201B 6E Chap001d

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    'earnin" (b)e#ti*e &

    Identify and give

    examples of each of thethree basic

    manufacturing cost

    categories.

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    The ProductThe Product

    Dire#tMaterials

    Dire#tMaterials

    Dire#t'abor 

    Dire#t'abor 

    Manu+a#turin"(*erhead

    Manu+a#turin"(*erhead

    Classi+i#ations o+ Manu+a#turin"

    Costs

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    Dire#t Materials

      !aw materials that be#ome an inte"ral$art o+ the $rodu#t and that #an be#on*enientl tra#ed dire#tl to it.

    Example: A radio installed in an automobile

    Example:  A radio installed in an automobile

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    Dire#t 'abor 

    hose labor #osts that #an be easiltra#ed to indi*idual units o+ $rodu#t.

    Example: Wages paid to automobile assembly worers

    Example:  Wages paid to automobile assembly worers

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    Manu+a#turin" (*erhead

    Manu+a#turin" #osts that #annot be easiltra#ed dire#tl to s$e#i+i# units $rodu#ed.

    Examples: Indirect materials and indirect labor 

    Examples:  Indirect materials and indirect labor 

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    -onmanu+a#turin" Costs

    Administrative!osts

    All executive"

    organi#ational" andclerical costs.

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    'earnin" (b)e#ti*e

    $istinguish between

    product costs andperiod costs and give

    examples of each.

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    Produ#t Costs /ersus Period Costs

      Product costs includedirect materials" direct

    labor" and

    manufacturingoverhead.

    Period costs include allselling costs and

    administrative costs. 

    Inventory !ost of %ood &old

    Balan#eSheet

    In#omeStatement

    &ale

    Expense

    In#omeStatement

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    0ui#k Che#k

      Whi#h o+ the +ollowin" #osts would be #onsidereda $eriod rather than a $rodu#t #ost in amanu+a#turin" #om$an1

     A. Manu+a#turin" e2ui$ment de$re#iation.B. Pro$ert ta3es on #or$orate head2uarters.

    C. Dire#t materials #osts.

    D. 4le#tri#al #osts to li"ht the $rodu#tion

    +a#ilit.

    4. Sales #ommissions.

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    0ui#k Che#k

      Whi#h o+ the +ollowin" #osts would be #onsidereda $eriod rather than a $rodu#t #ost in amanu+a#turin" #om$an1

     A. Manu+a#turin" e2ui$ment de$re#iation.B. Pro$ert ta3es on #or$orate head2uarters.

    C. Dire#t materials #osts.

    D. 4le#tri#al #osts to li"ht the $rodu#tion

    +a#ilit.

    4. Sales #ommissions.

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    Classi+i#ations o+ Costs

    Manu+a#turin" #osts are o+ten#lassi+ied as +ollows:

    Dire#tMaterial

    Dire#t'abor 

    Manu+a#turin"(*erhead

    PrimeCost

    Con*ersionCost

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    'earnin" (b)e#ti*e 5

    'nderstand cost

    behavior patternsincluding variable costs"fixed costs" and mixed

    costs.

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    Cost Classi+i#ations +or Predi#tin" Cost

    Beha*ior    Cost beha*ior re+ers tohow a #ost will rea#t to#han"es in the le*el o+

    a#ti*it. he most#ommon #lassi+i#ationsare:

    ▫ (ariable costs

    ▫ )ixed costs

    ▫ *ixed costs

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    /ariable Cost

      6our total texting bill is based on howman te3ts ou send.

    +umber of Texts &ent

       T  o   t  a   l

       T  e  x   t   i  n  g   ,   i   l   l

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    /ariable Cost Per 7nit

      he cost per text sent is #onstant at

    8 #ents $er te3t messa"e.

    +umber of Texts &ent

       !  o  s   t   P

      e  r   T  e  x   t   &  e  n   t

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    he A#ti*it Base 9Cost Dri*er

     A measure o+ what#auses the

    in#urren#e o+ a*ariable #ost

    7nits$rodu#ed

    Milesdri*en

    Ma#hine;hours

    'abor;hours

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    43am$les Ad*ertisin" and

    !esear#h andDe*elo$ment

    43am$lesDe$re#iation on Buildin"sand 42ui$ment and !eal

    4state a3es

    $es o+

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    !ele*ant!an"e

     A strai"ht line#losel

    a$$ro3imates a#ur*ilinear

    *ariable #ostline within therele*ant ran"e.

