Chapter 2 - Chapter 2 Basic Cost Management Concepts THINK...

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Chapter 2 Basic Cost Management Concepts
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THINK What is a Cost? Where do costs appear on the financial statements?
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What is a Cost? A cost is the sacrifice made to achieve a particular purpose. An expense is defined as the cost incurred when an asset is used up or sold for the purpose of generating revenue.
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Product Costs and Period Costs Product costs are the costs of goods manufactured or the cost of goods purchased for resale. These costs are inventoried until the goods are sold. Period costs are all other non-product costs in an organization (e.g., selling and administrative). Such costs are not inventoried but are expensed as time passes.
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Cost Classifications on Financial Statements – Income Statement Product Costs Cost of goods sold Period Costs Operating expenses
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Cost Classifications on Financial Statements – Balance Sheet Merchandiser Current Assets Cash Receivables Prepaid Expenses Merchandise Inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods
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Types of Production Processes Type of Production Description of Example of Process Process Manufacturer Job Shop Low volume Disney Little standardization Unique products Batch Multiple products Caterpillar Low volume Assembly Line A few major products Ford Higher volume Mass Customization High volume Dell Many standardized components Customized combination of components Continuous Flow High volume Exxon Highly standardized commodity products
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Manufacturing Costs The Product Direct Labor Manufacturing Overhead Direct Material
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Classifications of Costs in Manufacturing Companies Manufacturing costs are often combined as follows: Prime Cost Conversion Cost Direct Material Direct Labor Manufacturing Overhead
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Manufacturing Cost Flows Manufacturing Overhead Direct Material Direct Labor Finished Goods Inventory Cost of Goods Sold Work in Process Inventory
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Income Statement for a Manufacturer Comet Computer Corporation Income Statement For the Year Ended December 31, 20X2 Sales revenue 700,000 $ Less: Cost of goods sold 415,010 Gross margin 284,990 $ Selling and administrative expenses 174,490 Income before taxes 110,500 $ Income tax expense 30,000 Net income 80,500 $
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COGS Comet Computer Corporation Schedule of Cost of Goods Sold For the Year Ended December 31, 20X2 Finished-goods inventory, Jan. 1 200 $ Add: Cost of goods manufactured 415,000 Cost of goods available for sale 415,200 Deduct Finished-goods inventory, Dec. 31 190 Cost of goods sold 415,010 $
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Schedule of Cost of Goods Manufactured Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used 134,980 $ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs
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Chapter 2 - Chapter 2 Basic Cost Management Concepts THINK...

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