CA Lecture 14

8/6/2019 CA Lecture 14

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COST CONCEPTS

AND BEHAVIOR

Chapter 2

2 - 2

Define and illustrate

a cost object.

COST AND COST TERMINOLOGY

2 - 3

Costis a resource sacrificed or forgone to achievea specific objective.

An actual costis the cost incurred (a historical cost)

as distinguished from budgeted costs.

A cost objectis anything for which a separatemeasurement of costs is desired.

COST AND COST TERMINOLOGY

2 - 4

CostAccumulation

Cost Object

Cost Object

Cost Object

CostAssignment

Tracing

Allocating

2 - 5

COST BEHAVIOR

2 - 6

Distinguish between direct costs

and indirect costs.


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DIRECT AND INDIRECT COSTS

2 - 7

Direct Costs

Example: Paper on which

Sports Illustratedmagazine

is printed

Indirect Costs

Example: Lease cost for

Time-Warner buildinghousing the senior editors

of its magazine

COST OBJECT

Example:Sports

Illustrated magazine

COST OBJECT

Example:Sports

Illustrated magazine

DIRECT AND INDIRECT COSTS

EXAMPLE

2 - 8

Direct Costs:Maintenance Department $40,000Personnel Department $20,600Assembly Department $75,000Finishing Department $55,000

Assume that Maintenance Department costs areallocated equally among the production departments.

How much is allocated to each department?

DIRECT AND INDIRECT COSTS EXAMPLE

2 - 9

Allocated

$20,000

Maintenance

$40,000

AssemblyDirect Costs

$75,000

FinishingDirect Costs

$55,000

$20,000

2 -10

Explain variable costs

and fixed costs.

COST BEHAVIOR PATTERNS EXAMPLE

2 -11

Bicycles by the Sea buys a handlebar

at $52 for each of its bicycles.

What is the total handlebar cost when

1,000 bicycles are assembled?


2 -12

1,000 units $52 = $52,000

What is the total handlebar costwhen 3,500 bicycles are assembled?

3,500 units $52 = $182,000


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2 -13

Bicycles by the Sea incurred $94,500 ina given year for the leasing of its plant.

This is an example of fixed costs with

respect to the number of bicycles assembled.


2 -14

What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 1,000 bicycles?

$94,500 1,000 = $94.50

What is the leasing (fixed) cost per bicycle

when Bicycles assembles 3,500 bicycles?$94,500 3,500 = $27

COST DRIVERS

2 -15

The cost driver of variable costs is the levelof activity or volume whose change causes

the (variable) costs to change proportionately.

The number of bicycles assembled is acost driver of the cost of handlebars.

RELEVANT RANGE EXAMPLE

2 -16

Assume that fixed (leasing) costs are $94,500

for a year and that they remain the same for acertain volume range (1,000 to 5,000 bicycles).

1,000 to 5,000 bicycles is the relevant range.

RELEVANT RANGE EXAMPLE

2 -17

0

20000

40000

60000

80000

100000

120000

0 1000 2000 3000 4000 5000 6000

Volume

FixedCosts

$94,500

RELATIONSHIPS OF TYPES OF COSTS

2 -

18

Direct

Indirect

Variable Fixed


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2 -19

Distinguish between

manufacturing companies,

merchandising companies, and

service-sector companies.

MANUFACTURING

2 -20

Manufacturing companies

purchase materials and components and

convert them into finished goods.

A manufacturing company must also develop,design, market, and distribute its products.

2 -21

2 -22

QUICK CHECK

If your inventory balance at the beginning of the month

was $1,000, you bought $100 during the month, 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.

2 -23

QUICK CHECK

If your inventory balance at the beginning of the month

was $1,000, you bought $100 during the month, 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

2 -24


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MERCHANDISING

2 -25

Merchandising companies (Retail)

purchase and then sell tangible products

without changing their basic form.

2 - 26 2 - 27

SERVICE

2 -28

Service companies

provide services or intangible

products to their customers.

Labor is the most significant cost category.

2 - 29 2 - 30

Differentiate between

inventoriable costs

and period costs.


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TYPES OF INVENTORY

2 -31

Manufacturing-sector companies

typically have one or more of thefollowing three types of inventories:

1. Direct materials inventory

2. Work in process inventory (work

in progress)

3. Finished goods inventory

TYPES OF INVENTORY

2 -32

Merchandising-sector companies hold

only one type of inventory theproduct in its original purchased form.

Service-sector companies do nothold inventories of tangible products.

CLASSIFICATION OF

MANUFACTURING COSTS

2 -33

Direct materials costs

Direct manufacturing labor costs

Indirect manufacturing costs

PERIOD COSTS

2 -34

Period costs are all costs in the incomestatement other than cost of goods sold.

Period costs are recorded as expenses of the

accounting period in which they are incurred.

