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Unformatted text preview: CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 21 A cost object is anyt hing for which a separate measurement of costs is desired. Examples include a product, a service, a pro ject, a customer, a brand category, an act ivit y, and a department. 22 Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (costeffective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an econo mically feasible (costeffect ive) way. Cost assignment is a general term that enco mpasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a cost object. 23 Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allo cated costs. When costs are allo cated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisio ns. 24 Factors affecting the classificat ion of a cost as direct or indirect include · the materialit y of the cost in quest ion, · available informat iongathering techno logy, · design of operations 25 A variable cost changes in total in proportion to changes in the related level of total activit y or volume. An example is a sales co mmission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given t ime period, despite wide changes in the related level o f total activit y or volume. An example is the leasing cost of a machine that is unchanged for a given t ime period (such as a year) regardless of the number o f units o f product produced on the machine. 26 A cost driver is a variable, such as the level of activit y or volume, that causally affects total costs over a given t ime span. A change in the cost driver results in a change in the level of total costs. For example, the number o f vehicles assembled is a driver o f the costs of steering wheels on a motorvehicle assembly line. 27 The relevant range is the band of normal act ivit y level or vo lume in which there is a specific relationship between the level o f activit y or volume and the cost in quest ion. Costs are described as variable or fixed with respect to a particular relevant range. 28 A unit cost is co mputed by dividing so me amount of total costs (the numerator) by the related number of unit s (the deno minator). In many cases, the numerator will include a fixed cost that will not change despite changes in the deno minator. It is erroneous in those cases to mult iply the unit cost by act ivit y or volume change to predict changes in total costs at different activit y or vo lume levels. 21 29 Manufacturingsector companies purchase materials and components and convert the m into various finished goods, for example automotive and textile co mpanies. Merchandisingsector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribut ion. Servicesector companies provide services or intangible products to their customers, for example, legal advice or audits. 210 Manufacturing co mpanies t ypically have one or more of the fo llowing three types o f inventory: 1. Direct materials inventory. Direct materials in stock and await ing use in the manufacturing process. 2. Workinprocess inventory. Goods partially worked on but not yet completed. Also called work in progress. 3. Finished goods inventory. Goods completed but not yet sold. 211 Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is so ld. These costs are included in workinprocess and finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets. Period costs are all costs in the inco me statement other than cost of goods sold. These costs are treated as expenses o f the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not suffic ient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 212 No. Service sector companies have no inventories and, hence, no inventoriable costs. 213 Direct material costs are the acquisit io n costs of all materials that eventually beco me part of the cost object (work in process and then finished goods), and can be traced to the cost object in an economically feasible way. Direct manufacturing labor costs include the compensation o f all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an econo mically feasible way. Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in process and then finished goods), but cannot be traced to that cost object in an economically feasible way. Prime costs are all direct manufacturing costs (direct material and direct manufacturing labor). Conversion costs are all manufacturing costs other than direct material costs. 214 Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straighttime wage rates. Idle time is a subclassificat ion of indirect labor that represents wages paid for unproductive t ime caused by lack o f orders, machine breakdowns, material shortages, poor scheduling, and the like. 22 215 A product cost is the sum o f the costs assigned to a product for a specific purpose. Purposes for comput ing a product cost include · pr icing and product mix decisio ns, · contracting with government agencies, and · prepar ing financial statements for external reporting under generally accepted accounting principles. 216 (15 min.) Computing and interpreting manufacturing unit costs. 