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Page 2-1
Period
Prime Cost = DL + DM
Conversion Cost = DL + MOH
Exhibit 2-1 page 28 (Summary of Cost Terms)
BALANCE SHEET Inventory (Product)
Raw Materials
Work in Process
Finished Goods
INCOME STATEMENTCost of Goods sold (Product) or Operating expenses
(Period)
Chapter 2
Page 2-2
Chapter 2
Page 2-3
Discretionar
y
Depreciation on building
Research
Long term equipment lease
Pension payments to the companys
retirees
Management development and
training
Data Points
X
1
100
250
500
1000
Y
$500
$500
$500
$500
$500
Per
Guest
Page 2-4
Data Points
$25
0
$0
1
500
100
250
1000
# of guests
1
500
100
250
1000
# of guests
X
1
100
250
500
1000
Y
$30
$3,000
$7,500
$15,00
0
$30,00
0
Per
Guest
$5
0
$4
0
$3
0
$2
0
$1
0
$0
1
1000
100
250
500
1
100
1000
250
500
# of guests
# of guests
Page 2-5
Chapter 2
Page 2-6
Total Cost
High
Low
Change
Variable costs
=
Change in Cost
Change in
activity
Step 2: Determine FC
Step 3: Determine Equation of the cost line:
Step 4: Solve for any level of X (within the relevant range)
Practice:
Espresso Cafe operates a number of Espresso Coffee stands in
busy suburban malls. Following are the costs for two weeks (total cost per week
and average cost per cup).
1.
Why does
the
cost per
week change? And why does the cost per cup of coffee served change?
2.
3.
4.
5.
Chapter 2
Page 2-7
Practice
The Lakeshore Hotels guest-days of occupancy and custodial supplies
expenses over the last few months were:
Month
Guest-Days of
Custodial Supplies
Occupancy
Expense
March
7,000
$8,400
April
6,500
$7,945
May
8,000
$9,520
June
10,500
$12,000
July
12,000
$13,500
Guest-days are a measure of the overall activity at the hotel. For example, a
guest who stays at the hotel for three days is counted as three guest-days.
1.
2.
Using the high-low method, determine the fixed cost for Custodial
Supplies Expense.
3.
4.
Practice
Corp XYZ has the following costs; determine which are fixed, variable or
mixed:
Total cost
Expe
4,000
5,000
Cost
Comment
nse
units
units
Type
1
$240,00 $300,00
0
0
2
$21,000 $21,000
Chapter 2
Page 2-8
3
4
5
$34,000
$78,000
$12,000
$42,000
$89,000
$15,000
ABC, Inc.
Contribution Income Statement
For the Month Ended Augusts 31st
Per
Total
Unit
Sales
Less
Variable
Expenses
Contribution
Margin
Less
Fixed
Expenses
Net
Operating
Income
Page 2-9
Chapter 2
Page 2-10
Per Unit
Sales
Less Variable Expenses (both product &
period)
Contribution Margin
Less Fixed Expenses
Net operating income
If sales increase 1 unit, how much will net operating income increase?
Practice
PARK Company manufactures and sells a single product.
A partially
completed schedule of the companys total and per unit costs over a relevant
range of 60,000 to 100,000 units produced and sold each year is given
below:
Units Produced and
60,000
100,000
Sold
units
units
Total Costs:
Variable costs
$150,000
Fixed costs
360,000
Total costs
$510,000
Cost per unit:
Variable cost
Fixed cost
Total cost per unit
1. Complete the above schedule of the companys total and unit costs.
2. Assume the company produces and sells 90,000 units during the year at
the selling price of $7.50 per unit. Prepare a contribution format income
statement for the year.
Total
Per Unit
Sales
Less Variable Expenses
Contribution Margin
Less Fixed Expenses
Net operating income
ASSIGNING COSTS TO COST OBJECTS
Cost object is anything that management wants to get cost data on
Chapter 2
Page 2-11
Direct Costs
-easily and conveniently traced
Indirect Costs
-cannot be easily and conveniently traced
Common costa cost incurred to support a number of cost objects but
cannot be directly traced to any of them individually.
Practice
Northwest Hospital is a full-service hospital that provides everything from
major surgery and emergency room care to outpatient clinics. For each cost
incurred at Northwest indicate whether it would most likely be a direct cost
or indirect cost to the specified cost object.
Direct Indirec
Cost
Costing object
Cost
t Cost
1 The wages of pediatric
The pediatric department
.
nurses
2 Prescription drugs
A particular patient
.
3 Heating the hospital
The pediatric department
.
4 The salary of the head of
The pediatric department
.
pediatrics
5 The salary of the head of
A particular pediatric
.
pediatrics
patient
COST CLASSIFICATIONS FOR DECISION MAKING
Differential Cost and Revenue
(incremental or decremental)
Marginal cost concept (marginal cost/marginal revenue)
Differential cost can be either fixed or variable.
Opportunity Cost
Opportunity cost is the potential benefit that is given up when one
alternative is selected over another. (Examples on pages 45-46)
Sunk Cost
A cost that has already been incurred and cannot be changed.
Chapter 2
Page 2-12