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Transcript of Chapter 02 n
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Basic Cost Management Concepts and Accounting for Mass Customization Operations
Chapter 2
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
1
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Process of ManagementProcess of Management
1-3
DecisionMaking
DirectingControl
PlanningStrategy Formulation
Managers need cost information toperform each of these functions.
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What Do We Mean By a Cost?What Do We Mean By a Cost?
1-4
A costis the measure ofresources givenup to achieve a
particular purpose.
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
2
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Product Costs, Period Costs and Product Costs, Period Costs and ExpensesExpenses
1-6
Product costs are costs associated with goods for sale until the time period during which the products are sold, at which time the costs become expenses.
Period costs are costs that are expensed during the time period in which they are incurred.
Expenses are the consumption of assets for the purpose of generating revenue.
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
3
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Cost Classifications on Financial Cost Classifications on Financial Statements – Income StatementStatements – Income Statement
1-8
Product CostsProduct Costs
Cost of goods sold
Period CostsPeriod Costs
Operating expenses
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Cost Classifications on Financial Cost Classifications on Financial Statements – Balance SheetStatements – Balance Sheet
1-9
Merchandiser Current Assets
– Cash– Receivables– Prepaid Expenses– Merchandise
Inventory
Manufacturer Current Assets
CashCash ReceivablesReceivables Prepaid ExpensesPrepaid Expenses Inventories
Raw MaterialsWork in ProcessFinished Goods
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Cost Classifications on Financial Cost Classifications on Financial Statements – Balance SheetStatements – Balance Sheet
1-10
Merchandiser Current Assets
– Cash– Receivables– Prepaid Expenses– Merchandise
Inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw MaterialsWork in ProcessFinished Goods
Those materials waiting to be processed.
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Cost Classifications on Financial Cost Classifications on Financial Statements – Balance SheetStatements – Balance Sheet
1-11
MerchandiserMerchandiser Current AssetsCurrent Assets
– CashCash– ReceivablesReceivables– Prepaid ExpensesPrepaid Expenses– Merchandise Merchandise
InventoryInventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw MaterialsWork in ProcessFinished Goods
Partially complete products – material to
which some labor and/or overhead has
been added.
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Cost Classifications on Financial Cost Classifications on Financial Statements – Balance SheetStatements – Balance Sheet
1-12
MerchandiserMerchandiser Current AssetsCurrent Assets
– CashCash– ReceivablesReceivables– Prepaid ExpensesPrepaid Expenses– Merchandise Merchandise
InventoryInventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw MaterialsWork in ProcessFinished Goods
Completed products awaiting sale.
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
4
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1-14
Types of Production ProcessesTypes of Production ProcessesType of Production Description of Example of
Process Process Manufacturer
Job Shop Low volume DisneyLittle standardization
Unique products
Batch Multiple products CaterpillarLow volume
Assembly Line A few major products FordHigher volume
Mass Customization High volume DellMany standardized components
Customized combination of components
Continuous Flow High volume ExxonHighly standardized commodity products
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
5
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Manufacturing CostsManufacturing Costs
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TheProduct
DirectLabor
Manufacturing Overhead
DirectMaterial
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Direct MaterialDirect Material
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Example:Steel used tomanufacture
the automobile.
Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.
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Direct LaborDirect Labor
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Cost of salaries, wages, and fringebenefits for personnel who work
directly on manufactured products.
Example:Wages paid to an
automobile assemblyworker.
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Manufacturing OverheadManufacturing Overhead
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All other manufacturing costs
Materials used to support the production process. Examples: lubricants and
cleaning supplies used in an automobile assembly plant.
IndirectLabor
IndirectMaterial
OtherCosts
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Manufacturing OverheadManufacturing Overhead
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All other manufacturing costs
Cost of personnel who do not work directly on
the product. Examples: maintenance workers, janitors and security
guards.
IndirectLabor
IndirectMaterial
OtherCosts
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Manufacturing OverheadManufacturing Overhead
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All other manufacturing costs
Examples: depreciation on plant and equipment,
property taxes, insurance, utilities,
overtime premium, and unavoidable idle time.
IndirectLabor
IndirectMaterial
OtherCosts
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Classifications of Costs in Classifications of Costs in Manufacturing CompaniesManufacturing Companies
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Manufacturing costs are oftencombined as follows:
PrimeCost
ConversionCost
DirectMaterial
DirectLabor
ManufacturingOverhead
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Manufacturing Cost FlowsManufacturing Cost Flows
1-23
ManufacturingOverhead
Direct Material
Direct Labor Work in Process Inventory
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Manufacturing Cost FlowsManufacturing Cost Flows
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ManufacturingOverhead
Direct Material
Direct Labor
FinishedGoods
Inventory
Work in Process Inventory
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Manufacturing Cost FlowsManufacturing Cost Flows
1-25
ManufacturingOverhead
Direct Material
Direct Labor
FinishedGoods
Inventory
Cost of GoodsSold
Work in Process Inventory
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
6
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Schedule of Cost of Goods Schedule of Cost of Goods ManufacturedManufactured
1-27
Comet Computer CorporationSchedule of Cost of Goods Manufactured
Raw material used 134,980$ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs 414,980$ Add: Work-in-process inventory, January 1 120 Subtotal 415,100$ Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured 415,000$
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1-28
Comet Computer CorporationSchedule of Cost of Goods Manufactured
Raw material used 134,980$ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs 414,980$ Add: Work-in-process inventory, January 1 120 Subtotal 415,100$ Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured 415,000$
Schedule of Cost of Goods Schedule of Cost of Goods ManufacturedManufactured
Computation of Cost of Raw Material Used
Raw-material inventory, January 1 6,000$ Add: Purchases of raw materials 134,000 Raw material available for use 140,000 Deduct: Raw material inventory, December 31 5,020 Raw material used 134,980$
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Schedule of Cost of Goods Schedule of Cost of Goods ManufacturedManufactured
1-29
Comet Computer CorporationSchedule of Cost of Goods Manufactured
Raw material used 134,980$ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs 414,980$ Add: Work-in-process inventory, January 1 120 Subtotal 415,100$ Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured 415,000$
Include all direct labor costs incurred during the
current period.