1. Direct material cost Direct manuf. labor costs Indirect manuf. costs Total manuf. costs Fixed costs allocated at a rate of $20M ¸ $50M (dir ect mfg. labor) equal to $0.40 per dir. manuf. labor dollar (0.40 ´ $14; 28; 8) Variable costs Units produced (millions) Cost per unit (Total ma nuf. costs ÷ units produced) Variable manuf. cost per unit (Variable manuf. costs ¸ Units produced) Supreme $ 84.00 14.00 42.00 $140.00 (in millions) Deluxe $ 54.00 28.00 84.00 $166.00 Regular $ 62.00 8.00 24.00 $ 94.00 Total $200.00 50.00 150.00 $400.00 5.60 $134.40 80 $1.7500 11.20 $154.80 120 $1.3833 3.20 $ 90.80 100 $0.9400 20.00 $380.00 $1.6800 $1.2900 (in millions) Deluxe $0.9080 Supreme Regular Total 2. Based on total ma nuf. cost per unit ($1.75 ´ 120; $1.3833 ´ 160; $0.94 ´ 180) Correct total ma nuf. costs based on variable manuf. costs plus fixed costs equal Variable costs ($1.68 ´ 120; $1.29 ´ 160; $0.908 ´ 180) Fixed costs Total costs $210.00 $221.33 $169.20 $600.53 $201.60 $206.40 $163.44 $571.44 20.00 $591.44 The total manufacturing cost per unit in requirement 1 includes $20 millio n of indirect manufacturing costs that are fixed irrespect ive o f changes in the vo lume o f output per month, while the remaining variable indirect manufacturing costs change wit h the production vo lume. Given the unit vo lume changes for August 2008, the use of total manufacturing cost per unit fro m the past month at a different unit vo lume level (both in aggregate and at the individua l product level) will yield incorrect estimates of total costs of $600.53 millio n in August 2008 relat ive to the correct total manufacturing costs of $591.44 millio n calculated using variable manufacturing cost per unit times unit s produced plus the fixed costs of $20 millio n. 23 217 (15 min.) Direct, indirect, fixed and variable costs. 1. Clay – Direct, variable Paint direct, variable Packaging materials –direct (or could be indirect if small and not traced to each unit), variable Depreciat ion on machinery and mo lds –indirect, fixed (unless “units of output” depreciation, which then would be variable) Rent on factory – indirect, fixed Insurance on factory –indirect, fixed Factory utilit ies – indirect, probably some variable and so me fixed (e.g. electricit y may be variable but heat ing costs may be fixed) Painters – direct, variable Paint ing Department manager –indirect, fixed Baking Depart ment manager – indirect, fixed Materials handlers –depends on how they are paid. Most likely indirect fixed if salaried Custodian –indirect, fixed Night guard –indirect, fixed Machinist (running the baking machine) –depends on how they are paid. Most likely indirect fixed, if salaried Machine maintenance personnel – indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production Maintenance supplies – indirect, variable Cleaning supplies – indirect, most likely fixed since the custodians probably do the same amount of cleaning every night 2. If the cost object is Baking Department, then anyt hing direct ly associated with the Baking Department will be a direct cost. This will include: · depreciat ion on machinery and mo lds · Baking Depart ment manager · Materials handlers (of the Baking Department) · Machinist · Machine Maintenance personnel (of the Baking Department) · Maintenance supplies (of the Baking Department) Of course the clay will also be a direct cost of the Baking Depart ment, but it is already a direct cost of each kind of figurine produced. 24 218 (15–20 min.) Classification of costs, service sector. Cost object: Each individual focus group Cost variabilit y: Wit h respect to the number of focus groups There may be so me debate over classifications of individual items, especially wit h regard to cost variabilit y. Cost Item A B C D E F G H a D or I D I I I D I D I V or F V F a V F V F V b V Some students will note that phone call costs are variable when each call has a separate charge. It may be a fixed cost if Consumer Focus has a flat monthly charge for a line, irrespective of the amount of usage. b Gasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiple purposes, and detailed records may be required to examine how costs vary with changes in one of the many purposes served. 219 (15–20 min.) Classification of costs, merchandising sector. Cost object: Videos sold in video section of store Cost variabilit y: Wit h respect to changes in the number of videos so ld There may be so me debate over classifications of individual items, especially wit h regard to cost variabilit y. Cost Item A B C D E F G H D or I D I D D I I I D V or F F F V F F V F V 25 220 (15–20 min.) Classification of costs, manufacturing sector. Cost object: Type o f car assembled (Corolla or Geo Prism) Cost variabilit y: Wit h respect to changes in the number of cars assembled There may be so me debate over classifications of individual items, especially wit h regard to cost variabilit y. Cost Item A B C D E F G H D or I D I D D D I D I V or F V F F F V V V F 221 (20 min.) Variable costs, fixed costs, total costs. 