Académique Documents
Professionnel Documents
Culture Documents
2-2
Learning Objective 1
McGraw-Hill/Irwin
2-3
Product Costs Related to the purchase or manufacture of goods for resale. Assigned to inventory and cost of goods sold.
McGraw-Hill/Irwin
Period Costs Related to selling and administrative operations. Recognized as expenses in the same time period.
2-4
Learning Objective 3
McGraw-Hill/Irwin
2-5
Have no inventories.
McGraw-Hill/Irwin
2-6
Manufacturing Companies
The 3 major categories of manufacturing costs:
Manufacturing Overhead
Indirect material Indirect labor Other overhead
Direct Materials Raw materials, components, and other parts that can be traced to a specific product.
McGraw-Hill/Irwin
Direct Labor Payments and benefits for those employees who convert direct materials into finished product.
2-7
Manufacturing Companies
Prime Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead
McGraw-Hill/Irwin
2-8
Manufacturing Companies
Conversion Costs include:
Direct Materials
Direct Labor
Manufacturing Overhead
McGraw-Hill/Irwin
2-9
Less:
= Less: =
= Less:
McGraw-Hill/Irwin
2-10
Add: =
Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw material on hand. Axels purchase and transfers to the production floor are indicated below.
Date Feb 3 Feb 10 Feb 15 Feb 20 Feb 22 Feb 27 Cost of Purchases $ 8,000 12,000 14,000 9,000 16,000
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Less:
2-11
Add: = Less: =
Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw material on hand. Axels purchase and transfers to the production floor are indicated below.
Date Feb 3 Feb 10 Feb 15 Feb 20 Feb 22 Feb 27 Cost of Purchases $ 8,000 12,000 14,000 9,000 16,000
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-12
Add: = Less: =
Add:
Less:
On February 1, Axel had WIP of $30,000 on the factory floor. During February, Axel paid $92,000 in direct labor wages. Overhead is applied at 150% of direct labor. On 2/28, $22,000 is still in WIP.
2-13
Add:
= Less: =
On February 1, Axel had WIP of $30,000 on the factory floor. During February, Axel paid $92,000 in direct labor wages. Overhead is applied at 150% of direct labor. On 2/28, $22,000 is still in WIP.
2-14
Add: = Less: =
Add:
= Less: =
Add:
= Less: =
Finished Goods Beg. Inventory Cost of Goods Completed and Transferred from WIP Goods Available for Sale Cost of Goods Sold Ending Inventory
On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed $96,000 in Finished Goods still on hand. What was Cost of Goods Sold for February?
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-15
Stages of Production and the Flow of Costs - Example Cost of goods sold
Add: = Less: = Raw Materials $15,000 43,000 $58,000 45,000 $13,000
Add:
= Less: =
Add: = Less: =
On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed $96,000 in Finished Goods still on hand. What was Cost of Goods Sold for February?
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-16
Learning Objective 2
McGraw-Hill/Irwin
2-17
McGraw-Hill/Irwin
2-18
2-19
Schedule of Cost of Goods Computation of Cost of Raw Material Used Raw-material inventory, January 1 $ Manufactured Add: Purchases of raw materials
Raw material available for use Deduct: Raw material inventory, December 31 Raw material used
$ 850,000
CollegePak Company Schedule of Cost of Goods Manufactured Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured
McGraw-Hill/Irwin
2-20
2-21
2-22
2-23
McGraw-Hill/Irwin
2-24
CollegePak Company Income Statement For the Year Ended December 31, 20X2 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Operating profit before taxes
McGraw-Hill/Irwin
2-25
Income Statement Cost of goods sold $ 2,810,000 For the Year Ended December 31, 20X2 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Operating profit before taxes
McGraw-Hill/Irwin
2-26
A service provider cannot inventory its services. The costs of providing the service can be identified and measured, just as occurs in manufacturing industries. Managing and tracking the costs associated with valuechain activities can point to opportunities for improvement.
McGraw-Hill/Irwin
2-27
Cost Drivers
An activity is any discrete task that an organization undertakes to make or deliver a good or service. A cost driver is some characteristic of the activity that causes costs to be incurred.
McGraw-Hill/Irwin
2-28
Learning Objective 4
McGraw-Hill/Irwin
2-29
Cost Behavior
Cost behavior means how a cost will react to changes in the level of business activity.
Total variable costs change when activity level changes. Total fixed costs remain unchanged when activity level changes.
McGraw-Hill/Irwin
2-30
Minutes Talked
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-31
Minutes Talked
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-32
2-33
2-34
Fixed
McGraw-Hill/Irwin
2-35
Cost Hierarchy
Unit-level Costs
Directly traceable to the decision to produce the level of output
Costs that are incurred for every unit of product manufactured or service produced.
Includes direct material, direct labor, utilities to run equipment, other overhead directly related to the production process. All unit level costs are variable, but not all variable costs are unit level costs.
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-36
Cost Hierarchy
Batch-level Costs
Costs that are incurred for batch of product manufactured or service produced.
Includes setup costs, material-handling costs related to delivering raw material to the production line, etc.
