Helpful Hint: The income statement from the annual
report of a well-known local manufacturing firm can be
used to illustrate the functional income statement. Ask if
the various expense categories on the income statement
III. Cost classifications for assigning costs to cost objects
Learning Objective 6: Understand the differences
between direct and indirect costs.
A. Cost object − Anything for which cost data are desired
including products, customers, jobs, organizational
subunits, etc. For purposes of assigning costs to cost
objects costs are classified two ways:
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IV. Cost classifications for decision making
Learning Objective 7: Understand cost classifications
used in making decisions: differential costs, opportunity
costs, and sunk costs.
i. Differential costs (or incremental costs) − A
difference in cost between any two
alternatives (a difference in revenue between
two alternatives is called differential
revenue).
1. Differential costs can be either fixed or
variable.
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otherwise (e.g., working, sleeping, partying, studying,
etc.)
Quick Check
−
relevant costs
V. Summary of the types of cost classifications
V. Appendix 2A: Least-Squares Regression Computations
(Slide #61 is a title slide)
Learning Objective 8: Analyze a mixed cost using a
scattergraph plot and the least-squares regression
method.
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the variable and fixed cost components of your
total meals cost.
1. To get these three pieces of information you
will need three Excel functions, namely
SLOPE, INTERCEPT, and RSQ.
iii. The first step within Excel is to place your cursor
in cell F4 and press the = key. Click on the pull-
down menu and scroll down to “More Functions.”
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1. The slope, or estimated variable cost per
unit, is identified on the screen as shown.
Click “OK” to put this value on your
spreadsheet.
vi. Return to the function box and click on
“Statistical” and then on “INTERCEPT.”
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2. The estimated fixed cost is identified on the
screen as shown.
vii. Return to the function box and click on
“Statistical” and then on “RSQ.”
VI. Appendix 2B: cost of quality (Slide #73 is the title slide)
Learning Objective 9: Identify the four types of quality
costs and explain how they interact.
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B. There are four broad categories of quality costs:
i. Prevention costs − Are incurred to support
activities whose purpose is to reduce the
number of defects.
Helpful Hint: Suppose an ice cream company has been
having problems with unpleasant gritty ice crystals in
its ice cream. Ask students how they would prevent the
ice crystal defect. One approach would be to
ii. Appraisal costs − Are incurred to identify
defective products before the products are
shipped to customers.
Helpful Hint: Continuing the ice cream example, ask
students how they would “inspect out” the ice crystal
problem. This may be more difficult and expensive than
Helpful Hint: Continuing with the ice cream example,
ask students to identify examples of internal and
external failure costs. Internal failure costs could result
from throwing away defective ice cream. External
failure costs could result from customers returning
defective ice cream or failing to purchase the ice cream
company’s product at a later date.
v. Examples of each type of quality cost include:
1. Prevention − Quality training, quality
circles, statistical process control activities,
etc.
vi. Distribution of quality costs − Graphs are
often used to depict the relationship between
the four types of quality costs. The graph
illustrates four key concepts.
3. Companies reduce their total quality costs
by focusing their efforts on prevention and
appraisal because the cost savings from
reduced defects usually overwhelm the costs
of additional prevention and appraisal.
4. Total quality costs are minimized when the
quality of conformance is less than 100%.
This is a debatable point in the sense that
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C. Quality cost report − This report details the prevention,
appraisal, internal failure, and external failure costs that
arise from a company’s current quality control efforts.
ii. Quality cost reports can also be prepared in
graphic form. Managers should still look for
the same two trends whether the data are
presented in a graphic or table format.
iii. Uses of quality cost information:
1. It helps managers see the financial
significance of defects.
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iv. Limitations of quality cost information
1. Simply measuring and reporting quality cost
problems does not solve quality problems.
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2. Results usually lag behind quality
improvement programs. Initially,
VII. International aspects of quality
A. The International Organization for Standardization,
based in Geneva Switzerland, has established quality
control guidelines, known as the ISO 9000 standards.
For a company to become ISO 9000 certified by a
certifying agency, it must demonstrate that:
iii. The intended level of quality is being
achieved on a sustained basis.