1. Minutes/month Plan A ($/month) Plan B ($/month) Plan C ($/month) 0 0 16 20 50 100 150 200 250 300 350 400 4 8 12 16 20 24 28 32 16 16 16 16 16 16 18.50 21 20 20 20 20 20 20 20 20 450 36 23.50 20 480 500 550 600 650 38.40 40 44 48 52 25 26 28.50 31 33.50 20 20.80 22.80 24.80 26.80 50 40 Total Cost 30 20 10 0 0 100 200 300 400 500 600 Number of longdistance minutes Plan A Plan B Plan C 2. In each regio n, Co mpo chooses the plan that has the lowest cost. From the graph (or fro m calculat ions), we can see that if Co mpo expects to use 0–200 minutes of lo ngdistance each mo nth, she should buy Plan A; for 200–380 minutes, Plan B; and for over 380 minutes, Plan C. If Co mpo plans to make 100 minutes of lo ngdistance calls each mo nth, she should choose Plan A; for 300 minutes, choose Plan B; for 500 minutes, choose Plan C. 26 222 (15–20 min.) Variable costs and fixed costs. 1. Variable cost per ton of beach sand mined Subcontractor $ 80 per ton Government tax 50 per ton Total $130 per ton Fixed costs per month 0 to 100 tons of capacit y per day 101 to 200 tons of capacit y per day 201 to 300 tons of capacit y per day 2. To t a l Va ri ab l e C o st s Co s t s $ 30 0, 00 0 To t a l Fi x ed 2 ,5 00 5 ,0 00 $ 15 0, 00 0 $ 97 5,0 00 $ 45 0, 00 0 = = = $150,000 $300,000 $450,000 $ 65 0,0 00 $ 32 5,0 00 7 ,5 00 10 0 20 0 30 0 To n s Mi n e d To n s o f Cap aci t y p er D ay The concept of relevant range is potentially relevant for both graphs. However, the quest ion does not place restrict ions on the unit variable costs. The relevant range for the total fixed costs is fro m 0 to 100 tons; 101 to 200 tons; 201 to 300 tons, and so on. Within these ranges, the total fixed costs do not change in total. 3. Tons Mined Tons Mined Fixed Unit Variable Unit per Day per Month Cost per Ton Cost per Ton (1) (2) = (1) × 25 (3) = FC ÷ (2) (4) (a) 180 4,500 $300,000 ÷ 4,500 = $66.67 $130 (b) 220 5,500 $450,000 ÷ 5,500 = $81.82 $130 Total Unit Cost per Ton (5) = (3) + (4) $196.67 $211.82 The unit cost for 220 tons mined per day is $211.82, while for 180 tons it is only $196.67. This difference is caused by the fixed cost increment from 101 to 200 tons being spread over a n increment of 80 tons, while the fixed cost increment fro m 201 to 300 tons is spread over an increment of only 20 tons. 27 223 (20 min.) Variable costs, fixed costs, relevant range. 1. Since the production capacit y is 4,000 jaw breakers per month, the current annual relevant range of output is 0 to 4,000 jaw breakers × 12 months = 0 to 48,000 jaw breakers. 2. Current annual fixed manufacturing costs within the relevant range are $1,000 × 12 = $12,000 for rent and other overhead costs, plus $6,000 ÷ 10 = $600 for depreciat ion, totaling $12,600. The variable costs, the materials, are 10 cents per jaw breaker, or $3,600 ($0.10 per jaw breaker × 3,000 jaw breakers per month × 12 months) for the year. 3. If demand changes fro m 3,000 to 6,000 jaw breakers per month, or from 3,000 × 12 = 36,000 to 6,000 × 12 = 72,000 jaw breakers per year, Yumball will need a second machine. Assuming Yumball buys a second machine ident ical to the first machine, it will increase capacit y fro m 4,000 jaw breakers per month to 8,000. The annual relevant range will be between 4,000 × 12 = 48,000 and 8,000 × 12 = 96,000 jaw breakers. Assume the second machine costs $6,000 and is depreciated using straightline depreciation over 10 years and zero residual value, just like the first machine. This will add $600 of depreciat ion per year. Fixed costs for next year will increase to $13,200, $12,600 from the current year + $600 (because rent and other fixed overhead costs will remain the same at $12,000). That is, total fixed costs for next year equal $600 (depreciat ion on first machine) + $600 (depreciat ion on second machine) + $12,000 (rent and other fixed overhead costs). The variable cost per jaw breaker next year will be 90% × $0.10 = $0.09. Total variable costs equal $0.09 per jaw breaker × 72,000 jaw breakers = $6,480. 28 224 (20 min.) Cost drivers and value chain. 1. Ident ify the customer need (what do facult y and students want in a book?) – Product development Find an author – Product development Market the book to facult y – Marketing Author writes book – Product development Process orders from bookstores – Distribut ion Editor edits book – Product development Receive unso ld copies of book from bookstore – Distribut ion Author rewrites book– Product development Provide online assistance to facult y and students (study guides, test banks, etc.) – Customer service Print and bind the books – Production Deliver the book to bookstores – Distribut ion 2. Value Chain Category Activity Product Ident ify the customer need Development Find an author Author writes book Editor edits book Author rewrites book Print and bind the books Market the book to facult y Production Marketing Distribut ion Process orders from bookstores Deliver the book to bookstores Receive unso ld copies of book fro m bookstores Provide online assistance to facult y and students Cost driver Number of schools the marketing representative visit s to discuss book ideas Number of potential authors interviewed Number of pages of text Amount paid to the author (direct labor cost as cost driver) Number of changes editor makes Number of pages of text Number of times author must do rewrites Machine hours for running the pr int ing and binding equipment Number of schools the marketing representative visit s to market the book Hours spent with prospective customers to sell the book Number of deliveries made to bookstores Number of schools that adopt the new book Number of books ordered by bookstores (Note: Number of purchase orders would be a better driver, but it is not on the list of activit ies.) Number of deliveries made to bookstores Number of unso ld books sent back from bookstores Number of facult y that adopt the new book Number of books ordered by bookstores (probably net of number of unsold books sent back fro m bookstores) Customer service 29 225 (10–15 min.) Cost drivers and functions. 