202 Ch 2 S08 S

202 Ch 2 S08 S - ACC 202 Intro to Management Accounting...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ACC 202 Intro to Management Accounting Chapter 2: Cost Terms, Concepts and Classifications obj 1 Learning Objectives 3 manufacturing cost categories Product costs & period costs Variable costs & fixed costs Cost of goods manufactured (COGM) Direct costs & indirect costs Differential costs, opportunity costs & sunk costs 4 types of quality costs Direct Materials (DM) Manufacturing Costs Direct Labor (DL) Become an integral part of the finished product and can be physically & conveniently traced to it Labor costs that can be easily traced to individual units of product All manufacturing costs other than direct materials and direct labor Manufacturing Overhead (MOH) Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Product & Period Costs Product Costs Period Costs All costs involved in acquiring or making a product Direct materials, direct labor, MOH Inventoriable costs Expensed as COGS & matched against revenue All costs that are not product costs Expensed as incurred Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? (There may be more than one correct answer.) A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions. Inventory Accounts for a Manufacturer Raw Materials (RM) Work in Process (WIP) Materials used to make a product Units of product partially complete that require further work before sale Completed products not yet sold to customers Finished Goods (FG) Balance Sheet Merchandiser Current assets Cash Receivables Prepaid Expenses Merchandise Manufacturer Current Assets x Cash x Receivables x Prepaid Expenses x Inventories Raw Materials Work in Process Finished Goods Inventory Balance Sheet Merchandiser Current assets Cash Receivables Prepaid Expenses Partially complete Merchandise products some Inventory material, labor, or overhead has been added. Manufacturer Current Assets x Cash x Receivables Materials waiting to x Prepaid Expenses be processed. x Inventories Raw Materials Work in Process Finished Goods Completed products awaiting sale. Cost of Goods Manufactured Beginning finished goods inventory Add: Cost of goods manufactured Cost of goods available for sale Less: Ending inventory Cost of goods sold How do you derive COGM? Product Cost Flows Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials Work In Process + = = As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs + = = Conversion costs are costs incurred to convert the direct material into a finished product. Work In Process Product Cost Flows Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs Work In Process Beginning work in process inventory + Total manufacturing costs = Total work in process for the period + = = All manufacturing costs incurred during the period are added to the beginning balance of work in process. Product Cost Flows Raw Materials Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs Work In Process Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured + = Costs associated with the goods that are completed during the period are transferred to finished goods inventory. = Product Cost Flows Manufacturing Cost Flows Costs Material Purchases Direct Labor Manufacturing Overhead Balance Sheet Inventories Raw Materials Work in Process Finished Goods Income Statement Expenses Cost of Goods Sold Selling and Administrative Selling and Administrative Period Costs Quick Check Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A. $1,160,000 B. $ 910,000 C. $ 760,000 D. Cannot be determined. Variable & Fixed Costs Variable Costs (VC) Fixed Costs (FC) Vary, in total, in direct proportion to changes in the level of activity. Remain constant, in total, regardless of changes in the level of activity. Range of activity within which these assumptions about variable & fixed costs are valid. Relevant Range Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) 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. Average fixed cost per unit goes down as activity level goes up. Fixed Quick Check Which of the following costs would be variable with respect to the number of cones sold at a Ben & Jerry's shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers. Direct & Indirect Costs Direct Costs Indirect Costs can be easily & conveniently traced to a particular cost object cannot be easily & conveniently traced to a particular cost object Anything for which cost data are desired (products, jobs, cost units) Cost Object Cost Classifications for Decision Making Every decision involves a choice between at least two alternatives. between alternatives are relevant in a decision. All other costs and benefits can and should be ignored. Only those costs and benefits that differ Differential Costs & Revenues Costs and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 $1,500 = $500 Differential cost is: $300 Opportunity Costs The potential benefit given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000. Sunk Costs Costs that have already been incurred and cannot be changed. They should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost. Additional Labor Costs Idle Time Results from machine breakdowns, power failures, material shortages Treat as MOH to spread across production Overtime Premium Amount in excess of regular pay rate is treated as MOH for direct & indirect labor Labor Fringe Benefits Insurance, retirement, employer's payroll taxes Either treated as MOH for all labor, or a direct labor cost for portion related to DL High Quality of Conformance Cost of Quality Quality Costs A product that meets it's design specifications and is free of defects All costs incurred to prevent defects or that result from product defects Prevention costs Appraisal costs Internal failure costs External failure costs Prevention & Appraisal Costs Prevention Costs The cost of activities to reduce the number of defects Appraisal Costs Costs incurred to identify defective products before shipment to customers Internal & External Failure Costs Internal Failure Costs Incurred after identifying defects & before products are shipped External Failure Costs Incurred as a result of defective products being delivered to customers Examples of Quality Costs Prevention Costs Quality training Quality circles Statistical process control activities Appraisal Costs Testing & inspecting incoming materials Final product testing Depreciation of testing equipment External Failure Costs Cost of field servicing & handling complaints Warranty repairs Lost sales Internal Failure Costs Scrap Spoilage Rework Distribution of Quality Costs When quality of conformance is low, total quality cost is high and consists mostly of internal and external failure. Companies can reduce their total quality cost by focusing focus on prevention and appraisal. The cost savings from reduced defects usually swamps the costs of the additional prevention and appraisal efforts. ISO 9000 Standards ISO 9000 standards have become an international measure of quality. To become ISO 9000 certified, a company must demonstrate: 1. A quality control system is in use, and the system clearly defines an expected level of quality. 2. The system is fully operational and is backed up with detailed documentation of quality control procedures. 3. The intended level of quality is being achieved on a sustained basis. ...
View Full Document

This note was uploaded on 08/25/2008 for the course ACC 202 taught by Professor Woollen during the Spring '08 term at Hawaii.

Ask a homework question - tutors are online