CostsTerms,ConceptsandClassificationsChapterTwoWhycosts?AnimportantpartofinformationsystemAstrategyAnexample-----AirlinecompanyDifferentcostsfordifferentpurposes------costsusedinfinancialandmanagerialaccountingWholeorsegment?CostcompositionLearningObjective1Identifyandgiveexamplesofeachofthethreebasicmanufacturingcostcategories.TheProductDirect

MaterialsDirect

LaborManufacturing

OverheadManufacturingCostsDirectMaterials

Rawmaterialsthatbecomeanintegralpartoftheproductandthatcanbeconvenientlyand

directlytracedtoit.Example:

AradioinstalledinanautomobileDirectLaborThoselaborcoststhatcanbeeasilytracedtoindividualunitsofproduct.Example:

WagespaidtoautomobileassemblyworkersManufacturingcoststhatcannotbetracedconvenientlyanddirectlytospecificunitsproduced.ManufacturingOverheadIndirectmaterials,indirectlabor,andothermanufacturingoverheadWagespaidtoemployeeswhoarenotdirectlyinvolvedinproductionwork.

Examples:maintenanceworkers,janitorsandsecurityguards.Materialsusedtosupporttheproductionprocess.

Examples:lubricantsandcleaningsuppliesusedintheautomobileassemblyplant.Non-manufacturingCostsSelling

CostsCostsnecessarytogettheorderanddelivertheproduct.AdministrativeCostsAllexecutive,organizational,andclericalcosts.CostClassificationsLearningObjective2Distinguishbetweenproductcostsandperiodcostsandgiveexamplesofeach.MatchingPrinciple-----basedonAccrualaccounting

Costsincurredtogenerateaparticularrevenueshouldberecognizedasexpensesinthesameperiodthattherevenueisrecognized.Economiceventsarerecognizedbymatchingrevenuestoexpenses(thematchingprinciple)

atthetimeinwhichthetransaction

occursratherthanwhenpaymentismade(orreceived).ProductCostsVersusPeriodCosts

Productcostsincludedirectmaterials,directlabor,andmanufacturingoverhead.Periodcostsincludeallsellingcostsandadministrativecosts.

InventoryCostofGoodSoldBalance

SheetIncome

StatementSaleExpenseIncome

StatementQuickCheck

Whichofthefollowingcostswouldbeconsideredaperiodratherthanaproductcostinamanufacturingcompany?A.Manufacturingequipmentdepreciation.B.Propertytaxesoncorporateheadquarters.C.Directmaterialscosts.D.Electricalcoststolighttheproductionfacility.E.Salescommissions.QuickCheck

Whichofthefollowingcostswouldbeconsideredaperiodratherthanaproductcostinamanufacturingcompany?A.Manufacturingequipmentdepreciation.B.Propertytaxesoncorporateheadquarters.C.Directmaterialscosts.D.Electricalcoststolighttheproductionfacility.E.Salescommissions.ClassificationsofCostsDirect

MaterialDirect

LaborManufacturing

OverheadPrime

CostConversion

CostManufacturingcostsareoften

classifiedasfollows:ComparingMerchandisingandManufacturingActivitiesMerchandisers...Buyfinishedgoods.Sellfinishedgoods.Manufacturers...Buyrawmaterials.Produceandsellfinishedgoods.MegaLoMartBalanceSheet

Merchandiser

CurrentassetsCashReceivablesPrepaidExpensesMerchandiseInventory

Manufacturer

CurrentAssetsCashReceivablesPrepaidExpensesInventoriesRawMaterialsWorkinProcessFinishedGoods

Merchandiser

CurrentassetsCashReceivablesPrepaidExpensesMerchandiseInventory

Manufacturer

CurrentAssetsCashReceivablesPrepaidExpensesInventoriesRawMaterialsWorkinProcessFinishedGoodsBalanceSheetPartiallycompleteproducts–somematerial,labor,oroverheadhasbeenadded.Completedproductsawaitingsale.Materialswaitingtobeprocessed.LearningObjective3Prepareanincomestatementincludingcalculationofthecostofgoodssold.TheIncomeStatement

Costofgoodssoldformanufacturersdiffersonlyslightlyfromcostofgoodssoldformerchandisers.