1. Function 1. Account ing 2. Human Resources 3. Data processing 4. Research and development 5. Purchasing 6. Distribut ion 7. Billing 2. Function 1. Account ing 2. Human Resources 3. Data Processing 4. Research and Development 5. Purchasing 6. Distribut ion 7. Billing Representative Cost Driver Number of journal entries made Salaries and wages o f emplo yees Number of co mputer transact ions Number of new products being developed Number of different types of materials purchased Distance traveled to make deliveries Number of credit sales transact ions Representative Cost Driver Number of transact ions processed Number of emplo yees Hours of computer processing unit (CPU) Number of research scient ists Number of purchase orders Number of deliveries made Number of invo ices sent 210 226 (20 min.) Total costs and unit costs 1. Number of attendees 0 Variable cost per person ($9 caterer charge – $5 student door fee) $4 Fixed Costs $1,600 Variable costs (number of attendees × variable cost per person) 0 Total costs (fixed + variable) $1,600 100 200 300 400 500 600 $4 $1,600 $4 $1,600 $4 $1,600 $4 $1,600 $4 $1,600 $4 $1,600 400 $2,000 800 $2,400 1,200 $2,800 1,600 $3,200 2,000 $3,600 2,400 $4,000 Fixed, Variable and Total Cost of Graduation Party 5000 4000 Costs ($) 3000 Fixed costs Variable costs T otal cost 2000 1000 0 0 100 200 300 400 500 600 Number of attendees 2. Number of attendees Total costs (fixed + variable) Costs per attendee (total costs ¸ number of attendees) 0 $1,600 100 $2,000 $20.00 200 $2,400 $12.00 300 $2,800 $9.33 400 $3,200 $ 8.00 500 $3,600 $ 7.20 600 $4,000 $ 6.67 As shown in the table above, for 100 attendees the total cost will be $2,000 and the cost per attendee will be $20. 3. As shown in the table in requirement 2, for 500 attendees the total cost will be $3,600 and the cost per attendee will be $7.20. 211 4. Using the calculat ions shown in the table in requirement 2, we can construct the costper attendee graph shown below: 25 Co st per Attendee ($) 20 15 10 5 0 0 100 200 300 400 500 600 700 Number of Attendees As president of the student associat ion request ing a grant for the party, you should not use the per unit calculat ions to make your case. The person making the grant may assume an attendance of 500 students and use a low number like $7.20 per attendee to calculate the size o f your grant. Instead, you should emphasize the fixed cost of $1,600 that you will incur even if no students or very few students attend the party, and try to get a grant to cover as much o f the fixed costs as possible as well as a variable portion to cover as much o f the $5 variable cost to the student associat ion for each person attending the party. 227 (25 min.) Total and unit cost, decision making. 1. 60,000 Total Manufacturing Costs 50,000 40,000 Variable Costs 30,000 20,000 10,000 0 0 5,000 Number of Flanges 10,000 Total Manufacturing Costs Fixed Costs Note that the production costs include the $20,000 of fixed manufacturing costs but not the $10,000 of period costs. The variable cost is $1 per flange for materials, and $2 per flange ($20 per hour divided by 10 flanges per hour) for direct manufacturing labor. 212 2. The inventoriable (manufacturing) cost per unit for 5,000 flanges is $3 × 5,000 + $20,000 = $35,000. Average (unit) cost = $35,000 ÷ 5,000 units = $7 per unit. This is below Fred’s selling price of $8.25 per flange. However, in order to make a profit, Graham’s Glassworks also needs to cover the period (nonmanufacturing) costs of $10,000, or $10,000 ÷ 5,000 = $2 per unit. Thus total costs, both inventoriable ( manufacturing) and period (nonmanufacturing), for the flanges is $7 + $2 = $9. Graham’s Glassworks cannot sell below Fred’s price of $8.25 and st ill make a profit on the flanges. Alternat ively, At Fred’s price of $8.25 per flange: Revenue $8.25 × 5,000 = Variable costs $3.00 × 5,000 = Fixed costs Operating Loss $41,250 15,000 30,000 $ (3,750) Graham’s Glassworks cannot sell below $8.25 per flange and make a profit. At Fred’s price of $8.25 per flange, the company has an operating loss of $3,750. 3. If Graham’s Glassworks produces 10,000 units, then total inventoriable cost will be: Variable cost ($3 × $10,000 ) + fixed manufacturing costs, $20,000 = total manufacturing costs, $50,000. Average (unit) inventoriable (manufacturing) cost will be $50,000 ÷ 10,000 units = $5 per flange Unit total cost including both inventoriable and period costs will be ($50,000 +$10,000) ÷ 10,000 = $6 per flange, and Graham’s Glassworks will be able to sell the flanges for less than Fred and st ill make a profit. Alternat ively, At Fred’s price of $8.25 per flange: Revenue $8.25 × 10,000 Variable costs $3.00 × 10,000 Fixed costs Operating inco me = = $ 82,500 30,000 30,000 $ 22,500 Graham’s Glassworks can sell at a price below $8.25 per flange and st ill make a profit. The company earns operating inco me of $22,500 at a price of $8.25 per flange. The company will earn operating inco me as long as the price exceeds $6.00 per flange. The reason the unit cost decreases significant ly is that inventoriable ( manufacturing) fixed costs and fixed period (nonmanufacturing) costs remain the same regardless o f the number of units produced. So, as Graham’s Glassworks produces more units, fixed costs are spread over more units, and cost per unit decreases. This means that if you use unit costs to make decisio ns about pricing, and which product to produce, you must be aware that the unit cost only applies to a particular level of output. 