Basic Cost
Management Concepts
and Accounting for
Mass Customization
Operations
DELOS SANTOS, MARIFE S.
BALUYAN, NEIL PATRICK
ALEJANDRO, LESLIE
PROCESS OF MANAGEMENT
01 02 03
Formulating
Planning Control
Strategy
04 05
Directing
Decision Making Operational
Activities
01
What do we mean
by a Cost?
COST
measured by the can have different
resources given meanings depending
up, to achieve a on the context in
particular which it is used.
purpose.
PRODUCT COSTS, PERIOD COSTS and
EXPENSES
Product Cost Period Cost Expense
Cost assigned to goods that Cost identified with the period of Defined as cost incurred
were either purchased or time in which they are incurred when an asset is used up
manufactured for resale. rather than with units of purchased or sold out for the purpose
In period of the sale, it is or produced goods. Recognized as of generating revenue.
recognized as an expense an expense during the time period
called cost of goods sold. in which they are incurred.
Costs on Financial Statements
Income Statement
Airlines – under service industry; major airline
based in the southwestern United States.
Manufacturer of heavy equipment
Large retail firm with merchandising
operations
Costs on Financial Statements
Income Statement
Selling and administrative costs are always period costs
on any type of company’s income statement
For Caterpillar – costs of manufactured inventory are product
costs.
• All costs incurred in manufacturing finished products are
stored in inventory until the time period when the products
are sold.
• Then the product costs of the inventory sold become cost of
goods sold, an expense on the income statement.
Costs on Financial Statements
Income Statement
Walmart – product costs include all costs of acquiring
merchandise inventory for resale.
• These product costs are stored in inventory until the
time period during which the merchandise is sold.
• These costs become cost of goods sold.
Costs on Financial Statements
Income Statement
Southwest Airlines – no inventoried product costs.
• Service output is consumed as soon as it is produced.
• Generally, refer to the costs of producing services as
operating expenses.
• Operating expenses are treated as period costs and are
expensed during the period in which they are incurred.
Costs on Financial Statements
Balance Sheet
Southwest Airlines – under service industry;
major airline based in the southwestern United
States.
Caterpillar – heavy equipment manufacturer
Walmart stores – large retail firm with
merchandising operations
Costs on Financial Statements
Balance Sheet
Manufacturers Retailers/Merchandisers
Three (3) Types of Inventory The cost of acquiring merchandise is
1. Raw-material – all materials before they listed as the value of the
are placed into production merchandise inventories
2. Work-in-process – refers to manufactured
products that are only partially completed
at the date when the balance sheet is
prepared.
3. Finished-goods – refers to manufactured
goods that are complete and ready for
sale.
ACCOUNTING FOR MASS
CUSTOMIZATION
What Is Mass
Customization?
The process of delivering market goods
and services that are modified to satisfy a
specific customer's needs. Other names for
mass customization include made-to-order
or built-to-order.
MANUFACTURING COSTS
Direct Material- Raw material that is consumed in the manufacturing process, is physically
incorporated in the finished product, and can be traced to products relatively easily
Direct Labor- The cost of salaries, wages, and fringe benefits for personnel who work directly
on the manufactured products.
Manufacturing Overhead- All other costs of manufacturing which includes three types of
costs: indirect material, indirect labor, and other manufacturing costs.
Indirect Material- The cost of
materials that are required for the
production process but do not
become an integral part of the
Types of Indirect Labor- The costs of
finished product.
Manufacturing personnel who do not work directly
Overhead on the product, but whose services
are necessary for the
Other Manufacturing
manufacturing process.Costs- All
other manufacturing costs that are
neither material nor labor costs.
Cost of Goods Sold
Manufacturing Overhead
Product costs . . . . . . are stored in inventory . . . . . . until the products are sold.
Manufacturing Cost Flows
Basic Cost Management
Concepts: Different Costs for Different
Purposes
NEIL PATRICK A. BALUYAN
Basic Cost Management Concepts:
Different Costs for Different Purposes
• An understanding of cost concepts is critical
to cost management.
• Different perspectives on costs are
important in different managerial situations.
Variable and Fixed Costs
Variable Fixed
Cost changes in These costs do not
total in direct vary with changes in
proportion to a activity volume.
change in the level
of activity.
Direct Costs
Costs that can be directly traced to a
specific product, service, or project.
Indirect Costs
Costs that are not directly linked to a
specific product or service but are
necessary for overall operations.
Controllable Cost
Costs that can be influenced or controlled
by management decisions or actions.
Uncontrollable Cost
Costs that cannot be directly influenced
by managerial decisions in the short term.
Opportunity Costs
Defined as the benefit that is sacrificed
when the choice of one action precludes
taking an alternative course of action.
Sunk Cost
Costs are costs that have been incurred in the past.
Consequently, they do not affect future costs and
cannot be changed by any current or future action.
Costs and Benefits
of Information
An important task of the managerial
accountant is to determine which of
these cost concepts is most
appropriate in each situation
THANK YOU