     A strai"ht line#losel

    a$$ro3imates a#ur*ilinear

    *ariable #ostline within the

    rele*ant ran"e.

     A#ti*it

       ,  o

       t  a   l    C  o  s   t

    4#onomist=sCur*ilinear Cost

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       !  e  n   t

       C  o  s   t   i  n   ,   h  o

      u  s  a  n   d  s

      o   +   D  o   l   l  a  r  s

    % &,%%% ,%%% 5,%%%!ented Area 9S2uare

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    Cost Classi+i#ations +or Predi#tin" Cost

    Beha*ior 

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    0ui#k Che#k

    Whi#h o+ the +ollowin" #osts would be *ariable with res$e#tto the number o+ #ones sold at a Baskins !obbins sho$19here ma be more than one #orre#t answer.

     A. he #ost o+ li"htin" the store.B. he wa"es o+ the store mana"er.

    C. he #ost o+ i#e #ream.

    D. he #ost o+ na$kins +or #ustomers.

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    Whi#h o+ the +ollowin" #osts would be *ariable with res$e#tto the number o+ #ones sold at a Baskins !obbins sho$19here ma be more than one #orre#t answer.

     A. he #ost o+ li"htin" the store.B. he wa"es o+ the store mana"er.

    C. he #ost o+ i#e #ream.

    D. he #ost o+ na$kins +or #ustomers.

    0ui#k Che#k

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    Mi3ed Costs

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    Mi3ed Costs E An 43am$le

    I+ our +i3ed monthl utilit #har"e is >F%, ourI+ our +i3ed monthl utilit #har"e is >F%, our*ariable #ost is >%.%5 $er kilowatt hour, and our*ariable #ost is >%.%5 $er kilowatt hour, and our

    monthl a#ti*it le*el is ,%%% kilowatt hours, what ismonthl a#ti*it le*el is ,%%% kilowatt hours, what isthe amount o+ our utilit bill1the amount o+ our utilit bill1

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     Analsis o+ Mi3ed Costs

    InIn account analysisaccount analysis, ea#h a##ount is, ea#h a##ount is#lassi+ied as either *ariable or +i3ed based#lassi+ied as either *ariable or +i3ed based

    on the analston the analst=s knowled"e o+ how=s knowled"e o+ howthe a##ount beha*es.the a##ount beha*es.

    InIn account analysisaccount analysis, ea#h a##ount is, ea#h a##ount is#lassi+ied as either *ariable or +i3ed based#lassi+ied as either *ariable or +i3ed based

    on the analston the analst=s knowled"e o+ how=s knowled"e o+ howthe a##ount beha*es.the a##ount beha*es.

    he engineering approach #lassi+ies

    #osts based u$on an industrialen"ineer=s e*aluation o+ $rodu#tionmethods, and material, labor, and

    o*erhead re2uirements.

    he engineering approach #lassi+ies

    #osts based u$on an industrialen"ineer=s e*aluation o+ $rodu#tionmethods, and material, labor, and

    o*erhead re2uirements.

     A##ount Analsis and the 4n"ineerin" A$$roa#h A##ount Analsis and the 4n"ineerin" A$$roa#h A##ount Analsis and the 4n"ineerin" A$$roa#h A##ount Analsis and the 4n"ineerin" A$$roa#h

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    'earnin" (b)e#ti*e F

    Analy#e a mixed cost

    using a scattergraph plotand the highlow

    method.

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    S#atter"ra$h Plots E An 43am$le Assume the +ollowin" hours o+ maintenan#e work and the total maintenan#e #osts +or si3 months.

     

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    Plot the data $oints on a "ra$h9otal Cost Y  *s. A#ti*it  X .

    Plot the data $oints on a "ra$h9otal Cost Y  *s. A#ti*it  X .

    he S#atter"ra$h Method

    -

     /

    ours o+ Maintenan#e

       ,  o   t  a   l    M

      a   i  n   t  e  n  a  n  #  e   C  o  s   t

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    he i"h;'ow Method E An

    43am$lehehe variable costvariable cost

     per hour  per hour  o+o+

    maintenan#e ismaintenan#e ise2ual to the #han"ee2ual to the #han"e

    in #ost di*ided bin #ost di*ided bthe #han"e in hours.the #han"e in hours.

    hehe variable costvariable cost per hour  per hour  o+o+

    maintenan#e ismaintenan#e is

    e2ual to the #han"ee2ual to the #han"ein #ost di*ided bin #ost di*ided b

    the #han"e in hours.the #han"e in hours.

