Chapter 2 & 6 - Full Student Version

Chapter 2 & 6 - Full Student Version - 1 MANAGERIAL...

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Unformatted text preview: 1 MANAGERIAL ACCOUNTING RSM 222 Cost Terms, Concepts, and Classifications Cost Behaviour: Analysis and Use Chapter 2 and 6 2 Summary of Cost Classifications Costs need to be estimated and aggregated differently for different purposes Assigning costs to cost objects (traceability) Financial reporting Product Cost vs. Period Cost Predicting cost behaviour Direct vs. Indirect Fixed vs. Variable Decision making Differential Cost and Revenue Opportunity Cost Sunk Cost LO 7 3 Assigning Costs to Cost Objects Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labour Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead LO 6 4 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labour Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant. LO 1 5 Overhead - A Closer Look Depreciation on Manufacturing Assets Indirect Materials Factory Utilities Indirect Labour Supervisory Salaries Manufacturing Overhead Rent on Manufacturing Facilities Maintenance 6 Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labour Prime Cost Manufacturing Overhead Conversion Cost LO 1 7 Cost classification (Financial Reporting): Product Costs Versus Period Costs Product costs include direct materials, direct labour, and manufacturing overhead. Inventory Cost of Good Sold Period costs include all selling costs and administrative costs. Expense Sale Balance Sheet Income Statement Income Statement LO 2 8 Non-Manufacturing Costs Selling Costs Administrative Costs Costs necessary to get the order and deliver the product. All executive, organizational, and clerical costs. LO 1 9 Cost Classifications for Predicting Cost Behaviour How a cost will react to changes in the level of activity within the relevant range. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes. LO 5 10 Total Variable Cost Total Texting Bill Your total texting bill is based on how many texts you send. Number of Texts Sent LO 5 11 The Activity Base (Cost Driver) Machine hours Units produced A measure of what causes the incurrence of a variable cost Miles driven Labour hours LO 5 12 Total Fixed Cost Monthly Cell Phone Contract Fee Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make. Number of Minutes Used LO 5 13 Cost Classifications for Predicting Cost Behaviour Behaviour of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost changes as activity level changes. Variable cost per unit remains the same over wide ranges of activity. Fixed Total fixed cost remains the same even when the a ctivity level changes. Average fixed cost per unit goes down as activity level goes up. LO 5 14 Rent Cost in Thousands of Dollars Fixed Costs and Relevant Range 90 Relevant 60 Range 30 0 0 Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. 1,000 2,000 3,000 Rented Area (Square Feet) LO 1 15 The Linearity Assumption and the Relevant Range Total Cost Economist’s Curvilinear Cost Function Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Accountant’s Straight-Line Approximation (constant unit variable cost) Activity LO 1 16 Mixed Costs The total mixed cost line can be expressed a s an equation: Y = a + bX Where: b Y Total Utility Cost Y a X tal To d ixe m = the total mixed cost = the total fixed cost (the vertical intercept of the line) = the variable cost per unit of activity (the slope of the line) = the level of activity ost c Variable Cost per KW Activity (Kilowatt Hours) X Fixed Monthly Utility Charge LO 1 17 Least-Squares Regression Method Software can be used to fit a regression line through the data points. The cost analysis objective is the same: Y = a + bX Y Total Cost 20 ** ** 10 0 0 1 * ** * ** 2 3 Activity . 4 X LO 2 18 The High-Low Method The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours. $2,400 = $8.00/hour 300 LO 2 19 The High-Low Method Total Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = $9,800 – ($8/hour × 800 hours) Total Fixed Cost = $9,800 – $6,400 Total Fixed Cost = $3,400 LO 2 20 The High-Low Method The Cost Equation for Maintenance Y = $3,400 + $8.00X LO 2 21 Practice Question UTC Corporation recorded the following production activity and costs for two months with the highest and lowest activity levels. Units Cost High activity level 9,000 $9,700 Low activity level 5,000 6,100 Change 4,000 $3,600 Using high low method, compute 1. unit variable cost 2. fixed cost 3. total cost if it will produce 8000 units next month 22 Example: Cost classification for a furniture manufacturer. (D /ID?; V/F?, Product/Period?) 1. 2. 3. 4. 5. Wood used in chairs Lubricant used in machinery Factory rent Wages for assembly workers Depreciation on Machinery 23 Cost Classification for Decision Making Differential cost: Opportunity cost: Costs that differ among alternatives. The potential benefit that is given up when one alternative is selected over another. Sunk cost: A cost that has already been incurred and that cannot be changed by any decision made now or in future. 24 Differential Cost and Revenue 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 neighbouring 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 LO 7 25 Opportunity Cost The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending university, you could be earning $15,000 per year. Your opportunity cost of attending university for one year is $15,000. LO 7 26 Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. 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. LO 7 27 Manufacturing Cost Flows Costs Balance Sheet Inventories Material Purchases Raw Materials Direct Labour Income Statement Expenses Work in Process Manufacturing Overhead Selling and Administrative Finished Goods Period Costs Cost of Goods Sold Selling and Administrative LO 4 28 Comparing Merchandising and Manufacturing Activities - Balance Sheet Manufacturer Merchandiser Current assets u Cash u Receivables u Prepaid Expenses u Merchandise Inventory Current Assets x x x x Cash Receivables Prepaid Expenses Inventories • • • Raw Materials Work in Process Finished Goods LO 2 29 Comparing Merchandising and Manufacturing Activities - The Income Statementgoods sold for manufacturers differs only Cost of slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise i nventory $ 14,200 + Purchases 234,150 Goods available for sale $ 248,350 - Ending m erchandise i nventory (12,100) = Cost of goods sold $ 236,250 Manufacturing Company Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold $ 14,200 234,150 $248,350 (12,100) $236,250 LO 3 Review of Financial Accounting: Income statement Manufacturing, Inc. Income Statement 200X Sales $300 Less: Cost of Goods Sold: Beginning Finished Goods Inventory $ 20 ADD: Cost of Goods Manufactured 215 LESS: Ending Finished Goods Inv. 25 210 Gross Margin 90 30 31 Statement of Cost of Goods Manufactured Current Manufacturing Cost this period Material Used Beginning inventory Add: Purchases Less: Ending inventory Materials Used Direct Labor Used Factory Overhead Total Manufacturing Cost Account for change in Inventory ADD: Beginning Work in Process LESS: Ending Work in Process Cost of Goods Manufactured $10 70 5 $75 80 100 $255 10 50 $215 32 Basic Equation for Inventory Accounts Beginning balance + Additions to inventory = Ending balance + Withdrawals from inventory LO 3 33 Questions? ...
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