Aussie Pies (A)

1. Aussie Pies (A)

2. Cost Classifications

3. Cost Classifications • External reporting • Predicting cost behavior • Assigning costs to cost objects • Decision making

4. Cost Classifications • External reporting • Product vs. period costs • Predicting cost behavior • Variable vs. fixed costs • Assigning costs to cost objects • Direct vs. indirect costs • Decision making • Relevant vs. irrelevant costs

5. Let’s define all of the costs mentioned in the case.Who can give me one cost mentioned in the case?

6. Aussie Pies’ Costs • Ingredients • Utilities for cooking • Utilities for lighting the store • Pie boxes • Rent on store • Rent on cooking equipment • Rent on fixtures • Chefs salaries • Sales assistant salary

7. Let’s start by looking at these costs from an external reporting perspective.

8. Cracker Barrel

9. The Cheesecake Factory

10. The Cheesecake Factory

11. Cost Classification Summary

12. Product vs. Period Costs(external reporting)

13. Product vs. Period Costs(external Reporting)

14. What are the profit implications of treating a cost such as utilities for cooking as a period cost rather than a product cost?

15. Product Costs(excluding raw materials inventory) Product Costs (excluding raw materials) Period Costs Ending work in process inventory or ending finished goods inventory Cost of goods sold Selling & Admin. expense Balance Sheet Income Statement

16. Does a restaurant have work in process or finished goods inventory?

17. A Matching Perspective • Why not include the rental cost of cooking equipment in COGS?

18. A Matching Perspective • Why not include the rental cost of cooking equipment in COGS? • A manufacturer treats manufacturing equipment depreciation as a product cost because some units may be produced in the current period but not sold until a later period.

19. A Matching Perspective • Why not include the rental cost of cooking equipment in COGS? • A manufacturer treats manufacturing equipment depreciation as a product cost because some units may be produced in the current period but not sold until a later period. • A software developer incurs costs to develop products that will be sold in a later period. • So in these two instances there is a need to match costs with revenues.

20. A Matching Perspective • Why not include the rental cost of cooking equipment in COGS? • A manufacturer includes equipment depreciation in product cost because some units may be produced in the current period but not sold until a later period. • A software developer incurs costs to develop products that will be sold in a later period. • So in these two instances there is a need to match costs with revenues. • There is no such matching concern with a restaurant. Furthermore, cost of goods sold is more useful if not confounded with various non-food costs.

21. From an external reporting perspective, what would be Aussie Pie’s unit product cost?

22. Unit Product Cost

23. Unit Product Cost

24. Let’s look at Aussie Pies’ costs from a cost behavior standpoint.

25. Variable vs. Fixed Costs

26. Variable vs. Fixed Costs

27. What are Aussie Pie’s fixed cost per month?

28. Fixed Costs

29. Fixed Costs

30. What are Aussie Pie’s variable costs per pie?

31. Variable Costs

32. Cost Behavior

33. Cost Behavior

34. Cost Behavior

35. Cost Behavior

36. Cost Behavior

37. Cost Behavior

38. Let’s look at the topic of assigning costs to cost objects.

39. Direct vs. Indirect Costs • If Aussie Pies eventually opened a second store and hired two additional chefs for that store, then what would be the direct and indirect costs with respect to a specific store?

40. Direct vs. Indirect Costs

41. Direct vs. Indirect Costs

42. Let’s look at the topic of cost classifications for decision making.

43. Relevant vs. Irrelevant Costs • Assume the Aussie Pies’ owners claimed that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie.

44. Relevant vs. Irrelevant Costs • Assume the Aussie Pies’ owners claimed that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie. • Assume that Aussie Pies turned down a corporate client that wanted to buy 1,000 pies at $2.00 each because the price was below $2.25 per pie. • Comment on the wisdom of this decision.

45. Relevant vs. Irrelevant Costs • Assume the Aussie Pies’ owners claimed that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie. • Assume that Aussie Pies turned down a corporate client that wanted to buy 1,000 pies at $2.00 each because the price was below $2.25 per pie. • Comment on the wisdom of this decision. • Does the concept of “opportunity cost” affect your answer?

46. Relevant vs. Irrelevant Costs • If Aussie Pies is considering staying open 2 additional hours everyday, what costs on the next slide would be potentially relevant to this decision?

47. Relevant vs. Irrelevant Costs

48. Relevant vs. Irrelevant Costs Assumes that Chefs would demand an increase in salary to work two extra hours everyday.

49. Cost Classification Summary

50. Let’s take a closer look at the value of understanding cost behavior.