    >?.%%Hhour >?.%%Hhour >,F%%

     F%%

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    he i"h;'ow Method E An

    43am$le

    otal ?Hhour 8% hours 8% hours

    otal @,%% E >8,&%%otal @,%% E >8,&%%

    otal F,K%%

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    he i"h;'ow Method E An

    43am$le

    Y Y   >F,K%% L >?.%%  >F,K%% L >?.%% X  X 

    he Cost 42uation +or Maintenan#e

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    0ui#k Che#k

      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the *ariable $ortion o+ salessalaries and #ommission1

    a. >%.% $er unit

    b. >%.&% $er unit

    #. >%.& $er unitd. >%.&8 $er unit

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      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the *ariable $ortion o+ sales

    salaries and #ommission1a. >%.% $er unit

    b. >%.&% $er unit

    #. >%.& $er unit

    d. >%.&8 $er unit

    0ui#k Che#k

    'nits !ost

    0igh level 123"333  14"3335

    6ow level 73"333  13"333 !hange 43"333  4"3335

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    0ui#k Che#k

      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the +i3ed $ortion o+ salessalaries and #ommissions1

    a. > ,%%%

    b. > F,%%%

    #. >&%,%%%d. >&,%%%

      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the +i3ed $ortion o+ salessalaries and #ommissions1

    a. > ,%%%

    b. > F,%%%

    #. >&%,%%%d. >&,%%%

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      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the +i3ed $ortion o+ salessalaries and #ommissions1

    a. > ,%%%

    b. > F,%%%

    #. >&%,%%%d. >&,%%%

      Sales salaries and #ommissions are >&%,%%%when %,%%% units are sold, and >&F,%%% when&%,%%% units are sold. 7sin" the hi"h;lowmethod, what is the +i3ed $ortion o+ salessalaries and #ommissions1

    a. > ,%%%

    b. > F,%%%

    #. >&%,%%%d. >&,%%%

    0ui#k Che#k

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    'east;S2uares !e"ression Method

     A method used to anale mi3ed #osts i+ as#atter"ra$h $lot re*eals an a$$ro3imatel linear

    relationshi$ between the X  and Y  *ariables.

    his method useshis method uses all all  o+ theo+ thedata $oints to estimatedata $oints to estimatethe +i3ed and *ariablethe +i3ed and *ariable

    #ost #om$onents o+ a#ost #om$onents o+ ami3ed #ost.mi3ed #ost.

    his method useshis method uses all all  o+ theo+ thedata $oints to estimatedata $oints to estimate

    the +i3ed and *ariablethe +i3ed and *ariable#ost #om$onents o+ a#ost #om$onents o+ a

    mi3ed #ost.mi3ed #ost. he "oal o+ this method ishe "oal o+ this method is

    to +it a strai"ht line to theto +it a strai"ht line to the

    data thatdata that minimizes theminimizes the

    sum of the squared errorssum of the squared errors..

    he "oal o+ this method ishe "oal o+ this method is

    to +it a strai"ht line to theto +it a strai"ht line to thedata thatdata that minimizes theminimizes the

    sum of the squared errorssum of the squared errors..

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    'east;S2uares !e"ression Method

    So+tware #an be used to +it a re"ression linethrou"h the data $oints.

    he #ost analsis ob)e#ti*e is the same:

    Y  8 a 9 bX 

    'east;s2uares re"ression also $ro*ides a statisti#,

    #alled the !, whi#h is a measure o+ the "oodness

    o+ +it o+ the re"ression line to the data $oints.

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    Com$arin" !esults

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    'earnin" (b)e#ti*e 8

    Prepare incomestatements for a

    merchandising companyusing the traditional and

    contribution formats.

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    he raditional and Contribution

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    7ses o+ the Contribution

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    'earnin" (b)e#ti*e ?

    'nderstand the

    differences betweendirect and indirect costs.

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     Assi"nin" Costs to Cost (b)e#ts

    $irect costs

    • !osts that can beeasily and

    conveniently tracedto a unit of productor other cost obect.

    • Examples: direct

    material and directlabor 

    Indirect costs

    • !osts that cannotbe easily and

    conveniently tracedto a unit of productor other cost obect.

