com onents (e.g.

valves).

Factor workers wa es,

Factory supervisors

salary

Power, De reciation of

machines, Rent of

factory space

Selling

Sam les, Brochures and

Catalo ues, Dis la

signs

Counter staff wages,

Salesmens salaries and

commissions

Trans ort costs,

Advertisin costs,

Depreciation of vehicles

Administration Stationer , Costs of tea

and coffee

Pa roll Clerks salar ,

Secretar s salar ,

Computer operators

salary

De reciation of office

e ui ment. Rent of

office space.


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Cost Object: Is the technical name for the product,

project, organizational unit, or other

activity or purpose for which costs aremeasured. Some people prefer costobjective


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Full Cost Full cost means all the resources used

for a cost object.

The full cost of a cost object is the sumof its direct costs plus a fair share of

applicable indirect costs.


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Direct and Indirect Costs

The direct costs of a cost object are items of coststhat are specifically traced to, or caused by, that costobject.

Indirect costs are element of costs that are associatedwith, or caused by, two or more cost objects jointlybut that are not directly traced to each of themindividually.

The nature of an indirect cost is such that it is notpossible, or at least not feasible, to measure directlyhow much of the cost is attributable to a single costobject.


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The Overlap Of Cost Classification Methods

VARIABLE FIXED

D

I

R

E

C

T

Raw material purchase costs;

Finished product purchase cost;

Wages of production workers.

De reciation of a machine used onl for the

production of a single product type;

Salar of a factor su ervisor who oversees

production of a single product type.

I

N

D

I

R

E

C

T

Wa es of workers shared amon st

different product types;

Raw materials or urchased

com onents shared (e. . fuel, nuts and

bolts);

Overhead ex enses such as discounts,

commissions etc.

De reciation of Assets shared amon st

different product types;

Salar of factor su ervisors, a roll clerks,

salesmen etc. shared;

Overhead ex enses such as rent of remises,

audit fees, hire purchase payments etc.


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1. Payroll Related. The employers share of social security taxes, healthinsurance, and other fringe benefits may be allocated on the basis of thetotal labor costs. Alternatively, as mentioned above,

fringe benefit costs for direct workers may enter into the calculation ofdirect labor costs; if so, they will not appear as overhead costs at all.

2. Headcount Related. Human resource department costs and other costsassociated with the number of employees rather than with the amountthat they are paid may be allocated on the basis of number ofemployees (headcount)

3. Material Related. This category of costs typically includes the costs of

purchasing and receiving materials, including counting, weighing, orinspecting them. These costs may be allocated on the basis of either thequantity or the costs of direct material used in production cost centers.Alternatively, they may be excluded from the cost center overhead costsand instead assigned to product as part of their material cost. Forexample, if the material-related cost rate is 10 percent of direct materialcost, then a product with $5 direct material cost will have this cost

grossed up to %5.50 so as to include the material-related costs.

Cost Driver


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Cost Driver

4. Space related. Some items of cost are associated with the space thatthe cost center occupies, and they are allocated to cost centers on thebasis of the relative floor area or cubic or space or the cost centers.These are also called facility Relatedcosts.

5. Transaction Related. Some costs are caused by the number of time

some activity is performed rather than by the value of the goods orservices associated with the activity. For example, the cost of preparinga purchase order is unaffected by the dollar amount of the items on theorder, and the cost of scheduling a job is the same whether it is largejob or a small one. Such drivers are also calledActivity Related. If theactivity is performed once for each batch of product that is processed-such as preparing a set of production document for a job, scheduling thejob, setting up a piece of equipment, or inspecting one items from eachbatch produced the drivers is called a BatchLevel Driver.

6. Product Related. Some cost are caused by the existence of the product itself. Examples include engineering change order cost for a product, thecost of tools and dies that are used only for a single product, and thecost maintaining product-related document such as drawings, bills ofmaterial, and production routings.


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Cost Driver7. Overall drivers. As mentioned above, if the pool of cost to be allocated include a

mixture of activities, then a clear-cut causally related driver is difficult to identify.In these instances, abroad, overall measure such as DLH, DL $, machinehours,material cost, prime cost (direct material plus direct labor), or number of units isused. Because the choice of such a driver often is made only after the failure to

find a driver that more clearly reflects a clear-cut causal relationship, somepeople refer to these as default drivers. Note that these drivers all havesomething in common; any of them will assign twice a much cost to two ofproduct as to one unit. This is because two units have twice as much direct-laborcontent, machine time, direct material, of prime costs as does one unit. Driverswith this characteristic are therefore called Unit-level drivers.

Plantwide Overhead Rate. Many companies, although having a

number of production departments, use the same overhead rate for all of them.This Plantwide overhead rateis calculated by dividing total plant overhead costsby an overall activity measure, usually DLH or DL $. This is the simplest possibleway to allocate overhead to products; it involves none of the complicationsillustrated in the Marker Pen example because there is only one cots center in theproduct costing system the entire plant.