213 228 (20–30 min.) Inventoriable costs versus period costs. 1. Manufacturingsector companies purchase materials and components and convert the m into different finished goods. Merchandisingsector companies purchase and then sell tangible products without changing their basic form. Servicesector companies provide services or intangible products to their customers—for example, legal advice or audits. Only manufacturing and merchandising co mpanies have inventories o f goods for sale. 2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then beco me cost of goods sold when the product is so ld. These costs for a manufacturing co mpany are included in workinprocess and finished goods inventory (they are “inventoried”) to build up the costs of creat ing these assets. Period costs are all costs in the inco me statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 3. (a) Mineral water purchased for resale by Safeway—inventoriable cost of a merchandising co mpany. It becomes part of cost of goods sold when the mineral water is so ld. (b) Electricit y used at GE assembly plant—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (c) Depreciat ion on Google’s co mputer equipment—period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost. (d) Electricit y for Safeway’s store aisles—period cost of a merchandis ing company. It is a cost that benefits the current period and it is not traceable to goods purchased for resale. (e) Depreciat ion on GE’s assembly testing equipment—inventoriable cost of a manufacturing co mpany. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (f) Salaries o f Safeway’s market ing personnel—period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficient ly reliable evidence to estimate such future benefits). (g) Bottled water consumed by Google’s engineers—period cost of a service co mpany. Google has no inventory of goods for sale and, hence, no inventoriable cost. (h) Salaries o f Google’s marketing personnel—period cost of a service co mpany. Google has no inventory of goods for sale and, hence, no inventoriable cost. 214 229 (20 min.) Flow of Inventoriable Costs. (All numbers below are in millio ns). 1. Direct materials inventory 8/1/2008 Direct materials purchased Direct materials available for production Direct materials used Direct materials inventory 8/31/2008 2. Total manufacturing overhead costs Subtract: Variable manufacturing overhead costs Fixed manufacturing overhead costs for August 3. Total manufacturing costs Subtract: Direct materials used ( from requirement 1) Total manufacturing overhead costs Direct manufacturing labor costs for August 4. Workinprocess inventory 8/1/2008 Total manufacturing costs Workinprocess available for production Subtract: Cost of goods manufactured (moved into FG) Workinprocess inventory 8/31/2008 5. Finished goods inventory 8/1/2008 Cost of goods manufactured (moved fro m WIP) Finished goods available for sale in August 6. Finished goods available for sale in August (from requirement 5) Subtract: Cost of goods sold Finished goods inventory 8/31/2008 $ $ 90 360 450 375 75 $ 480 (250) $ 230 $ 1,600 (375) (480) $ 745 $ 200 1,600 1,800 (1,650) $ 150 $ 125 1,650 $ 1,775 $ 1,775 (1,700) $ 75 215 230 (20 min.) Computing cost of goods purchased and cost of goods sold. (1) Marvin Department Store Schedule of Cost of Goods Purchased For the Year Ended December 31, 2008 (in thousands) $155,000 7,000 162,000 $4,000 6,000 Purchases Add transportationin Deduct: Purchase return and allo wances Purchase discounts Cost of goods purchased (2) 10,000 $152,000 Marvin Department Store Schedule of Cost of Goods Sold For the Year Ended December 31, 2008 (in thousands) $ 27,000 152,000 179,000 34,000 $145,000 Beginning merchandise inventory 1/1/2008 Cost of goods purchased (above) Cost of goods available for sale Ending merchandise inventory 12/31/2008 Cost of goods sold 216 231 (30–40 min.) Cost of goods manufactured. 