Chapter%202 - THE UNIVERSETY OF TEXAS AT AUSTIN MCCOMBS...

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Unformatted text preview: THE UNIVERSETY OF TEXAS AT AUSTIN MCCOMBS SCHOOL OF BUSINESS ACC 312 — Spring 2011 Fundamentals of Managerial AccOunting Instructor — Brian Lendecky, MPA, CPA (copyright 2011 © Brian Lendecky) Thursday & Tuesday, January 20 & 25, 2011 Chapter 2 — Identifying and Estimating Costs and Benefits Relevant Costs and Revenues When making a decision you need to determine which revenues and costs are relevant and which are irrelevant. In order for a cost or benefit/revenue to be relevant it must meet two criteria: 1. Bearing an inn, [drum SunkCosts_ ill/it'll i/lfiJ‘L Mirth; USCG“ ifiUDIFQA. 1;.(L iFfQiCLIIAf ll“ dtci‘fic‘fi mail/“n bca‘JEG’ 7“”— ‘mun'l‘s (‘onriét’r iii Unaan l; ' JrU‘fi +’u . Keynote... 3 GU ‘5 We (A file; Relevant information must involve costs and benefits to be realized in the future. Therefore past/historical/sunk costs may be helpful as a basis for making predictions, however past costs themselves are always irrelevant when making decisions. 2, Dvallcrs amen] We Cxi'ilnlaildcb How do costs behave? Variable or Fixed CostDriver— Ans wml’ er admit—3 Tidal” $01059; C95“ it:an incu{/QJ_ ' I] 5 (N ’P A ‘ {1 h ' Variablecosts_ “Crust; ‘. tUL(FcQ§eg m itth '\ Pi? la a a C aje W \. I . i ’1, Q - H mm”? mg he (est 39%“ M [Oil PLEIL'W rcMcu'As cmtw‘, Example ~ the paper cost 0 tests will vary with the number of students each professor has in their class. The cost driver of a variable cost is the level of activity or volume whose change causes proportionate changes in the variable cost. Fixed Costs— ran/1a!“ (Orgi‘qfil’ :rx 'laiql 5.5 “ll-u; live! ‘95 ‘LC Flu-:77 (Ltnfldg [Uthif‘ 1. rdfiidchi‘ rmjch’ ((9§(l" Par 00:01" l’lchflq “0'71 r dtfl' [1,85% gill—id JFO (Ranges. , .Iy Example — My salary. My salary is fixed no matter how many of you are enrolled in this class. w However, my salary cost per student will vary depending on class size. Fixed costs do not have a cost driver within a relevant range. Mixed cost— cod—41h) Sol-La 5; {Cd n—J um'alde (on, ponchfif.‘ Example — Most salespeople are compensated with a salary and a sales commission. Example: Blue Bell sells each half-gallon carton of ice cream (from Blue Bell to grocery chain, delivered) for $2.50 each. In December, Blue Bell produced and sold 80,000 cartons at an average cost of $2.00 per carton. (FYI - Total variable costs equaled $120,000, total fixed costs equaled $40,000). What was Blue Bell profit in December? goon) e (15‘; _. (m 0060 r This coming June, Blue Bell plans to sell 120,000 cartons. How much profit will they have? \S lZO,@©0(L§5 '“ W lloooohsébe) ~- qoooo The above Blue Bell example is a good example of the pitfalls of using unit costs instead of total costs. Generally, the decision maker should think in terms of total costs rather than unit costs. But, decision makers need to also consider activity levels, so managerial accounting reports often report costs per unit. Unit costs are very important, but be VERY careful when computing and analyzing. Units costs for predicting the future are only good when production levels stay the same! (FYI m missed test or quiz questions often are the result of students not being careful when analyzing unit costs! !) .. .. A, a; “fix {mam W i w. w. J) p . n ¢ . . . y ‘ . a a n m 4 . . a x4. g ~ . a a x w . a ‘ g w A A u p u . u . a a ~ » jarriia. J . g a ¢ e 4... 3. . w t a 1 a g a ~ a; w a u e :éaf...» x y w . g a m y . u » v M $ a ¢ p u M p s u u m ( a 4 ‘ g q ‘ «wafihv: km Mm; w r (2..» (WE wry. 33 * . x , . a . I k . y , A , 4 4 1 . a a u . . . . a ‘ . . ‘ y a . . q . . w , i . u x 4 1 . y . Z p . k w . . , . 5.. WJJW 325.13...§2§:..i22;:Z.1...$2.23,:3.2.2.232, T 1 r. ... 5. a» x 64‘; (straw a . . u , ‘ x y 2 a i 3 i c u z z A v ‘ I a y a a y ... a . 1 y ¢ ‘ 1 :....wz ¢ a « y a . ; a w a u a . a 2 2 a . ¢ww¢¢a A»..1«x~x.r:ry‘ava.wcuaa.ypw;+_yw...fi:.a...fi.£arr...