WeekKey Concepts Distinguish between financial and managerial accounting. Define cost terms used in planning, control, and decision making. Distinguish between manufacturing and nonmanufacturing costs and between product and period costs. Describe the flow of product costs in a manufacturing firm's accounts. Explain the relationship between the cost of jobs and the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts.American Insurance Group (AIG) Scandal of 2005 was a multinational insurance corporation that committed massive insurance fraud in the amount of (allegedly) $3.9 billion dollars, as well as participating in bid-rigging and stock price manipulation. It has been alleged that CEO Hank Greenberg booked loans as revenue, and lead clients to insurers that AIG had pay off agreements with, and had traders to inflate the stock prices. Greenberg was fired and I don't believe he faced any criminal charges. AIG settled with the Stock Exchange Commission (SEC) for $10 million in 2003, $1.64 million in 2006.

Our company promotes an ethical environment by having employee's reading and signing our companies Standards of Excellence and certificate of compliance. The Standards of Excellence is details of what's expected of your as an employee and the certificate of compliance is stating is a disclosure describing an entities in which employee or member of their household has a significant financial interest/position with competitor or that person maybe in a position that would have conflict when doing business with our company.I found a really interesting website of the worlds top ten most unethical companies in the world. Some I have heard of some I haven't. I am truly surprised at some of them. Here they are:1. Monsanto Co. - an agricultural company, mostly know for the herbicide Roundup2. Halliburton - an oilfield services corporation3. Chevron - an oil and gas company4. Freeport-McMoran - a copper and gold company5. Phillip Morris - cigarette manufacturer6. Occidental Petroleum - an oil and gas corporation7. Ryanair - an Irish airline8. Syngenta - a Swiss agricultural and chemical company9. Grupo Mexico - the Mexican mining enterprise10. Total - a French oil and gas corporationIsn't it a little bizarre that most of the unethical companies in the world are oil and gas and large mining companies? I find that very interesting.http://www.actionforourplanet.com/#/top-10-unethical-companies/4545796858As most of you wrote:Class:The following is from your lecture:Costs can be classified in regard to how they respond to changes in the activity level. Total variable costs change in proportion to changes in the activity level. If production decreases 20%, variable costs will also decrease 20%. However, the unit variable cost remains the same regardless of the production level. For example, if it costs $5 to produce one unit of Product X, total variable costs are $10,000 if 2,000 units are produced. If production decreases to 1,000 units, total variable costs decrease to $5,000. Notice that while the total variable costs decreased in proportion to the decrease in production, unit variable costs remained the same at $5 per unit.Total fixed costs are not affected by a change in the activity level. However, the unit fixed cost varies inversely with changes in the activity level. As production decreases, unit fixed costs increase because there are fewer units to absorb the cost. For example, assume the rent on a production facility is $5,000 per month. The total cost for rent will be $5,000, regardless of whether the company produces 2,000 or 1,000 units. However, the unit fixed cost is $2.50 if 2,000 units are produced and $5.00 if 1,000 units are produced. As you can see, the unit fixed cost increases as production decreases.

Question:If the 1000 units costs our company $11,000 made of $8 per unit plus fixed cost of $3000 what would 2000 units cost? SHOW ALL WORK.

RE: #2 Cost BehaviorsVariable: 2,000 units * $8/unit = $16,000$16,000 + $3,000 fixed cost = $19,000 Total Cost

Class: #3Which of the following are considered "Direct Product Cost"? WHY?1) Shipping2) Wages of assembly workers3) salary of office accountant4) Advertising5) factory insurance6) Material to make the product7) Automobiles for the salesmen8) Tickets to Cubs games for clientsSolution to Problem #3

Firstly, Insurance on the FACTORY is part of INDIRECT Manufacturing cost. So it does not qualify as DIRECT.

Therefore, only 2 and 6 are DIRECT manufacturing cost.

Post YOUR work even though I may have posted a solution.

Shipping could depend on who pays for the shipping.

Of course, Insurance is a fixed cost and shipping is a variable cost.

CLASS: PROBLEM #4

This problem emphasizes how variable and fixed costs work. EVERYONE should work on this even if others have completed it. Share your work with the class-- even if you are not sure.

1) Sarah's Toys projects Material costs of $375,000 and labor costs of $125,000 in a period when 25,000 toys are produced.

a) What is the variable cost per unit? b) If production is expected to drop to 20,000 toys in the next period, what is the expected labor cost in the next period? Why?

2) If Sarah's Toys also had rent expense of $30,000 a) What is the fixed cost per unit? b) What would be the rent expense when the units drop to 20,000? c) What is the fixed cost per unit at 20,000 units? Why?

3) What is the combined variable plus fixed cost PER UNIT at a)25,000 units? b) At 20,000 units? c) Why did it change? d) By what amount did it change? Why?