BasicEquationforInventoryAccounts BeginningbalanceAdditions

toinventory+=EndingbalanceWithdrawals

frominventory+QuickCheck

Ifyourinventorybalanceatthebeginningofthemonthwas$1,000,youbought$100duringthemonth,andsold$300duringthemonth,whatwouldbethebalanceattheendofthemonth?A.$1,000.B.$800.C.$1,200.D.$200.QuickCheck

Ifyourinventorybalanceatthebeginningofthemonthwas$1,000,youbought$100duringthemonth,andsold$300duringthemonth,whatwouldbethebalanceattheendofthemonth?A.$1,000.B.$800.C.$1,200.D.$200.$1,000+$100=$1,100$1,100-$300=$800LearningObjective4Prepareascheduleofcostofgoodsmanufactured.ScheduleofCostofGoodsManufacturedCalculatesthecostofrawmaterial,directlaborandmanufacturingoverheadusedinproduction.Calculatesthemanufacturingcostsassociatedwithgoodsthatwerefinishedduringtheperiod.Asitemsareremovedfromrawmaterialsinventoryandplacedintotheproductionprocess,theyare

calleddirectmaterials.ProductCostFlowsConversioncostsarecostsincurredtoconvertthedirectmaterialintoafinishedproduct.ProductCostFlowsProductCostFlowsAllmanufacturingcostsincurredduringtheperiodareaddedtothebeginningbalanceofworkinprocess.ProductCostFlowsCostsassociatedwiththegoodsthatarecompletedduringtheperiodaretransferredtofinishedgoodsinventory.ProductCostFlowsManufacturingCostFlowsFinished

GoodsCostof

Goods

SoldSellingand

AdministrativePeriodCostsSellingand

AdministrativeManufacturing

Overhead

Workin

ProcessDirectLabor

BalanceSheet

CostsInventories Income

Statement

ExpensesMaterialPurchasesRawMaterialsCostThe$100listedonthebalancesheetasaninventoryExpenseThe$100expenseduntilthefinishedgoodsaresoldthataremadeoftherawmaterial

PayoutPay$100forRawMaterialQuickCheck

Beginningrawmaterialsinventorywas$32,000.Duringthemonth,$276,000ofrawmaterialwaspurchased.Acountattheendofthemonthrevealedthat$28,000ofrawmaterialwasstillpresent.Whatisthecostofdirectmaterialused?A. $276,000B. $272,000C. $280,000D. $2,000

QuickCheck

Directmaterialsusedinproductiontotaled$280,000.Directlaborwas$375,000andfactoryoverheadwas$180,000.Whatweretotalmanufacturingcostsincurredforthemonth?A. $555,000B. $835,000C. $655,000D. Cannotbedetermined.QuickCheck

Beginningworkinprocesswas$125,000.Manufacturingcostsincurredforthemonthwere$835,000.Therewere$200,000ofpartiallyfinishedgoodsremaininginworkinprocessinventoryattheendofthemonth.Whatwasthecostofgoodsmanufacturedduringthemonth?A. $1,160,000B. $910,000C. $760,000D. Cannotbedetermined.QuickCheck

Beginningfinishedgoodsinventorywas$130,000.Thecostofgoodsmanufacturedforthemonthwas$760,000.Andtheendingfinishedgoodsinventorywas$150,000.Whatwasthecostofgoodssoldforthemonth?A.$20,000.B.$740,000.C.$780,000.D.$760,000.LearningObjective5Understandthedifferencesbetweenvariablecostsandfixedcosts.CostClassificationsforPredictingCostBehavior

Howacostwillreacttochangesinthelevelofactivitywithintherelevantrange.Totalvariablecosts

changewhenactivitychanges.Totalfixedcosts

remainunchangedwhenactivitychanges.VariableCost

Yourtotallongdistancetelephonebillisbasedonhowmanyminutesyoutalk.MinutesTalkedTotalLongDistance

