Maliyet Muhasebesi Cost Terms, Concepts and Classifications Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Cost Terms, Concepts and Classifications Chapter TwoCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 2 Learning Objective 1 Identify and give examples of each of the three basic manufacturing cost categories.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 3 The Product Direct Materials Direct Labor Manufacturing Overhead Manufacturing CostsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 4 Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobileCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 5 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workersCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 6 Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 7 Assigning Costs to Cost Objects Direct costs Costs that can be • easily and conveniently traced to a unit of product or other cost object. Examples: direct • material and direct labor Indirect costs Costs that cannot be • easily and conveniently traced to a unit of product or other cost object. Example: manufacturing • overheadCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 8 Non-manufacturing Costs Selling Costs Costs necessary to get the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 9 Learning Objective 2 Distinguish between product costs and period costs and give examples of each.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 10 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead . Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income StatementCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 11 Quick Check ? Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 12 Quick Check ? Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 13 Classifications of Costs Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 14 Comparing Merchandising and Manufacturing Activities Merchandisers . . . Buy finished goods. ? Sell finished goods. ? Manufacturers . . . Buy raw materials. ? Produce and sell ? finished goods. MegaLoMartCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 15 Balance Sheet Merchandiser Current assets Cash ? Receivables ? Prepaid Expenses ? Merchandise ? Inventory Manufacturer Current Assets Cash * Receivables * Prepaid Expenses * Inventories * Raw Materials • Work in Process • Finished Goods •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 16 Merchandiser Current assets Cash ? Receivables ? Prepaid Expenses ? Merchandise ? Inventory Manufacturer Current Assets Cash * Receivables * Prepaid Expenses * Inventories * Raw Materials • Work in Process • Finished Goods • Balance Sheet Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 17 Learning Objective 3 Prepare an income statement including calculation of the cost of goods sold.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 18 The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. M a n u f a c t u r i n g C o m p a n y C o s t o f g o o d s s o l d : B e g . f i n i s h e d g o o d s i n v . 1 4 , 2 0 0 $ + C o s t o f g o o d s m a n u f a c t u r e d 2 3 4 , 1 5 0 G o o d s a v a i l a b l e f o r s a l e 2 4 8 , 3 5 0 $ - E n d i n g f i n i s h e d g o o d s i n v e n t o r y ( 1 2 , 1 0 0 ) = C o s t o f g o o d s s o l d 2 3 6 , 2 5 0 $ M e r c h a n d i s i n g C o m p a n y C o s t o f g o o d s s o l d : B e g . m e r c h a n d i s e i n v e n t o r y 1 4 , 2 0 0 $ + P u r c h a s e s 2 3 4 , 1 5 0 G o o d s a v a i l a b l e f o r s a l e 2 4 8 , 3 5 0 $ - E n d i n g m e r c h a n d i s e i n v e n t o r y ( 1 2 , 1 0 0 ) = C o s t o f g o o d s s o l d 2 3 6 , 2 5 0 $ Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 19 Basic Equation for Inventory Accounts Beginning balance Additions to inventory + = Ending balance Withdrawals from inventory +Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 20 Quick Check ? If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 21 Quick Check ? If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200. $1,000 + $100 = $1,100 $1,100 - $300 = $800Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 22 Learning Objective 4 Prepare a schedule of cost of goods manufactured.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 23 Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 24 M a n u f a c t u r i n g W o r k R a w M a t e r i a l s C o s t s I n P r o c e s s B e g i n n i n g r a w D i r e c t m a t e r i a l s m a t e r i a l s i n v e n t o r y + R a w m a t e r i a l s p u r c h a s e d = R a w m a t e r i a l s a v a i l a b l e f o r u s e i n p r o d u c t i o n – E n d i n g r a w m a t e r i a l s i n v e n t o r y = R a w m a t e r i a l s u s e d i n p r o d u c t i o n As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost FlowsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 25 M a n u f a c t u r i n g W o r k R a w M a t e r i a l s C o s t s I n P r o c e s s B e g i n n i n g r a w D i r e c t m a t e r i a l s m a t e r i a l s i n v e n t o r y + D i r e c t l a b o r + R a w m a t e r i a l s + M f g . o v e r h e a d p u r c h a s e d = T o t a l m a n u f a c t u r i n g = R a w m a t e r i a l s c o s t s a v a i l a b l e f o r u s e i n p r o d u c t i o n – E n d i n g r a w m a t e r i a l s i n v e n t o r y = R a w m a t e r i a l s u s e d i n p r o d u c t i o n Conversion costs are costs incurred to convert the direct material into a finished product. Product Cost FlowsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 26 M a n u f a c t u r i n g W o r k R a w M a t e r i a l s C o s t s I n P r o c e s s B e g i n n i n g r a w D i r e c t m a t e r i a l s B e g i n n i n g w o r k i n m a t e r i a l s i n v e n t o r y + D i r e c t l a b o r p r o c e s s i n v e n t o r y + R a w m a t e r i a l s + M f g . o v e r h e a d + T o t a l m a n u f a c t u r i n g p u r c h a s e d = T o t a l m a n u f a c t u r i n g c o s t s = R a w m a t e r i a l s c o s t s = T o t a l w o r k i n a v a i l a b l e f o r u s e p r o c e s s f o r t h e i n p r o d u c t i o n p e r i o d – E n d i n g r a w m a t e r i a l s i n v e n t o r y = R a w m a t e r i a l s u s e d i n p r o d u c t i o n Product Cost Flows All manufacturing costs incurred during the period are added to the beginning balance of work in process. Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 27 M a n u f a c t u r i n g W o r k R a w M a t e r i a l s C o s t s I n P r o c e s s B e g i n n i n g r a w D i r e c t m a t e r i a l s B e g i n n i n g w o r k i n m a t e r i a l s i n v e n t o r y + D i r e c t l a b o r p r o c e s s i n v e n t o r y + R a w m a t e r i a l s + M f g . o v e r h e a d + T o t a l m a n u f a c t u r i n g p u r c h a s e d = T o t a l m a n u f a c t u r i n g c o s t s = R a w m a t e r i a l s c o s t s = T o t a l w o r k i n a v a i l a b l e f o r u s e p r o c e s s f o r t h e i n p r o d u c t i o n p e r i o d – E n d i n g r a w m a t e r i a l s – E n d i n g w o r k i n i n v e n t o r y p r o c e s s i n v e n t o r y = R a w m a t e r i a l s u s e d = C o s t o f g o o d s i n p r o d u c t i o n m a n u f a c t u r e d Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 28 W o r k I n P r o c e s s F i n i s h e d G o o d s B e g i n n i n g w o r k i n B e g i n n i n g f i n i s h e d p r o c e s s i n v e n t o r y g o o d s i n v e n t o r y + M a n u f a c t u r i n g c o s t s + C o s t o f g o o d s f o r t h e p e r i o d m a n u f a c t u r e d = T o t a l w o r k i n p r o c e s s = C o s t o f g o o d s f o r t h e p e r i o d a v a i l a b l e f o r s a l e – E n d i n g w o r k i n - E n d i n g f i n i s h e d p r o c e s s i n v e n t o r y g o o d s i n v e n t o r y = C o s t o f g o o d s C o s t o f g o o d s m a n u f a c t u r e d s o l d Product Cost FlowsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 29 Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw MaterialsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 30 Quick Check ? Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A. $276,000 B. $272,000 C. $280,000 D. $ 2,000 Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 31 Quick Check ? Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A. $276,000 B. $272,000 C. $280,000 D. $ 2,000 B e g . r a w m a t e r i a l s 3 2 , 0 0 0 $ + R a w m a t e r i a l s p u r c h a s e d 2 7 6 , 0 0 0 = R a w m a t e r i a l s a v a i l a b l e f o r u s e i n p r o d u c t i o n 3 0 8 , 0 0 0 $ – E n d i n g r a w m a t e r i a l s i n v e n t o r y 2 8 , 0 0 0 = R a w m a t e r i a l s u s e d i n p r o d u c t i o n 2 8 0 , 0 0 0 $ Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 32 Quick Check ? Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A. $555,000 B. $835,000 C. $655,000 D. Cannot be determined.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 33 Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A. $555,000 B. $835,000 C. $655,000 D. Cannot be determined. D i r e c t M a t e r i a l s 2 8 0 , 0 0 0 $ + D i r e c t L a b o r 3 7 5 , 0 0 0 + M f g . O v e r h e a d 1 8 0 , 0 0 0 = M f g . C o s t s I n c u r r e d f o r t h e M o n t h 8 3 5 , 0 0 0 $ Quick Check ?Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 34 Quick Check ? Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A. $1,160,000 B. $ 910,000 C. $ 760,000 D. Cannot be determined. Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 35 Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A. $1,160,000 B. $ 910,000 C. $ 760,000 D. Cannot be determined. Quick Check ? B e g i n n i n g w o r k i n p r o c e s s i n v e n t o r y 1 2 5 , 0 0 0 $ + M f g . c o s t s i n c u r r e d f o r t h e p e r i o d 8 3 5 , 0 0 0 = T o t a l w o r k i n p r o c e s s d u r i n g t h e p e r i o d 9 6 0 , 0 0 0 $ – E n d i n g w o r k i n p r o c e s s i n v e n t o r y 2 0 0 , 0 0 0 = C o s t o f g o o d s m a n u f a c t u r e d 7 6 0 , 0 0 0 $ Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 36 Quick Check ? Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 37 Quick Check ? Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 38 Learning Objective 5 Understand the differences between variable costs and fixed costs.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 39 Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of activity within the relevant range. Total variable costs ? change when activity changes. Total fixed costs remain ? unchanged when activity changes.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 40 Variable Cost Total variable cost increases as the level of activity increases.. Level of activity D i r e c t m a t e r i a l s c o s tCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 41 Variable Cost Per Unit Level of activity D i r e c t m a t e r i a l s c o s t p e r u n i t The variable cost per unit is constant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 42 Fixed Cost Level of activity R e n t c o s t Total fixed cost does not change as the level of activity changes.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 43 Fixed Cost Per Unit Fixed cost per unit decreases as the level of activity increases. Level of activity R e n t c o s t p e r u n i tCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 44 Cost Classifications for Predicting Cost Behavior B e h a v i o r o f C o s t ( w i t h i n t h e r e l e v a n t r a n g e ) C o s t I n T o t a l P e r U n i t V a r i a b l e T o t a l v a r i a b l e c o s t c h a n g e s V a r i a b l e c o s t p e r u n i t r e m a i n s a s a c t i v i t y l e v e l c h a n g e s . t h e s a m e o v e r w i d e r a n g e s o f a c t i v i t y . F i x e d T o t a l f i x e d c o s t r e m a i n s A v e r a g e f i x e d c o s t p e r u n i t g o e s t h e s a m e e v e n w h e n t h e d o w n a s a c t i v i t y l e v e l g o e s u p . a c t i v i t y l e v e l c h a n g e s .Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 45 Quick Check ? Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 46 Quick Check ? Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 47 Learning Objective 6 Distinguish Total Cost & Unit CostCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 48 Total Costs and Unit Costs A unit cost (also called an average cost) is • computed by dividing some amount of cost total by some number of units. The “ units ” may be expressed in various ways: • Hours worked – Packages delivered – Bicycles assembled –Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 49 Total Cost & Unit Cost Assume that Metairie Bicycles buys a handlebar • at $52 for each of its bicycles. Total handlebar cost is an example of a cost that • changes in total in proportion to changes in the number of bicycles assembled (variable cost). What is the total handlebar cost when 1,000 • bicycles are assembled?Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 50 Total Cost & Unit Cost 1,000 units x $52 = $52,000 • What is the total handlebar cost when 3,500 • bicycles are assembled? 3,500 units x $52 = $182,000 •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 51 Total Cost & Unit Cost Total costs $182,000 $52,000 0 1,000 3,500 UnitsCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 52 Total Cost & Unit Cost Assume that Metairie Bicycles incurred $94,500 • in a given year for the leasing of its plant. This is an example of fixed costs with respect to • the number of bicycles assembled. These costs are unchanged in total over a • designated range of the number of bicycles assembled during a given time span.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 53 Total Cost & Unit Cost What is the leasing (fixed) cost per bicycle when • Metairie assembles 1,000 bicycles? $94,500 ÷ 1,000 = $94.50 • What is the leasing (fixed) cost per bicycle when • Metairie assembles 3,500 bicycles? $94,500 ÷ 3,500 = $27 •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 54 Relevant Range... is the band of the level of activity or volume in – which a specific relationship between the level of activity or volume and the cost in question is valid. Assume that fixed (leasing) costs are $94,500 • for a year and that they remain the same for a certain volume range (1,000 to 5,000 bicycles). 1,000 to 5,000 bicycles is the relevant range. •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 55 Relevant Range If annual demand for Metairie’s bicycles • increases, and the company needs to assemble more than 5,000 bicycles, it would need to lease additional space which would increase its fixed costs.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 56 Relevant Range Total fixed costs $100,000 $94,500 Relevant range 0 1,000 5,000 VolumeCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 57 Total Costs and Unit Costs What is the total cost and unit cost (leasing and • handlebars) when Metairie Bicycles assembles 1,000 bicycles? Total fixed cost $94,500 • Total variable cost (52 × 1,000) $52,000 Total cost $146,500 Unit cots=$146,500 ÷ 1,000 = $146.50 •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 58 Total Cost & Unit Cost What is the total cost and unit cost (leasing and • handlebars) when Metairie Bicycles assembles 3,500 bicycles? Total fixed cost $ 94,500 • Total variable cost (52 × 3,500) 182,000 Total cost $276,500 $276,500 ÷ 3,500 = $79.00 •Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 59 Learning Objective 7 Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 60 Every decision involves a choice between at • least two alternatives. Only those costs and benefits that differ • between alternatives are relevant in a decision. All other costs and benefits can and should be ignored. Cost Classifications for Decision MakingCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 61 Differential Cost and Revenue Costs and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 62 Opportunity Cost The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 63 Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 64 Quick Check ? Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 65 Quick Check ? Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 66 Quick Check ? Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 67 Quick Check ? Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 68 Quick Check ? Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 69 Quick Check ? Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 70 Learning Objective 8 Labor costs associated with idle time, overtime, and fringe benefits.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 71 Idle Time The labor costs incurred during idle time are ordinarily treated as manufacturing overhead. Machine Breakdowns Material Shortages Power FailuresCopyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 72 Overtime The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead. Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 73 Labor Fringe Benefits Fringe benefits include employer paid costs for insurance programs, retirement plans, supplemental unemployment programs, Social Security, Medicare, workers’ compensation and unemployment taxes. Some companies include all of these costs in manufacturing overhead. Other companies treat fringe benefit expenses of direct laborers as additional direct labor costs.Copyright © 2008, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 2- 74 End of Chapter 2