CHAPTER 1CHAPTER 1

PowerPoint Author:LuAnn Bean, Ph.D., CPA, CIA, CFE

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Components of Product Components of Product CostCost

Materials Labor Overhead

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Average Cost per UnitAverage Cost per Unit

Total CostNumber of Units

= Average Cost per Unit

= $250$1,0004

Tabor Example Average Cost Per Unit

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Costs Can Be Assets or Costs Can Be Assets or ExpensesExpenses

Period Cost Expense

COGSAssetProduct

Cost

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Overhead Costs: A Overhead Costs: A Closer LookCloser Look

Indirect Costs

Depreciation Supervisor’s Salary Utilities

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Indirect Cost AllocationIndirect Cost Allocation

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Manufacturing Product Cost Manufacturing Product Cost SummarySummary

DirectMaterials

DirectLabor

ManufacturingOverhead

Raw materialcosts that can

be easily tracedto products.

Factory wagesthat can be easily traced to products.

Other factory costs such as indirect

materials and labor, utilities, rent, security,

and depreciation.

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Product Costing in Service Product Costing in Service and Merchandising and Merchandising CompaniesCompanies

ServiceCompanies

Merchandising Companies

Provide products to customers that are

consumed immediately

Sell products other companies make

Service and merchandising companies also incur labor and overhead costs. However, these costs are normally treated as general, selling and administrative expenses

rather than accumulated in inventory accounts.

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Inventory Holding Inventory Holding CostsCosts

Obvious Hidden

Financing and Warehouse

Space

Supervision

Theft, damage,

obsolescence

Increased Production

Time

Sloppy work Decreased Motivation

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Just-in-Time Inventory Just-in-Time Inventory

JITEnables

Reduction or Elimination of

Non-value Added

Activities

Avoidance of Lost

Opportunities

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Corporate GovernanceCorporate GovernanceCorporate governance is a set of relationships between

the board of directors, management, shareholders, auditors, and other stakeholders that determine how a

company is operated.

Board of DirectorsAuditors

Management

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Internal Control Internal Control PracticesPractices

Separating Duties

Hiring Competent Personnel

Bonding Employees

Using Prenumbere

d Documents

Establishing Physical Controls

Performing Evaluations at Regular Intervals

RequiringExtended Absences

Establishing Clear Lines of Authority

& Responsibili

ty

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End of Chapter 1End of Chapter 1