1102AFE Lecture Notes - Lecture 9: Price Skimming, Predatory Pricing, Activity-Based Costing
Week 9 Accounting for decision making lecture notes
Costing and pricing
1. How cost information is used
• Need info to prepare income statement and balance sheet
• Need info for
o Product pricing
o Assessing viability of commencing production
o Quoting on potential work orders
o Comparison of budgets with actual costs
2. Costing and the cost object
• Costing is the calculation of the cost of:
o Producing (manufacturing) a product
o Providing a service
o Servicing a particular customer
o Performing a business activity
• Managers can cost any object for which it requires a separate measure of cost.
Cost objects can be products, services, customers, activities
3. Costing a manufactures product
• All manufacturing costs make up the cost of a product. There are three
manufacturing costs:
o 1. Direct materials (raw materials)
o 2. Direct labour
o 3. Manufacturing overhead
• Note that the cost of selling, admin and financing is NOT included here
• The total of these three costs is described as:
o Total manufacturing cost, or
o Total produt ietoriale ost
• The tet alls this the full ost
4. Costing a service
• Service costing is a little different from the costing of a manufactured product
(which includes only DM, DL and
OH)
• The cost of providing a service typically includes ALL costs of the service,
WHATEVER they are
• This would include selling, admin and financing costs
• The total of all of the osts of proidig the serie is alled the full ost
5. Process and job costing
• There are two principal types of costing systems:
o 1. Process costing (example slide 9-11)
o 2. Job costing (example slides 12-14)
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6. Direct and indirect costs
• Costs can be defined in different ways depending on our purpose. Last week we
focused on cost behavior, i.e.:
o Variable costs and
o Fixed costs
• This week we differentiate between:
o Direct costs and indirect costs
• Whether a cost is direct or indirect depends on the cost object. A cost object is
sipl the thig the ojet e are ostig. Cost ojets a e:
o A product
o A service
o A process
o A department
o An activity
• For most questions in this course, the cost object will be a PRODUCT or SERVICE
• There are two ways of costing a product (or service):
o 1. TRACE costs to the product. These costs are called DIRECT COSTS
o 2. ALLOCATE costs to the product. These costs are called INDIRECT COSTS
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Week 9 accounting for decision making lecture notes. Cost objects can be products, services, customers, activities: costing a manufactures product, all manufacturing costs make up the cost of a product. Oh: the cost of providing a service typically includes all costs of the service, Job costing (example slides 12-14: direct and indirect costs, costs can be defined in different ways depending on our purpose. Last week we focused on cost behavior, i. e. variable costs and: fixed costs, this week we differentiate between, direct costs and indirect costs, whether a cost is direct or indirect depends on the cost object. These costs are called direct costs: 2. 6. 1 direct costs (examples slides 21-22: direct costs, occur solely because of product, are an integral part of product, can be physically and economically traced to product, direct costs include only, direct materials (dm) and, direct labour (dl)