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DirectLabor

Overhead

Cost

+ =

+ =

ConversionCost

DirectMaterialCost

=+

+

FullProductionCost (orInventoryCost)

SellingCost

General AndAdministrativeCost

Full Cost

ELEMENTS OF PRODUCT COST


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ELEMENTS of PRODUCT COST

The most common cost object of interest in a business isa product.

This can be either a tangible good, such as a batch of

jeans, or a service, such as a repair job on anautomobile.

The system that accumulates and reports the costs ofproduct cost objects is called a product costingsystem.

Elements of product cost are either material, labor, orservices.

In a product costing system these elements arecustomarily recorded in certain categories.


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Direct Material Cost:The quantities ofmaterial that can be specifically identified with a

cost object in an economically feasible manner,priced at the unit price of direct material are thedirect material cost of a cost object.

These materials, often called raw materials or

just materials, are to be distinguished fromsupplies, or indirect materials, which arematerials used in the production process but not

directly traced to individual products. Examples of supplies include lubricating oil for

factory machinery and spices in a restaurantskitchen.


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Direct Labor Cost. The labor quantitiesthat can be specifically identified with acost object in an economically feasiblemanner, priced at a unit price of directlabor are the direct labor of a costobject.

Other Direct Costs. Conceptually, anycost traced to a single product is a directcost of that product. Example: energycosts.

However, most companies classify onlydirect material and direct labor costs asdirect production costs.


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Overhead Cost. All indirect production costs

all production costs other than direct costs are included in overhead cost. Oneelement of overhead is indirect labor: theearnings of employees who do not workdirectly on a single product but whose effortsare related to the overall process ofproduction. Examples include supervisors,

janitors, materials handlers, stockroompersonnel, inspectors, and crane and forkliftoperators.


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Another element of overhead is indirectmaterial costs, described above.

Overhead also includes such items as

heat, light, power, maintenance,depreciation, taxes, and insurance relatedto assets used in the production process.


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Conversion Cost. The sum of direct laborcost and overhead cost is conversion cost.

It includes all production costs needed toconvert direct materials into finished goods.

As factories become automated, direct materialcosts tend to become a much more significant

cost element than direct labor; at the sametime the distinction between direct labor andindirect labor becomes blurred.

As a result, some companies no longerdistinguish between direct labor and overheadcost; instead, the single category of conversioncost is used.


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Full productionCost. The sum of direct materialcost and conversion cost is full production cost.

In a manufacturing firm full production cost often iscalled inventory cost because this is the cost atwhich completed goods are carried as inventory andthe amount that is reported as cost of sales when thegoods are sold.

The cost at which goods are carried in inventoryincludes neither distribution nor selling costs, northose general and administrative costs that areunrelated to production operations.

in a manufacturing firm full production cost includesonly the costs that are incurred within the fourfactory walls


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In a financial accounting these full productioncost that flow through inventory accounts are

called product costs to distinguish themfrom period cost, which do not flow throughinventory accounts but rather are charged areexpenses of the period in which they areincurred.

The term inventory cost is more descriptive offull production costs than product costbecause the full cost a product cost objectalso includes nonmanufacturing costs such asthe cost of selling the product.

Nevertheless, referring to inventory cost asproduct costs is well established in practice.


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Non-production cost. Nonproduction cost(also called period costs) are all costs

incurred in an organization other thaninventory costs.

These include selling costs, research anddevelopment costs, general andadministrative cost, and interest cost.

In a companys income statement, many ofthese cost are reported as a lump sum under

the single caption, selling general andadministrative expense (informally calledSG&A by many businesspersons).


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In a manufacturing firm selling costs includeboth marketing (order-getting) costs and

logistics (order-filling) costs. The distinction between the two types of

selling cost is that marketing costs are incurredbefore a sales order is received whereas

logistics costs are incurred after the goodshave been produced.

Marketing costs include market research,advertising, point-of-sale promotions, and

sales persons compensation and travel costs. Logistics cost include warehousing and delivery

costs as well as the recordkeeping costassociated with processing an order.


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General administrative costs include the costsof service and staff units (such as the human

resource management and public relationsdepartments) and general corporate costs,including the compensation of topmanagement and donations to charitable

organizations. Interest costs are the costs of using borrowed

funds.

In most companies no attempt is made to

associate interest cost with specific products. Research and development (R&D) costs are

the costs associated with efforts to find new orimproved products or production processes.


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Full cost.The full cost of product issimply the sum of all the cost elementsdescribed above.

Thus full product costs includes bothinventory (full Production) cost and nonproduction cost.

However, in practice, many accountantsuse the term full cost to mean only fullproduction cost.

This is another example of the lack ofprecision in practitioners use of cost-related terms and another reason why onemust look beyond the label to be certain

what the user of really term means.


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The Behavior of Costs

Understanding cost-volume-relationships, how cost behave as the

level of activity changes. The concepts of fixed and variable costs

Variable costs are items of cost that

vary, in total, directly andproportionately with volume.

Fixed costs are items of cost that, in

total, do not vary at all with volume.


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The Classification of Costs

Semi-variable costs are those costs thatinclude a combination of variable costs and

fixed cost item.