~xpar.ar.;uznav;s,. mm“ m mag W. was gamma: Ema. mm: “mm. amamnmm 33% “wme E “mafia 53 Egg 3 33:3 .a Umwnfluga mung mm mm a“, “$3553 .. ‘5“ hwmfiuui fin. Gama WW mammwm waofimm fimfifimmmm mum “macaw fig mwnmmmm “$8. $3 gamfim 38 a $3 & A. Graph :3! Tatai Fixed Cost Total fixed 0051 (Web sates manager's sa§ary} $150,080 Aciiviiy {or .. . . . - - - SQstdrévear}: m 20 39 1.10323 produced 8. Tahulafiun 31‘ Fixed 8051 Maui“: (at cost driver) fixee} Cast gar Gm: mm; Fixeé Ens: fiififififififl ........................................................ ,. Eiéfigfififl magi: ....................... ................... xxxxxx 15am 5 .................... ,,,, ......... .... ...... .; Zfififif} iéfifiéfifl 3% ....................................... ...... ............ A. wag; 15mm ‘1? ....... ..................................................... M 3338" ifi—Qfififi 29 .................................... .......... ,,,,,,,, .. 3.5% §5€3§3§ :21 .................................... ........ ............ .. F1342? ....................................................... ., ififififlfi 3i} ............................................................. ,. fifififi .................... ....... ............ .. fliwfiifi 0. Graph a! Unit fixed East $159,900 - a i E 5 3100.000 g .. 5 5 i 2 $ 50390 —§e- i E Activity (for ' cost driver): if} 20 39 units produced ._.o.8_ 00mg _§:38 c:: 08.8 How do costs get assigned to Cost Objects? Direct 0r Indirect What are the two most basic questions every business needs to answer? How much 5““ “T” 9‘“ "‘fiJ Wmuct or DEN-Wit 9"? HOV) Nuc‘fl 4&5”! Hi‘ (05+ {MC +0 Mt; KL Fro (9(ch 0’" 53);! jaw/(ice? Tr» {‘40 (ij (on, We, canéwar 4&3 The, CNS} Queéff’JN 563'th be, bijjqr was,“ 14“, Cost Object— An €Qton6l . gimmick frotiUUif Sarul‘ct/ (JEtQCF'i‘me a“) £6 L-Ui/) (“kriy {-4 I'cl‘ 4 ((5 l” “I Virgil ml R49 1' (1H) ,. WL" 44‘ 3"”; “4‘ i” to Know The (0?? 0 [09a 19"" ‘x Prflcjoci’f Macblnbf 5(1’01'49 prams! (idf‘o‘tfit‘l‘fl m fj ( (Kimmy) . _ ’A _ DirectCost— Q,“ my» {1,6qu (cm be eéié/‘ty my a a:— (V‘Q (cal ha 4 r L r h — lndirectCost— a {09; (4,}, (a (QC/jg! +/‘«(¢¢ to .3 “up 013%}, “lb Q (53%“ McAfi +0 be, ,' Jlljl ed. a. M m Lawton, 3"“? “7 a“! t” 0%¢ct¢._ Twilr Cd: (6%! (“‘C’ ‘zflkadt’d to (Fit nga {3‘ Whether a cost is direct or indirect, depends on the cost object! Example 1: Direct or Indirect Cost? — Dean Gilligan’s salary If the Cost Object = Campus (UT-Austin, UT-Arlington, UT-San Antonio, etc) DitQC ’i If the Cost Object = School (School of Education, Architecture School, Business School, Engineering School, etc.) n ‘D{ (“Cil’ If the Cost Object = Department (Accounting, Finance, Marketing, MIS, Supply Chain, etc.) in“ f Example 2: Direct or Indirect Cost? e electricity at Michael Angelo’s Cost Object = Manufacturing Plant Week Cost Object = Product (Lasagna, Chicken Parmesan, Calzones, etc.) Tamra" So a cost (pasta, tomato sauce, salary of production supervisor, salary of accountant, rent, electricity, advertising campaign, gas, copier paper) is a: Variable Cost or Fixed Cost (Behavior of cost) AND Direct Cost or Indirect COSt (Assignment of cost to cost object) Four-level Cost Hierarchy l. Output-unit level costs t + _% (.0$ri$ @9fo F oJ i-HN GAO/x L? mai‘ 5 o 0 90 Example m tomatoes at MAGF, steering wheels at Honda, 2. Batch level costs Cori) OQGN‘ will“ ‘th twirl/x. 0i: amid mt outlet” of I‘090'i’5- Example — truck deliveries, machine set-up costs (ex. — set-up labor) 3. Product level (aka product sustaining) costs 7 . 6; (05b in colrrefi (in The pfoduci line {Elma/€55 Oi- ‘H’lt non/1'5“ 0C “"3 Sr b “Rh Example w design costs (ex. — wages and salary of R&D team) 4. Facility sustaining costs 0 iji'utiorxal (UNIS if) (Mia 'i'b‘ ‘il (“Mi m, 5. FCC iC’lC‘t («i/Grated a‘o indwlciv‘a/ Prodfér't Example — building security, rent, property taxes, and top management compensation HA ex} My comments and suggestions For quizzes and tests: 1. Avoid making the VERY false assumption that all variable costs are relevant and all fixed costs are irrelevant. 2. Make all calculations on a “total” revenue and cost basis; not a “per unit” revenue and cost basis. Just trust me on this one. ...
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Chapter%202 - THE UNIVERSETY OF TEXAS AT AUSTIN MCCOMBS...

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