McGraw-Hill/Irwin
2-37
Cost Hierarchy
Product-level Costs
Costs that are incurred for each line of product or service.
Includes design costs for product lines and marketing costs for each product line.
McGraw-Hill/Irwin
2-38
Cost Hierarchy
Facility-level Costs
Costs that are incurred to maintain the organizations overall facility and infrastructure.
Includes production managers salary, plant depreciation, and insurance on the facility and equipment.
McGraw-Hill/Irwin
2-39
Learning Objective 5
McGraw-Hill/Irwin
2-40
Discretionary
Easier to alter in the short term by current managerial decisions.
2-41
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
McGraw-Hill/Irwin
2-42
Sunk Costs
Past payments for resources that cannot be changed by any current or future decision.
McGraw-Hill/Irwin
2-43
Traceability of Resources
Direct Costs
Indirect Costs
Costs that can be traced easily and conveniently to a product or department. Example: Cost of paint in the paint department of an automobile assembly plant.
Costs that need to be allocated, before they can be assigned to a product or department. Example: Cost of national advertising for an airline is indirect to a given flight or route.
McGraw-Hill/Irwin
2-44
Learning Objective 6
McGraw-Hill/Irwin
2-45
2-46
Variable Costing
A system of cost accounting that assigns only the variable cost of production to products.
2-47
Learning Objective 7
McGraw-Hill/Irwin
2-48
Product costs
Product costs
McGraw-Hill/Irwin
2-49
McGraw-Hill/Irwin
2-50
McGraw-Hill/Irwin
2-51
Selling and administrative expenses are always treated as period expenses and deducted from revenue as they are incurred.
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-52
$ 1,120,000
532,000 588,000
362,000 226,000
2-53
Variable Costing
$ 1,120,000
460,000 212,000
2-54
$ 24,000 $ 24,000
210,000 $ 210,000
McGraw-Hill/Irwin
2-55
Reconciling Income
We can reconcile the difference between absorption and variable net income as follows:
Variable costing net income Add: Fixed mfg. overhead costs deferred in inventory (2,000 units $7 per unit) Absorption costing net income
$ 212,000
14,000 $ 226,000
2-56
McGraw-Hill/Irwin
2-57
McGraw-Hill/Irwin
2-58
2-59
608,000 672,000
378,000 294,000
2-60
460,000 308,000
McGraw-Hill/Irwin
2-61
Summary
Income Comparison
Costing Method Absorption Variable 1st Period $ 226,000 212,000 2nd Period $ 294,000 308,000 Total $ 520,000 520,000
In the first period, production (30,000 units) was greater than sales (28,000). In the second period, production (30,000 units) was less than sales (32,000). For the two-year period, total absorption income and total variable income are the same.
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-62
Summary
McGraw-Hill/Irwin
2-63
Learning Objective 8
McGraw-Hill/Irwin
2-64
Fixed costs are not really the costs of any particular product.
Absorption Costing
McGraw-Hill/Irwin
Variable Costing
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-65
These are capacity costs and will be incurred even if nothing is produced.
Absorption Costing
McGraw-Hill/Irwin
Variable Costing
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-66
Variable Costing
McGraw-Hill/Irwin
Absorption Costing
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-67
Units Total Variable Produced Cost 10,000 $100,000 12,000 $120,000 14,000 $140,000 16,000 $160,000 18,000 $180,000 20,000 $200,000
McGraw-Hill/Irwin
Fixed Total Average Manufacturing Manufacturing Manufacturing Overhead Cost Cost $100,000 $200,000 $ 20.00 $100,000 $220,000 $ 18.33 $100,000 $240,000 $ 17.14 $100,000 $260,000 $ 16.25 $100,000 $280,000 $ 15.56 $100,000 $300,000 $ 15.00
2-68
Absorption Costing Cost of goods sold decreases because production exceeds sales, leaving a portion of fixed manufacturing costs in inventory.
COGS
$150,000
$100,000
0 0 0 0 0 0 10 ,0 0 14 ,0 0 18 ,0 0 22 ,0 0 26 ,0 0 30 ,0 0 34 ,0 0 0
2-69
Throughput Costing
Unit-level spending for direct costs
Indirect, past or committed costs Unit-level costs are incurred every time a unit of product is manufactured and will not be incurred again until the next unit is manufactured.
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Product cost
2-70
Throughput Costing
Example In an automated process direct material may be the only unit-level cost and so is the only product cost. All other manufacturing costs are expensed as period costs. Incentive to overproduce is reduced Average unit cost does not vary with changes in production levels.
Advantages
McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
2-71
Learning Objective 9
McGraw-Hill/Irwin
2-72
Absorption costing: Excess inventory would include more fixed production costs, so that gross income for the period would be artificially higher. An unethical manager would have an incentive to produce for inventory at the end of a period, in order to obtain a better looking bottom line. Throughput costing: No such incentive would exist, since fixed production costs would be charged against operating income for the period.
McGraw-Hill/Irwin
2-73
End of Chapter 2
McGraw-Hill/Irwin