1. Canseco Company Schedule of Cost of Goods Manufactured Year Ended December 31, 2009 (in thousands) Direct materials: Beginning inventory, January 1, 2009 $ 22,000 Purchases of direct materials 75,000 Cost of direct materials available for use 97,000 Ending inventory, December 31, 2009 26,000 Direct materials used Direct manufacturing labor Indirect manufacturing costs: Indirect ma nufacturing labor 15,000 Plant insurance 9,000 Depreciation—plant building & equipment 11,000 Repairs and maintenance—plant 4,000 Total indir ect manufacturing costs Manufacturing costs incurred during 2009 Add beginning workinpr ocess inventory, January 1, 2009 Total manufacturing costs to account for Deduct ending workinprocess inventory, December 31, 2009 Cost of goods manufactured (to Income Statement) $ 71,000 25,000 39,000 135,000 21,000 156,000 20,000 $136,000 2. Canseco Company Income Statement Year Ended December 31, 2009 (in thousands) $300,000 $ 18,000 136,000 154,000 23,000 131,000 169,000 93,000 29,000 122,000 $ 47,000 Revenues Cost of goods sold: Beginning finished goods, January 1, 2009 Cost of goods manufactured Cost of goods available for sale Ending finished goods, December 31, 2009 Cost of goods sold Gross margin Operating costs: Marketing, distribution, and customerser vice costs General and administrative costs Total operating costs Operating income 217 232 (25–30 min.) Income statement and schedule of cost of goods manufactured. Howell Corporation Income Statement for the Year Ended December 31, 2009 (in millions) Revenues Cost of goods sold: Beginning finished goods, Jan. 1, 2009 Cost of goods manufactured (below) Cost of goods available for sale Ending finished goods, Dec. 31, 2009 Gross margin Marketing, distribut ion, and customerservice costs Operating inco me $950 $ 70 645 715 55 660 290 240 $ 50 Howell Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2009 (in millions) Direct materials costs: Beginning inventory, Jan. 1, 2009 Purchases of direct materials Cost of direct materials available for use Ending inventory, Dec. 31, 2009 Direct materials used Direct manufacturing labor costs Indirect manufacturing costs: Indirect manufacturing labor Plant supplies used Plant utilit ies Depreciat ion––plant and equipment Plant supervisory salaries Miscellaneous plant overhead Manufacturing costs incurred dur ing 2009 Add beginning workinprocess inventory, Jan. 1, 2009 Total manufacturing costs to account for Deduct ending workinprocess, Dec. 31, 2009 Cost of goods manufactured $ 15 325 340 20 $320 100 60 10 30 80 5 35 220 640 10 650 5 $645 218 233 (15–20 min.) Interpretation of statements (continuation of 232). 1. The schedule in 232 can beco me a Schedule of Cost of Goods Manufactured and So ld simply by including the beginning and ending finished goods inventory figures in the supporting schedule, rather than direct ly in the body of the inco me statement. Note that the term cost of goods manufactured refers to the cost of goods brought to complet ion (finished) during the accounting period, whether they were started before or during the current accounting period. Some o f the manufacturing costs incurred are held back as costs of the ending work in process; similarly, the costs of the beginning work in process inventory beco me a part of the cost of goods manufactured for 2009. 2. The sales manager’s salary would be charged as a market ing cost as incurred by both manufacturing and merchandising companies. It is basically an operating cost that appears below the gross margin line on an inco me statement. In contrast, an assembler’s wages would be assigned to the products worked on. Thus, the wages cost would be charged to WorkinProcess and would not be expensed unt il the product is transferred through Finished Goods Inventory to Cost of Goods Sold as the product is so ld. 3. The directindirect dist inct ion can be reso lved only wit h respect to a particular cost object. For example, in defense contracting, the cost object may be defined as a contract. Then, a plant supervisor working only on that contract will have his or her salary charged directly and who lly to that single contract. 4. Direct materials used = $320,000,000 ÷ 1,000,000 units = $320 per unit Depreciat ion on plant equipment = $80,000,000 ÷ 1,000,000 units = $80 per unit 5. Direct materials unit cost would be unchanged at $320 per unit. Depreciat ion cost per unit would be $80,000,000 ÷ 1,200,000 = $66.67 per unit. Total direct materials costs would rise by 20% to $384,000,000 ($320 per unit × 1,200,000 units), whereas total depreciat ion would be unaffected at $80,000,000. 6. Unit costs are averages, and they must be interpreted with caut ion. The $320 direct materials unit cost is valid for predicting total costs because direct materials is a variable cost; total direct materials costs indeed change as output levels change. However, fixed costs like depreciat ion must be interpreted quite different ly fro m variable costs. A co mmo n error in cost analys is is to regard all unit costs as one—as if all the total costs to which they are related are variable costs. Changes in output levels (the deno minator) will affect total variable costs, but not total fixed costs. Graphs of the two costs may clarify t his point; it is safer to think in terms o f total costs rather than in terms of unit costs. 