TelephoneBillVariableCostPerUnitMinutesTalkedPerMinute

TelephoneCharge

Thecostperlongdistanceminutetalkedisconstant.FixedCost

Yourmonthlybasictelephonebillprobablydoesnotchangewhenyoumakemorelocalcalls.NumberofLocalCallsMonthlyBasicTelephoneBillFixedCostPerUnitNumberofLocalCallsMonthlyBasicTelephoneBillperLocalCallTheaveragefixedcostperlocalcalldecreasesasmorelocalcallsaremade.CostClassificationsforPredictingCostBehaviorImportanceofunderstandingcostbehaviorFoodcostsatahotelAhammercosts$1,000QuickCheck

WhichofthefollowingcostswouldbevariablewithrespecttothenumberofconessoldataBaskins&Robbinsshop?(Theremaybemorethanonecorrectanswer.)A.Thecostoflightingthestore.B.Thewagesofthestoremanager.C.Thecostoficecream.D.Thecostofnapkinsforcustomers.QuickCheck

WhichofthefollowingcostswouldbevariablewithrespecttothenumberofconessoldataBaskins&Robbinsshop?(Theremaybemorethanonecorrectanswer.)A.Thecostoflightingthestore.B.Thewagesofthestoremanager.C.Thecostoficecream.D.Thecostofnapkinsforcustomers.LearningObjective6Understandthedifferencesbetweendirectandindirectcosts.CostObject

Anythingforwhichcostdataaredesired.Examples:products,customers,jobs,organizationalsubunits,etc.AssigningCoststoCostObjectsDirectcostsCoststhatcanbe

easilyandconvenientlytracedtoaunitofproductorothercostobject.Examples:directmaterialanddirectlaborIndirectcostsCoststhatcannotbeeasilyandconvenientlytracedtoaunitofproductorothercostobject.Example:manufacturingoverheadCommoncostAcostthatisincurredtosupportanumberofcostobjectsbutcannotbetracedtothemindividually.AnExample-----AtradewithDOD

LearningObjective7Defineandgiveexamplesofcostclassificationsusedinmakingdecisions:differentialcosts,opportunitycosts,andsunkcosts.Everydecisioninvolvesachoicebetweenatleasttwoalternatives.

Onlythosecostsandbenefitsthatdifferbetweenalternativesarerelevantinadecision.Allothercostsandbenefitscanandshouldbeignored.CostClassificationsforDecisionMakingDifferentialCostandRevenueCostsandrevenuesthatdifferamongalternatives.Example:Youhaveajobpaying$1,500permonthinyourhometown.Youhaveajobofferinaneighboringcitythatpays$2,000permonth.Thecommutingcosttothecityis$300permonth.Differentialrevenueis:

$2,000–$1,500=$500Differentialcostis:

$300OpportunityCost

Thepotentialbenefitthatisgivenupwhenonealternativeisselectedoveranother.

Example:Ifyouwere

notattendingcollege,

youcouldbeearning

RMB100,000peryear.

Youropportunitycost

ofattendingcollegeforoneyearisRMB100,000.SunkCosts

Sunkcostshavealreadybeenincurredandcannotbechangednoworinthefuture.Theyshouldbeignoredwhenmakingdecisions.

Example:

Youboughtanautomobilethatcost$10,000twoyearsago.The$10,000costissunkbecausewhetheryoudriveit,parkit,tradeit,orsellit,youcannotchangethe$10,000cost.QuickCheck

SupposeyouaretryingtodecidewhethertodriveortakethetraintoPortlandtoattendaconcert.Youhaveamplecashtodoeither,butyoudon’twanttowastemoneyneedlessly.Isthecostofthetrainticketrelevantinthisdecision?Inotherwords,shouldthecostofthetrainticketaffectthedecisionofwhetheryoudriveortakethetraintoPortland?A.Yes,thecostofthetrainticketisrelevant.B.No,thecostofthetrainticketisnotrelevant.QuickCheck

SupposeyouaretryingtodecidewhethertodriveortakethetraintoPortlandtoattendaconcert.Youhaveamplecashtodoeither,butyoudon’twanttowastemoneyneedlessly.Isthecostofthetrainticketrelevantinthisdecision?Inotherwords,shouldthecostofthetrainticket