Ete_ppt1_Cost Terms & Concepts

8/3/2019 Ete_ppt1_Cost Terms & Concepts

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Cost Terms, Concepts,and Classifications


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Comparing Merchandisingand Manufacturing Activities

Merchandisers . . .Buy finished

goods.Sell finished goods.

Man u fact u rers . . .Buy raw materials.

Prod u ce and sellfinished goods.

Wall y World Mart


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T he Prod u ctT he Prod u ct

D irectMaterials

D irectLabor

ManufacturingOverhead

Manufacturing Costs


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D irect Materials

Those materials that become an integral partof the product and that can be conveniently

traced directly to it.

Ex ample: A radio installed in an a u tomobile


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D irect Labor

Those labor costs that can be easily traced toindividual units of product.

Ex ample: Wages paid to a u tomobile assembl y workers


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Manufacturing costs that cannot be traceddirectly to specific units produced.

Manufacturing Overhead

Ex

amples: Indirect labor and indirect materials

Wages paid to emplo yeeswho are not directl y

involved in prod u ctionwork.Ex amples: maintenance

workers, and sec u rit y g u ards.

Materials u sed to s u pportthe prod u ction process.

Ex amples: lu bricants andcleaning s u pplies u sed in theau tomobile assembl y plant.


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Classifications of Costs

D irectMaterial

D irectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:


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N onmanufacturing Costs

Marketing andSelling Cost

Costs necessary to get the

order and deliver theproduct.

AdministrativeCost

All executive,

organizational, andclerical costs.


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Product Costs Versus PeriodCosts

Product costs includedirect materials, direct

labor, andmanufacturingoverhead.

Period costs are notincluded in product

costs. They areexpensed on the

income statement.Inventor y Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Ex pense

IncomeStatement


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Q uick Check Period vs. Product Costs

W hich of the following costs would beconsidered a period rather than a product costin a manufacturing company? A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.C. D irect materials costs.

D . Electrical costs to light the productionfacility.


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Balance Sheet

Merchandiser Current assets

CashReceivablesPrepaid expensesMerchandise inventory

Manufacturer Current Assets

CashReceivablesPrepaid ExpensesInventories

Raw MaterialsW ork in ProcessFinished Goods


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The Income Statement

Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.

Man u fact u ring Compan y

Cost of goods sold: Beg. finished

goods inv. 14,200$+ Cost of goods

man u fact u red 234,150 Goods available

for sale 248,350$- E nding

finished goodsinventor y (12,100)

= Cost of goodssold 236,250$

Merchandising C ompan y

C ost of goods sold: B eg. merchandise

inventor y 14,200$+ P u rchases 234,150 Goods available

for sale 248,350$- E nding

merchandiseinventor y (12,100)

= C ost of goodssold 236,250$


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Selling andAdministrative

Period Costs

Manufacturing Cost Flows

FinishedGoods

Cost of Goods

Sold

Selling andAdministrative

Man u fact u ringOverhead

Work inProcess

Direct Labor

Balance SheetCosts Inventories

IncomeStatementExpenses

Material P u rchases Raw Materials


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W hich of the following transactions wouldimmediately result in an expense? (There maybe more than one correct answer.) A. W ork in process is completed.B. Finished goods are sold.C. Raw materials are placed into production.

D . Administrative salaries are accrued andpaid.


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W hich of the following transactions wouldimmediately result in an expense? (There maybe more than one correct answer.) A. W ork in process is completed.B. Finished goods are sold.C. Raw materials are placed into production.

D . Administrative salaries are accrued andpaid.


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Inventory Flows

Beginningbalance

$$

Additions$$$+

Available$$$$$=

E ndingbalance

$$=

Withdrawals$$$

_ Available$$$$$


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Man u fact u ring WorkRaw Materials C osts In Process

B eginning raw Direct materials B eginning work inmaterials inventor y + Direct labor process inventor y

+ Raw materials + Mfg. overhead + T otal man u fact u ringp u rchased = T otal man u fact u ring costs

= Raw materials costs = T otal work inavailable for u se process for thein prod u ction period

E nding work in

process inventor y= C ost of goods

man u fact u red.

Product Costs - A Closer Look

Costs associated with the goods thatare completed d u ring the period are

transferred to finished goods

inventor y.


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Cost Classifications for Predicting Cost Behavior

How a cost will react to changes in the level of business activity.

Total variable costs change when activity changes.Total fix ed costs remain unchanged when activitychanges.

W hat do we mean by ACTIVITY?


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A Cell Phone Bill.