219 234 (25–30 min.) Income statement and schedule of cost of goods manufactured. Chan Corporation Income Statement for the Year Ended December 31, 2009 (in millions) Revenues Cost of goods sold: Beginning finished goods, Jan. 1, 2009 Cost of goods manufactured (below) Cost of goods available for sale Ending finished goods, Dec. 31, 2009 Gross margin Marketing, distribut ion, and customerservice costs Operating inco me $350 $ 40 204 244 12 232 118 90 $ 28 Chan Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2009 (in millions) Direct material costs: Beginning inventory, Jan. 1, 2009 Direct materials purchased Cost of direct materials available for use Ending inventory, Dec. 31, 2009 Direct materials used Direct manufacturing labor costs Indirect manufacturing costs: Plant supplies used Property taxes on plant Plant utilit ies Indirect manufacturing labor costs Depreciat ion––plant and equipment Miscellaneous manufacturing overhead costs Manufacturing costs incurred dur ing 2009 Add beginning workinprocess inventory, Jan. 1, 2009 Total manufacturing costs to account for Deduct ending workinprocess inventory, Dec. 31, 2009 Cost of goods manufactured (to inco me statement) $ 30 80 110 5 $105 40 6 1 5 20 9 10 51 196 10 206 2 $204 220 235 (15–20 min.)Terminology, interpretation of statements (continuation of 234). $105 millio n 40 millio n $145 millio n $ 40 millio n 51 millio n $ 91 millio n 1. Direct materials used Direct manufacturing labor costs Prime costs Direct manufacturing labor costs Indirect manufacturing costs Conversio n costs 2. Inventoriable costs (in millio ns) for Year 2009 Plant utilit ies Indirect manufacturing labor Depreciat ion—plant and equipment Miscellaneous manufacturing overhead Direct materials used Direct manufacturing labor Plant supplies used Property tax on plant Total inventoriable costs Period costs (in millio ns) for Year 2009 Marketing, distribut ion, and customerservice costs $ 5 20 9 10 105 40 6 1 $196 $ 90 3. Design costs and R&D costs may be regarded as product costs in case of contracting wit h a governmental agency. For example, if t he Air Force negotiated to contract with Lockheed to build a new t ype of supersonic fighter plane, design costs and R&D costs may be included in the contract as product costs. 4. Direct materials used = $105,000,000 ÷ 1,000,000 units = $105 per unit Depreciat ion on plant and equipment = $9,000,000 ÷ 1,000,000 units = $9 per unit 5. Direct materials unit cost would be unchanged at $105. Depreciat ion unit cost would be $9,000,000 ÷ 1,500,000 = $6 per unit. Total direct materials costs would rise by 50% to $157,500,000 ($105 per unit × 1,500,000 units). Total depreciat ion cost of $9,000,000 would remain unchanged. 6. In this case, equipment depreciat ion is a variable cost in relat ion to the unit output. The amount of equipment depreciat ion will change in direct proportion to the number of unit s produced. (a) Depreciat ion will be $4 millio n (1 millio n × $4) when 1 millio n units are produced. (b) Depreciat ion will be $6 millio n (1.5 millio n × $4) when 1.5 millio n units are produced. 221 236 (20 min.) Labor cost, overtime and idle time. 1.(a) Total cost of hours worked at regular rates 42 hours × 12 per hour 42 hours × 12 per hour 43 hours × 12 per hour 40 hours × 12 per hour Minus idle t ime (5.2 hours × $12 per hour) Direct manufacturing labor costs (b) Idle time = 5.2 hours × 12 per hour = (c) Overtime and ho liday premium. Week 1: Overtime (4240) hours × Premium, $6 per hour Week 2: Overtime (4240) hours ×Premium, $6 per hour Week 3: Overtime (4340) hours × Premium, $6 per hour Week 4: Holiday 8 hours × Premium, $12 per hour Total overtime and ho liday premium (d) Total earnings in May Direct manufacturing labor costs Idle time Overt ime and ho liday premium Total earnings $ 504.00 504.00 516.00 480.00 2,004.00 62.40 $1,941.60 $62.40 $ 12.00 12.00 18.00 96.00 $138.00 $1,941.60 62.40 138.00 $2,142.00 2. Idle time caused by equipment breakdowns and scheduling mixups is an indirect cost of the jo b because it is not related to a specific jo b. Overt ime premium caused by the heavy overall volume of work is also an indirect cost because it is not related to a particular jo b that happened to be worked on during the overtime hours. If, however, the overtime is the result o f a demanding “rush jo b,” the overtime premiu m is a direct cost of that job. 222 237 (30–40 min.) Fire loss, computing inventory costs. 1. 2. 3. Finished goods inventory, 2/26/2009 = $50,000 Workinprocess inventory, 2/26/2009 = $28,000 Direct materials inventory, 2/26/2009 = $62,000 This problem is not as easy as it first appears. These answers are obtained by working fro m the known figures to the unknowns in the schedule below. The basic relat ionships between categories of costs are: Prime costs (given) = Direct materials used = = Conversio n costs = $294,000 $294,000 – Direct manufacturing labor costs $294,000 – $180,000 = $114,000 Direct manufacturing labor costs ÷ 0.6 $180,000 ÷ 0.6 = $300,000 Indirect manuf. costs = $300,000 – $180,000 = $120,000 (or 0.40 ´ $300,000) Schedule of Computations Direct materials, 1/1/2009 Direct materials purchased Direct materials available for use Direct materials, 2/26/2009 3 = Direct materials used ($294,000 – $180,000) Direct manufacturing labor costs Prime costs Indirect manufacturing costs Manufacturing costs incurred dur ing the current period Add work in process, 1/1/2009 Manufacturing costs to account for Deduct work in process, 2/26/2009 2 = Cost of goods manufactured Add finished goods, 1/1/2009 Cost of goods available for sale (given) Deduct finished goods, 2/26/2009 1 = Cost of goods sold (80% of $500,000) $ 16,000 160,000 176,000 62,000 114,000 180,000 294,000 120,000 414,000 34,000 448,000 28,000 420,000 30,000 450,000 50,000 $400,000 Some instructors may wish to place the key amounts in a Work in Process Taccount. This problem can be used to introduce students to the flow o f costs through the general ledger (amounts in thousands): Cost of Work in Process Finished Goods Goods Sold BI 34 BI 30 DM used 114 COGM 420 > 420 COGS 400 >400 DL 180 OH 120 Available To account for 448 for sale 450 EI 28 EI 50 223 238 (30 min.) Comprehensive problem on unit costs, product costs. 