Académique Documents
Professionnel Documents
Culture Documents
McGraw-Hill/Irwin
Process of Management
Strategy Formulation
Planning
Directing
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Period costs are costs that are expensed during the time period in which they are incurred.
Expenses are the consumption of assets for the purpose of generating revenue.
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Operating expenses
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Manufacturer
Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials Work in Process Finished Goods
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Manufacturer
Current Assets
Cash Those materials waiting to be Receivables processed. Prepaid Expenses Inventories
Raw Materials Work in Process Finished Goods
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Manufacturer
products material to Cash which some labor Receivables and/or overhead has been added. Prepaid Expenses Inventories
Raw Materials Work in Process Finished Goods
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Manufacturer
Current Assets
Cash Receivables Completed products awaiting sale. Prepaid Expenses Inventories
Raw Materials Work in Process Finished Goods
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Manufacturing Costs
Direct Labor Direct Material Manufacturing Overhead
The Product
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Direct Material
Cost of raw material that is used to make, and can be conveniently traced, to the finished product.
Example: Steel used to manufacture the automobile.
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Direct Labor
Cost of salaries, wages, and fringe benefits for personnel who work directly on manufactured products.
Example: Wages paid to an automobile assembly worker.
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Manufacturing Overhead
All other manufacturing costs
Indirect Material Indirect Labor Other Costs
Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.
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Manufacturing Overhead
All other manufacturing costs
Indirect Material Indirect Labor Other Costs
Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards.
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Manufacturing Overhead
All other manufacturing costs
Indirect Material Indirect Labor Other Costs
Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.
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Prime Cost
Conversion Cost
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Exh. 2-7
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Exh. 2-7
$ 134,980
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 $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000
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Exh. 2-7
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Exh. 2-7
Utilities 15,000 Comet Computer Corporation Insuranceof Cost of Goods Manufactured 5,000 Schedule Total manufacturing overhead $ 230,000
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
$ $ $
Exh. 2-9
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Exh. 2-9
Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets Comet Computer Corporation section of the balance sheet. 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 $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000
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Exh. 2-7
Comet Computer Corporation Income Statement For the Year Ended December 31, 20X2 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income tax expense Net income $ $ $ $ 700,000 415,010 284,990 174,490 110,500 30,000 80,500
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Exh. 2-7
Cost of goods available for sale Comet Computer Corporation Deduct Finished-goods inventory, Dec. 31 Cost of goods sold
Income Statement $ 415,010 For the Year Ended December 31, 20X2 $ $ $ $
Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income tax expense Net income
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Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.
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Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Cost Classifications
Summary of Variable and Fixed Cost Behavior
Cost Variable In Total Total variable cost changes as activity level changes. Total fixed cost remains the same even when the activity level changes. Per Unit Variable cost per unit remains the same over wide ranges of activity. Fixed cost per unit goes down as activity level goes up.
Fixed
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Indirect costs
Costs that must be allocated in order to be assigned to a product or department. Example: cost of national advertising for an airline is indirect to a particular flight.
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Tracing costs directly to departments or products helps to identify and eliminate non-value added costs.
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Cost of food used Restaurant in a restaurant manager Cost of national advertising by a restaurant chain Restaurant manager
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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 Rs10,00,000 per year. Your opportunity cost of attending college for one year is Rs10.00,000.
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Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost Rs 5,00,000 two years ago. The Rs 5,00,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the Rs 5,00,000 cost.
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Differential Costs
Costs that differ between alternatives.
Example: You can earn Rs15,000 per month in your hometown or Rs20,000 per month in a nearby city. Your commuting costs are Rs500 per month in your hometown and Rs 3000 per month to the city.
What is your differential cost? Rs3000 - Rs500 = Rs2500
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Marginal and average costs are largely a function of cost behavior -- variable and fixed costs.
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Costs
Benefits
More information does not mean more benefits if information overload results.
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