FLOW OF COSTS EXAMPLE

2 -35

Bicycles by the Sea had $50,000 of directmaterials inventory at the beginning of the period.

Purchases during the period amounted to

$180,000 and ending inventory was $30,000.How much direct materials were used?

$50,000 + $180,000 $30,000 = $200,000


2 -36

Direct labor costs incurred were $105,500.

Indirect manufacturing costs were $194,500.What are the total manufacturing costs incurred?

Direct materials used $200,000

Direct labor 105,500

In direct manufact uring cos ts 194,500

Total manufacturing costs $500,000


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2 -37

Assume that the work in process inventoryat the beginning of the period was $30,000,

and $35,000 at the end of the period.

What is the cost of goods manufactured?Beginning work in process $ 3 0,000

Total manufacturing costs 500,000

Ending work in process 35,000

Cost of goods manufactured $495,000


2 -38

Assume that the finished goods inventoryat the beginning of the period was $10,000,

and $15,000 at the end of the period.

What is the cost of goods sold?Beginning finished goods $ 10,000

Cost of goods manufactured 495,000

Ending finished goods 15,000

Cost of goods sold $490,000


2 -39

Work in ProcessBeg. Balance 30,000 495,000Direct mtls. used 200,000Direct labor 105,500Indirect mfg. costs 194,500

Ending Balance 35,000


2 -40

Work in Process

495,000

Finished Goods10,000 490,000

495,00015,000

Cost of Goods Sold490,000

QUICK CHECK

Beginning raw materials inventory was $32,000. During

the month, $276,000 of raw material was purchased. A

count at the end of the month revealed that $28,000 of

raw material was still present. What is the cost of direct

material used?

A. $276,000

B. $272,000

C. $280,000

D. $ 2,000

QUICK CHECK

Beginning raw materials inventory was $32,000. During

the month, $276,000 of raw material was purchased. A

count at the end of the month revealed that $28,000 of

raw material was still present. What is the cost of direct

material used?

A. $276,000

B. $272,000

C. $280,000

D. $ 2,000

Beg. raw materials 32,000$

+ Raw materials

purchased 276,000

= Raw materials available

for use in production 308,000$

Ending raw materials

inventory 28,000

= Raw materials used

in production 280,000$

Beg. raw materials 32,000$

+ Raw materials

purchased 276,000

= Raw materials available

for use in production 308,000$

Ending raw materials

inventory 28,000

= Raw materials used

in production 280,000$


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MANUFACTURING COMPANY

2 -43

MaterialsInventory

FinishedGoods

Inventory

Revenues

Cost ofGoods Sold

INCOME STATEMENT

PeriodCosts

InventoriableCosts

BALANCE SHEET

Equals Operating Income

whensalesoccur

deduct

Equals Gross Margindeduct

Work inProcess

Inventory

MERCHANDISING COMPANY

2 -44

INCOME STATEMENTBALANCE SHEET

whensalesoccur

InventoriableCosts

MerchandisePurchases

Inventory

Revenuesdeduct

Cost ofGoods Sold

Equals Gross Margindeduct

PeriodCosts

Equals Operating Income

2 -45

PRIME COSTS

2 -46

Direct

Materials

Direct

Labor

Prime

Costs+ =

PRIME COSTS

2 -47

What are the prime costs for Bicycles by the Sea?

Direct materials used $200,000+ Direct labor 105,500= $305,000

CONVERSION COSTS

2 -48

Direct

Labor

ManufacturingOverhead+ =

ConversionCosts

IndirectLabor

IndirectMaterials Other


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CONVERSION COSTS

2 -49

What are the conversion costs for

Bicycles by the Sea?

Direct labor $105,500

+ Indirect manufacturing costs 194,500= $300,000

MEASURING COSTS

REQUIRES JUDGMENT

2 -50

Manufacturing labor-cost classificationsvary among companies.

The following distinctions are generally found:

Direct manufacturing labor

Manufacturing overhead

MEASURING COSTS

REQUIRES JUDGMENT

2 -51

Manufacturing overhead

Indirect labor Managers salaries Payroll fringe costs

Forklift truck operators (internal handling of materials)

Janitors Rework labor

Overtime premium Idle time

2 -52

Explain why product costs are

computed in different waysfor different purposes.

MANY MEANINGS OF PRODUCT COST

2 -53

A product cost is the sum of the costs

assigned to a product for a specific purpose.

1. Pricing and product emphasis decisions

2. Contracting with government agencies

3. Preparing financial statements for externalreporting under generally acceptedaccounting principles

2 -54

Present key features of

cost accounting andcost management.


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A FRAMEWORK FOR COST

MANAGEMENT

2 -55

Three features of cost accountingand cost management:

1. Calculating the costs of products

2. Obtaining information

3. Analyzing information

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CA Lecture 14