1. If 2 pounds o f direct materials are used to make each unit of finished product, 100,000 units × 2 lbs., or 200,000 lbs. were used at $0.70 per pound of direct materials ($140,000 ÷ 200,000 lbs.). (The direct material costs of $140,000 are direct materials used, not purchased.) Therefore, the ending inventory of direct materials is 2,000 lbs. ´ $0.70 = $1,400. 2. Manufacturing Costs for 100,000 units Variable Fixed Total Direct materials costs $140,000 $ – $140,000 Direct manufacturing labor costs 30,000 – 30,000 Plant energy costs 5,000 – 5,000 Indirect manufacturing labor costs 10,000 16,000 26,000 Other indirect manufacturing costs 8,000 24,000 32,000 Cost of goods manufactured $193,000 $40,000 $233,000 Average unit manufacturing cost: Finished goods inventory in units: $233,000 ÷ 100,000 units = $2.33 per unit $20,970 (given) = $2.33 per unit = 9,000 units 3. Units so ld in 2009 = = Selling price in 2009 = = Beginning inventory + Production – Ending inventory 0 + 100,000 – 9,000 = 91,000 units $436,800 ÷ 91,000 $4.80 per unit $436,800 $ 0 233,000 233,000 20,970 4. Revenues (91,000 units so ld × $4.80) Cost of unit s sold: Beginning finished goods, Jan. 1, 2009 Cost of goods manufactured Cost of goods available for sale Ending finished goods, Dec. 31, 2009 Gross margin Operating costs: Marketing, distribut ion, and customerservice costs Administrative costs Operating inco me Note: Although not required, the full set of unit variable costs is: Direct materials cost Direct manufacturing labor cost Plant energy cost Indirect manufacturing labor cost Other indir ect manufacturing cost Marketing, distribution, and customerservice costs $1.40 0.30 0.05 0.10 0.08 $1.35 212,030 224,770 162,850 50,000 212,850 $ 11,920 = $1.93 per unit manufactured per unit sold 224 239 (2025 min.) Labor cost classification; ethics. 1. No. The direct manufacturing labor costs are not 20% or greater of total manufacturing costs. Direct manufacturing labor costs are $410,000 which are 16.4% of total manufacturing costs, $410,000 ÷ $2,500,000 = 16.4% 2. Bob Zixson can ask the controller to reclassify at least two of the costs that are currently reported as indirect manufacturing costs to direct manufacturing labor costs. The most logical are the fringe benefit s and so me o f the overtime costs, particularly if it can be argued that some o f the overtime was direct ly caused by jo bs. The fringe benefits are logical because they are not only the largest, but can be argued to be a part of normal cost of manufacturing labor. Fringe benefit s related to direct manufacturing labor costs together with so me of the overtime premium could bring the total direct manufacturing labor cost over the minimum $500,000. Just ification for reclassifying vacat ion and sick time is similar to that of fringe benefits— that it is a normal cost of labor since it is part of and can be traced to the direct manufacturing laborer’s payment. It is harder to justify reclassifying idle t ime, since it is difficult to ident ify a specific job that the idle time relates to. Idle time is also the smallest cost item. 3. The controller should not reclassify overhead costs as direct manufacturing labor costs just so the firm can reap tax benefits particularly if the changes would vio late the company’s po licy o f co mputing direct manufacturing labor costs. The idea of cost classificat ion is to allow internal (and external) decisio n making by clarifying what each cost item represents. Also, if costs in only the Costa Melon plant are reclassified, it will be harder for Zix to evaluate the Costa Melon plant, when co mpared to Zix’s other plants. Nevertheless, so me of the arguments presented in requirement 2 can be just ified and could prompt a reevaluat ion of Zix’s direct manufacturing labor classificat ions. 225 240 (20–25 min.) Finding unknown amounts. Let G = given, I = inferred Step 1: Use gross margin formula Revenues Cost of goods sold Gross margin Step 2: Use schedule of cost of goods manufactured formula Direct materials used Direct manufacturing labor costs Indirect manufacturing costs Manufacturing costs incurred Add beginning work in process, 1/1 Total manufacturing costs to account for Deduct ending work in process, 12/31 Cost of goods manufactured Step 3: Use cost of goods sold formula Beginning finished goods inventory, 1/1 Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory, 12/31 Cost of goods sold For case 1, do steps 1, 2, and 3 in order. For case 2, do steps 1, 3, and then 2. Case 1 $ 32,000 G A 20,700 I $ 11,300 G Case 2 $31,800 G 20,000 G C $11,800 I $ 8,000 G 3,000 G 7,000 G 18,000 I 0 G 18,000 I 0 G $ 18,000 I $ 12,000 G 5,000 G D 6,500 I 23,500 I 800 G 24,300 I 3,000 G $ 21,300 I $ 4,000 G 18,000 I 22,000 I B1,300 I $ 20,700 I $ 4,000 G 21,300 I 25,300 I 5,300 G $ 20,000 G 226 ...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.
- Spring '10
- Cost Accounting