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1-30
Comet Computer CorporationSchedule of Cost of Goods Manufactured
Raw material used 134,980$ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs 414,980$ Add: Work-in-process inventory, January 1 120 Subtotal 415,100$ Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured 415,000$
Computation of Total Manufacturing Overhead
Indirect material 10,000$ Indirect labor 40,000 Depreciation on factory 90,000 Depreciation on equipment 70,000 Utilities 15,000 Insurance 5,000 Total manufacturing overhead 230,000$
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Schedule of Cost of Goods Schedule of Cost of Goods ManufacturedManufactured
1-31
Comet Computer CorporationSchedule of Cost of Goods Manufactured
Raw material used 134,980$ Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs 414,980$ Add: Work-in-process inventory, January 1 120 Subtotal 415,100$ Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured 415,000$
Beginning work-in-process inventory is carried over from the
prior period.
Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.
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Income Statement for a Income Statement for a ManufacturerManufacturer
1-32
Comet Computer CorporationIncome Statement
For the Year Ended December 31, 20X2Sales revenue 700,000$ Less: Cost of goods sold 415,010 Gross margin 284,990$ Selling and administrative expenses 174,490 Income before taxes 110,500$ Income tax expense 30,000 Net income 80,500$
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1-33
Comet Computer CorporationIncome Statement
For the Year Ended December 31, 20X2Sales revenue 700,000$ Less: Cost of goods sold 415,010 Gross margin 284,990$ Selling and administrative expenses 174,490 Income before taxes 110,500$ Income tax expense 30,000 Net income 80,500$
Comet Computer CorporationSchedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1 200$ Add: Cost of goods manufactured 415,000 Cost of goods available for sale 415,200 Deduct Finished-goods inventory, Dec. 31 190 Cost of goods sold 415,010$
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
7
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Activities that cause costs to be Activities that cause costs to be incurred are called COST DRIVERS:incurred are called COST DRIVERS:
1-35
Cost Driver ExamplesActivity Cost Driver
Machining operations Machine hoursSetup Setup hoursProduction scheduling Manufacturing ordersInspection Pieces inspectedPurchasing Purchase ordersShop order handling Shop ordersValve assembly support Customer requisitions
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
8
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Cost ClassificationsCost Classifications
1-37
Cost behavior means how a cost will react to changes in the level of business activity.– Total variable costs
change when activity changes.
– Total fixed costs remain unchanged when activity changes.
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Total Variable Cost ExampleTotal Variable Cost Example
1-38
Your total cable pay-per-view bill is based on how many movies you watch.
Pay-Per-View Movies Watched
Tota
l Pay
-Per
-Vie
w
Bill
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Variable Cost Per Unit ExampleVariable Cost Per Unit Example
1-39
The cost per movie watched is constant. For example, $4.00 per movie.
Movies Watched
Per
Mov
ie C
harg
e
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Total Fixed Cost ExampleTotal Fixed Cost Example
1-40
Your monthly cable bill probably does not change when you watch movies on channels that you have
elected to be paid on a monthly basis (HBO).
Number of HBO Movies Watched
Mon
thly
Cha
rge
for
HB
O B
ill
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Fixed Cost Per Unit ExampleFixed Cost Per Unit Example
1-41
The average cost per HBO movie decreases as more HBO movies are watched.
Number of HBO Movies Watched
Mon
thly
HB
O B
ill p
er M
ovie
W
atch
ed
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Cost ClassificationsCost Classifications
1-42
Summary of Variable and Fixed Cost BehaviorCost In Total Per Unit
Total variable cost changes Variable cost per unitVariable as activity level changes. remains the same over
wide ranges of activity.
Total fixed cost remains Fixed cost per unitFixed the same even when the goes down as activity
activity level changes. level goes up.
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
9
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Direct and Indirect CostsDirect and Indirect Costs
1-44
Direct costs• Costs that can be
easily and conveniently traced to a product or department.
• Example: cost of paint in the paint department of an automobile assembly plant.
Indirect costs• Costs that must be
allocated in order to be assigned to a product or department.
• Example: cost of national advertising for an airline is indirect to a particular flight.
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Controllable andControllable andUncontrollable CostsUncontrollable Costs
1-45
A cost that can be significantly influencedby a manager is a controllable cost.
Cost item Manager ClassificatonCost of food used Restaurant Controllablein a restaurant managerCost of national Restaurant Uncontrollableadvertising by a managerrestaurant chain
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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objective
10
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Opportunity CostOpportunity Cost
1-47
The potential benefit that is given up when one alternative is selected over another.– Example: If you were
not attending college,you could be earning$20,000 per year. Your opportunity costof attending college for one year is $20,000.
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Sunk CostsSunk Costs
1-48
All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions.
– Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.
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Differential CostsDifferential Costs
1-49
Costs that differ between alternatives.
Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in yourhometown and $300 per month to the city.
What is your differential cost? $300 - $50 = $250
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Marginal Costs and Average Marginal Costs and Average CostsCosts
1-50
The extra costincurred to produceone additional unit.
The total cost toproduce a quantity
divided by thequantity produced.
Marginal and average costs arelargely a function of cost behavior
-- variable and fixed costs.
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Costs and Benefits of InformationCosts and Benefits of Information
1-51
Costs Benefits
More information does not mean more benefits if information overload results.
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End of Chapter 2End of Chapter 2
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