Ete_ppt1_Cost Terms & Concepts
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Transcript of 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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Q uick Check Period vs. Product Costs
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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Q uick Check Period vs. Product Costs
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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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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Q uick Check Va ri abl e/Fixed Costs
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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Q uick Check Va ri abl e/Fixed Costs
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
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
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 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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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 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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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 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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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 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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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 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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Man u fact u ring WorkRaw Materials C osts In Process
B eginning rawmaterials inventor y
Product Costs - A Closer Look
Beginning inventor y is the inventor y
carried over fromthe prior period.
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Man u fact u ring WorkRaw Materials C osts In Process
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.
Product Costs - A Closer Look
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Man u fact u ring WorkRaw Materials C osts In Process
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
E nding raw materials
inventor y= Raw materials u sed
in prod u ction
Conversioncosts are costs
inc u rred toconvert thedirect materialinto a finished
prod u ct.
Product Costs - A Closer Look
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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 raw materials
inventor y= Raw materials u sedin prod u ction
Product Costs - A Closer Look
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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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 goodsman 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 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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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.
$1,000 + $100 = $1,100$1,100 - $300 = $800
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Q uick Check Cost F l ows
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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Q uick Check Cost F l ows
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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Q uick Check Cost F l ows
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$
Q uick Check Cost F l ows
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Q uick Check Cost F l ows
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.
Q uick Check Cost F l ows
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
Product Costs - A Closer Look
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Q uick Check Cost F l ows
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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Q uick Check Cost F l ows
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