    • Example:

    manufacturingoverhead

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    'earnin" (b)e#ti*e K

    'nderstand costclassifications used in

    maing decisions:differential costs"

    opportunity costs" andsun costs.

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    Cost Classi+i#ations +or De#isionMakin"

    4*er de#ision in*ol*es a #hoi#ebetween at least two alternati*es.

    (nl those #osts and bene+its thatdi++er between alternati*es are rele*antin a de#ision. All other #osts and

    bene+its #an and should be i"nored asirrele*ant.

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    Di++erential Cost and !e*enue

    Costs and re*enues that di++er amon" alternati*es.

    Example: /ou have a ob paying 51";33 per month inyour hometown. /ou have a ob offer in a neighboringcity that pays 52"333 per month. The commuting costto the city is 5

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    ($$ortunit Cost

      The potential benefit that is givenup when one alternative is

    selected over another.

    43am$le:  I+ ou werenot attendin" #olle"e,ou #ould be earnin"

    >&8,%%% $er ear.6our o$$ortunit #osto+ attendin" #olle"e +orone ear is >&8,%%%.

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    Sunk Costs

    Sunk #osts ha*e alread been in#urred and #annot be#han"ed now or in the +uture. hese #osts should be

    i"nored when makin" de#isions.

    43am$le:  Su$$ose ou had $ur#hased "old +or

    >F%% an oun#e, but now it is sellin" +or >8% anoun#e. Should ou wait +or the "old to rea#h >F%% anoun#e be+ore sellin" it1 6ou ma sa, N6esO e*enthou"h the >F%% $ur#hase is a sunk #ost.

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    0ui#k Che#k

      Su$$ose ou are trin" to de#ide whether to dri*e or takethe train to Portland to attend a #on#ert. 6ou ha*e am$le#ash to do either, but ou don=t want to waste moneneedlessl. Is the #ost o+ the train ti#ket rele*ant in this

    de#ision1 In other words, should the #ost o+ the train ti#keta++e#t the de#ision o+ whether ou dri*e or take the train toPortland1

     A. 6es, the #ost o+ the train ti#ket is rele*ant.

    B. -o, the #ost o+ the train ti#ket is not rele*ant.

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      Su$$ose ou are trin" to de#ide whether to dri*e or takethe train to Portland to attend a #on#ert. 6ou ha*e am$le#ash to do either, but ou don=t want to waste moneneedlessl. Is the #ost o+ the train ti#ket rele*ant in this

    de#ision1 In other words, should the #ost o+ the train ti#keta++e#t the de#ision o+ whether ou dri*e or take the train toPortland1

     A. 6es, the #ost o+ the train ti#ket is rele*ant.

    B. -o, the #ost o+ the train ti#ket is not rele*ant.

    0ui#k Che#k

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    0ui#k Che#k

      Su$$ose ou are trin" to de#ide whether to dri*e or takethe train to Portland to attend a #on#ert. 6ou ha*e am$le#ash to do either, but ou don=t want to waste moneneedlessl. Is the annual #ost o+ li#ensin" our #ar

    rele*ant in this de#ision1 A. 6es, the li#ensin" #ost is rele*ant.

    B. -o, the li#ensin" #ost is not rele*ant.

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      Su$$ose ou are trin" to de#ide whether to dri*e or takethe train to Portland to attend a #on#ert. 6ou ha*e am$le#ash to do either, but ou don=t want to waste moneneedlessl. Is the annual #ost o+ li#ensin" our #ar

    rele*ant in this de#ision1 A. 6es, the li#ensin" #ost is rele*ant.

    B. -o, the li#ensin" #ost is not rele*ant.

    0ui#k Che#k

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    0ui#k Che#k

    Su$$ose that our #ar #ould be sold now +or >8,%%%. Isthis a sunk #ost1

     A. 6es, it is a sunk #ost.

    B. -o, it is not a sunk #ost.

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    Su$$ose that our #ar #ould be sold now +or >8,%%%. Isthis a sunk #ost1

     A. 6es, it is a sunk #ost.

    B. -o, it is not a sunk #ost.

    0ui#k Che#k

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    Summar o+ the $es o+ CostClassi+i#ations

    )inancial)inancial

    >eporting>eportingPredicting !ostPredicting !ost

    ,ehavior ,ehavior 

    Assigning !ostsAssigning !oststo !ost ?bectsto !ost ?bects

    *aing ,usiness*aing ,usiness$ecisions$ecisions

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    4nd o+ Cha$ter %&