Family Plan for cell phone usage,unlimited nights and weekends, $60.00Includes 250 text messages

Any text messages above 250 are$0.10 per text sent A ND $0.10 textreceived.You do N OT have a D ATA PLA N andpay $0.01 per KB


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Variable Cost Per Unit

Per KBs used

P e r

M i n u

t e

T e

l e p h o n e

C h a r g e

The cost per K B of DA T A is constant. For example, $.01 cents per KB.

D A T A C O S T P e r

K B

U

s e d


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Total Variable Cost

Your total D ATA cost is based on howmany KB you use..

D ATA used

T o

t a l D A T A C O S T o n

y o u r

C e l l

p h o n e

B i l l


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Total Fixed Cost

Your monthly basic cellphone bill does notchange when you make more calls.

N umber of Local Calls

M o n

t h l y B a s

i c

T e l e p

h o n e

B i l l

NTT DoCoMo's wristwatch-stylecellphone


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Fixed Cost Per Unit

N umber of Local Calls M o n

t h l y B a s

i c T e

l e p

h o n e

B i l l

p e r

L o c a

l C a

l l

The average cost per call decreases as morelocal calls are made.


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Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per UnitVariable Total variable cost changes Variable cost per unit remains

as activit y level changes. the same over wide rangesof activity.

Fixed Total fixed cost remains Fi xed cost per unit goesthe same even when the down as activit y level goes up.activity level changes.


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Q uick Check Va ri abl e/Fixed Costs

W hich of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins 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.


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W hich of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins 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.


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W hich of the following costs would be variablewith respect to the number of people who buy aticket for a show at a movie theater? (There

may be more than one correct answer.) A. The cost of renting the film.B. Royalties on ticket sales.

C.W

age and salary costs of theater employees.D . The cost of cleaning up after the show.


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W hich of the following costs would be variablewith respect to the number of people who buy aticket for a show at a movie theater? (There

may be more than one correct answer.) A. The cost of renting the film.B. Royalties on ticket sales.

C.W

age and salary costs of theater employees.D . The cost of cleaning up after the show.

T he ro yalties on ticket sales is directl y related to the n u mber of tickets sold.

T he cost of cleaning u p MAY also be variable if the theater pa yscleaning crews b y the ho u r. T he more tickets sold wo u ld

increase the time it wo u ld take to clean u p the theater.


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D ifferential Costs andRevenues

Costs and revenues that differ amongalternatives.

Ex ample: Yo u have a job pa ying $1,500 per month inyou r hometown. Yo u have a job offer in a neighboringcit y that pa ys $2,000 per month. T he comm u ting costto the cit y is $300 per month.

Differential reven u e is:$2,000 $1,500 = $500

Differential cost is:

$300


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Q uick Check -R e l ev an t Costs

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you dont want to waste money needlessly. Isthe cost of the pizza you ate last night relevantin this decision? In other words, should the costof the pizza affect the decision of whether youdrive or take the train to Portland? A. Yes, the cost of the pizza is relevant.B. N o, the cost of the pizza is not relevant.


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Q uick Check R e l ev an t Costs


you dont want to waste money needlessly. Isthe cost of the pizza you ate last night relevantin this decision? In other words, should the costof the pizza affect the decision of whether youdrive or take the train to Portland? A. Yes, the cost of the pizza is relevant.B. N o, the cost of the pizza is not relevant.


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you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether you

drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant.B. N o, the cost of the train ticket is not relevant.


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you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether you

drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant.B. N o, the cost of the train ticket is not relevant.


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you dont want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis decision? A. Yes, the licensing cost is relevant.B. N o, the licensing cost is not relevant.


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you dont want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis decision? A. Yes, the licensing cost is relevant.B. N o, the licensing cost is not relevant.


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you dont want to waste money needlessly. Isthe depreciation on your car relevant in thisdecision? A. Yes, the depreciation is relevant.B. N o, the depreciation is not relevant.

Depreciation that is a

function of the passage of time would not be relevant.


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Opportunity Costs

The potential benefit that isgiven up when one alternativeis selected over another.

Example: If you werenot attending college,you could be earning$15,000 per year.Your opportunity costof attending college for one year is $15,000.


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Sunk Costs

Sunk costs cannot be changed by any decision.They are not differential costs and should be

ignored when making decisions.

Example: You bought an automobile that cost$10,000 two years ago. The $10,000 cost issunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $10,000 cost.


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Q uick Check S u nk Costs

Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost.B. N o, it is not a sunk cost.


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Q uick Check S u nk Costs

Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost.B. N o, it is not a sunk cost.


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Further Classification of Labor Costs

Idle T imeT reated as

man u fact u ringoverhead cost

OvertimePremi u m of

Factor y Workers

T reated asman u fact u ringoverhead cost

Labor FringeBenefits

T reated as indirectlabor or direct labor


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Merchandiser Current assets

Cash

ReceivablesPrepaid expensesMerchandise inventory

Manufacturer Current Assets

Cash

ReceivablesPrepaid ExpensesInventories

Raw MaterialsW ork in ProcessFinished Goods

Balance Sheet

Partiall y completeprod u cts somematerial, labor, or overhead has been

added.Completed prod u cts

awaiting sale.