Semi-variable costs are also called semi-

fixed, partly variable, or mixed costs.


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1. THE HIGHEST-LOWEST METHOD

ACTIVITIES

THEHIGHEST(AUG,85)

THELOWEST(FEB,84)

THEDIFF.()

VOLUME (UNITS)TOTAL COST (Rp 000)

8,000600,-

6,000500,-

2,000100,-

*UVC = Rp 100,000,- : 2000 = Rp 50,-


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THE HIGHESTACTIVITY

THE LOWESTACTIVITY

TOTAL COST

TOTAL VAR. COST:8,000 x Rp. 50,-6,000 x Rp. 50,-

Rp. 600.000,-

400.000,--

Rp. 500.000,-

-300.000,-

TFC / MONTH Rp. 200.000,- Rp. 200.000,-

TFC CALCULATION :


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2. THE LEAST SQUARE METHOD /LINEAR REGRESSION

TOTAL COST : Y = a + b x

b =n x 2( x ) 2n xy - x y

a =n

y - b x


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Break-even Volume

At the break-even volume, total costsequal total revenue.

Total Revenue (TR) = Total Costs (TC)

TR = Price/u * Volume (X)

TC = TFC + (VC/u * X), so

P/u * X = TFC + (VC/u * X)

Break-even Volume=X = TFC / P/uVC/u


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Case:JACKSON THOMAS (Q 1)

Variable Costs per unit:

- Purchased parts $2.68

- Labor ($11.75*1.2/15) .94

-

Shipping Costs.. .16- Total VC/unit. $3.78


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JACKSON THOMAS (Q1)

FIXED COST/MONTH:

Rent........... $1,900

GMs Salary. 6,300

Off Mgrs Salary 2,200

Other. 1,500 Total FC/month $ 11,900 or

$ 142,800 per year


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JACKSON THOMAS (Q1&2)

Total Costs = 142,800 + 3.78X

If X = 400,000 TC=1,654,800 AC=$4.14

If X = 450,000 TC=1,843,800 AC=$4.10

If X = 525,000 TC=2,127,300 AC=$4.05


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JACKSON THOMAS (Q3)

If volume up to 450,000 units per year:

Total Costs =

(142,800 +15 persons (2,000*11.75*1.2) +(2.68 + .16)X


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Jackson Thomas (Q3)

And for volume between 450,000 and525,000 units per year:

TC= 565,800+2.84(450,000)+(X-450,000)(2.84+(21.15/15)

= 1,843,800 + (X-450,000)(4.25)

= -68,700 + 4.25X


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Jackson Thomas (Q3)

Total and average unit costs at thethree volumes are as follows:

X TC Cost/U

400,000 $ 1,701,800 $4.25

450,000 $1,843,800 $4.10

525,000 $ 2,162,550 $4.12


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Jackson Thomas (Q4)

Number of assemblers required to produce525,000 units:

(525,000 units/year) / (2,000 hrs/yr) / (15units/worker/hr)=17.5 workers, or 18 units:Fixtures: 18@$1,575= $28,350

Other: 18@$945= $17,010

Total $45,360


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Jackson Thomas (Q4)

Monthly depreciation = $45,360/6*12=$630

Annual depreciation= $ 7,560

Thus,

Monthly FC = $11,900+$630=$12,530

Annual FC = $142,800 + $7,560=$150,360Variable costs remain unchanged, so we

have:


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Jackson Thomas (Q 4)

X Total Cost Cost/Unit

400,000 $1,662,360 $4.16450,000 $1,851,360 $4.11

525,000 $2,134,860 $4.07


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Jackson Thomas (Q5)

X T Revenue T Costs Profit

400,000 $1,780,000 $1,654,800 $125,200450,000 $2,002,500 $1,843,800 $158,700

525,000 $2,336,250 $2,127,300 $208,950


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Pak Amat

Dalam suatu pasar malam, Pak Amat akanmembuka tempat penitipan sepeda. Diamenyewa tempat yang dapat menampung 500

sepeda. Sewa tempat tersebut per malam Rp1500,-. Untuk menjaga sepeda dia akanmemperkerjakan dua orang, dengan upahRp1000,- semalam per orang, ditambah upahinsentip sebesar Rp2,50 per orang untuk setiap

sepeda yang masuk titipan. Tarif titipan yangdibebankan adalah Rp 25,- per sepeda semalam.Berapa jumlah sepeda minimum yang harusmasuk setiap malam agar supaya usaha titipantersebut tidak rugi?


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Flexible BudgetPak Amat (untuk 500 unit)

Jumlah %

Hasil Penjualan= 500*Rp25,-=Rp 12.500,- 100

Biaya Variabel:Upah:

500*2org*rp2,50= (2.500,-) 20

Contribution Margin (10.000,-) 80

Biaya Tetap:

Sewa tempat Rp1.500,-

Upah 2 org 2.000,- (3.500,-) 28

Laba Bersih Rp 6.500,- 52


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SCHEMATIC OF CONTRIBUTION

Fixed Costs Profit

Contribution

Revenues

3.cost control concept, theory, and its practice

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