Materials waiting tobe processed.


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B eginning rawmaterials inventor y


Beginning inventor y is the inventor y

carried over fromthe prior period.


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B eginning raw Direct materialsmaterials inventor y

+ Raw materialsp u rchased

= Raw materialsavailable for u sein prod u ction

E nding raw materials

inventor y= Raw materials u sedin prod u ction

As items are removed from rawmaterials inventor y and placed into

the prod u ction process, the y arecalled direct materials.



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B eginning raw Direct materialsmaterials inventor y + Direct labor

+ Raw materials + Mfg. overheadp u rchased = T otal man u fact u ring

= Raw materials costsavailable for u sein prod u ction


inventor y= Raw materials u sed

in prod u ction

Conversioncosts are costs

inc u rred toconvert thedirect materialinto a finished

prod u ct.



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inventor y= Raw materials u sedin prod u ction


All man u fact u ring costs inc u rreddu ring the period are added to thebeginning balance of work in

process.


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E nding work in

process inventor y= C ost of goodsman u fact u red.


Costs associated with the goods thatare completed d u ring the period are

transferred to finished goodsinventor y.


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Q uick Check Cost F l ows

If your inventory balance at the beginning of themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what

would be the balance at the end of the month? A. $1,000.B. $ 800.

C. $1,200.D . $ 200.


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If your inventory balance at the beginning of themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what

would be the balance at the end of the month? A. $1,000.B. $ 800.

C. $1,200.D . $ 200.

$1,000 + $100 = $1,100$1,100 - $300 = $800


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Beginning raw materials inventory was $32,000.D uring the month, $276,000 of raw material waspurchased. A count at the end of the monthrevealed that $28,000 of raw material was stillpresent. W hat is the cost of direct materialused?

A. $276,000B. $272,000C. $280,000D . $ 2,000


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Beginning raw materials inventory was $32,000.D uring the month, $276,000 of raw material waspurchased. A count at the end of the monthrevealed that $28,000 of raw material was stillpresent. W hat is the cost of direct materialused?

A. $276,000B. $272,000C. $280,000D . $ 2,000

Beg. raw materials 32,000$+ Raw materials

p u rchased 276,000 = Raw materials available

for u se in prod u ction 308,000$ E nding raw materialsinventor y 28,000

= Raw materials u sedin prod u ction 280,000$


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D irect materials used in production totaled$280,000. D irect labor was $375,000 andfactory overhead was $180,000. W hat weretotal manufacturing costs incurred for themonth?

A. $555,000B. $835,000C. $655,000D . Cannot be determined.


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D irect materials used in production totaled$280,000. D irect labor was $375,000 andfactory overhead was $180,000. W hat weretotal manufacturing costs incurred for themonth?

A. $555,000B. $835,000C. $655,000D . Cannot be determined.

Direct Materials 280,000$

+ Direct Labor 375,000 + Mfg. Overhead 180,000 = Mfg. C osts Inc u rred

for the Month 835,000$



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Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of

partially finished goods remaining in work inprocess inventory at the end of the month.W hat was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D . Cannot be determined.


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Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of

partially finished goods remaining in work inprocess inventory at the end of the month.W hat was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D . Cannot be determined.


B eginning work inprocess inventor y 125,000$

+ Mfg. costs inc u rredfor the period 835,000

= T otal work in processd u ring the period 960,000$

E nding work inprocess inventor y 200,000

= C ost of goodsman u fact u red 760,000$


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WorkIn Process Finished Goods

B eginning work in B eginning finished

process inventor y goods inventor y+ Man u fact u ring costs + C ost of goodsfor the period man u fact u red

= T otal work in process = C ost of goodsfor the period available for sale

E nding work in - E nding finished

process inventor y goods inventor y= C ost of goods C ost of goods

man u fact u red sold



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Beginning finished goods inventory was$130,000. The cost of goods manufactured for the month was $760,000. And the ending

finished goods inventory was $150,000. W hatwas the cost of goods sold for the month? A. $ 20,000.B. $740,000.C. $780,000.D . $760,000.


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Beginning finished goods inventory was$130,000. The cost of goods manufactured for the month was $760,000. And the ending

finished goods inventory was $150,000. W hatwas the cost of goods sold for the month? A. $ 20,000.B. $740,000.C. $780,000.D . $760,000.

$130,000 + $760,000 = $890,000$890,000 - $150,000 = $740,000

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Ete_ppt1_Cost Terms & Concepts