(Note that this is not a quiz. I am hoping we all can SHARE and SHOW our work on this important problem. Comment on other students work.Class: Problem #4 SOLUTION.Don't review until you have worked on the problem. Many of you have done a great (and correct) job!

SHARE your work EVEN THOUGH I have posted the solution.

The answers to the problems are as follows:

1). A variable cost is (375,000 +125,000=500,000) (500,000/25000=$20.00) The variable cost per unit is $20.00

B. There was a decrease of 5000 units.(5,000/25000=.20) So there was a percentage decrease of 20%. (125,000*.20=25,000) (125,000-25000=100,000) The expected labor cost in the next period dropped to $100,000 because not as many hours of labor needed to produce less product.

2).a (30,000/25,000=1.20 per unit) the fixed cost per unit would be 1.20 per unit.

B. rent expense still would be 30,000 because it is a fixed cost.

C. (30,000/20,000=1.50) the fixed unit cost would be $1.50 because rent is a constant and divided by the units produced.

3). ...............25,000........................ 20,000 .Per unit ..............Per Unitmaterials cost ..... 375,000 15.00 ... 300,000 15.00Labor cost..........125,000 5.00....... 100,000 5.00rent cost......... $30,000 1.20........$30,000 1.50

Variable plus fixed cost per unit at 25,000 units is $21.20.Variable plus fixed cost per unit at 20,000 units is $21.50.The variable cost per unit stayed the same because variables dropped all around by 20 percent, however the rent stayed the same which increased the cost per unit because the company has to pay the same rent for less units.

Please comment on parts that you do not understand or parts that you now understand.

Basic concepts1)Variable expensesExample: Material is always exactly the same per unit but always increases as you produce more. Never changes per unit for that problem.2)Fixed expenses do not change in TOTAL.Rent is always the same for that company. Always stay the same for that problem.3)Managerial Acctg is directed at INTERNAL;Financial Acctng is directed to outsiders.4)Managerial Acctng does not have GAAP.5)Managerial is often non-monetary and places an emphasis on the future not the past.Insurance on Manufacturing Plant (to manufacturer) is an INDIRECT Manufacturing cost; Insurance on office is an Indirect Administrative cost. Fixed cost but thats not the issue here. It is an INDIRECT cost meaning it is not a DIRECT manufacturing cost.Materials and Direct Labor are DIRECT Manufacturing costs.

Any questions on this?

Class,One of the main points of this week is that totalfixed costs are not affected by a change in the activity level. However, the unit fixed cost varies inversely with changes in the activity level. As production decreases, unit fixed costs increase because there are fewer units to absorb the cost. For example, assume the rent on a production facility is $5,000 per month. The total cost for rent will be $5,000, regardless of whether the company produces 2,000 or 1,000 units. However, the unit fixed cost is $2.50 if 2,000 units are produced and $5.00 if 1,000 units are produced. As you can see, the unit fixed cost increases as production decreases.

TCO2Given a job costing accounting system, prepare the entries, tracking the cost flow from material purchases to cost of goods sold; close out of over- or under-applied overhead, and explain the importance of the applied overhead rate

Key Concepts Discuss the three inventory accounts of a manufacturing firm. Discuss the types of product costing systems. Describe how direct material, direct labor, and manufacturing overhead are assigned to jobs. Explain the role of a predetermined overhead rate in applying overhead to jobs. Explain why the difference between actual overhead and overhead allocated to jobs using a predetermined rate is closed to Cost of Goods Sold or is apportioned among Work In Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.TCO3Given a process costing environment, determine the value of goods transferred out of the department using equivalent units of production, and prepare the entries to assign costs to the next production department and to ending inventory.Key Concepts Describe how products flow through departments and how costs flow through accounts. Discuss the concept of an equivalent unit. Calculate the cost per equivalent unit. Calculate the cost of goods completed and the ending work in process balance in a processing department. Describe a production cost report.

CLASS: Problem #1 for EVERYONE to try to work On:

Kit Company uses a predetermined overhead rate of $8.00 per machine hour. 60,000 machine hours were worked this year and actual overhead costs of $465,000 were incurred.What was the amount of under-applied or over-applied overhead?Indicate if it is over-applied or under applied.

Share your work.Class: Solution to Problem #1:Everyone should work on this and share their answer even though I posted the solution.

The correct answer is$15,000 over applied.

As you wrote they applied 480,000 but only spent 465,000. Therefore they need to reduce the COGS since they expensed $480,000.

If it helps, you might want to prepare T accounts. However, it is not necessary.Note that: The $480,000 went into the COGS as an expense even though they only actually spent $465,000.Therefore the Cost of Goods Sold needs to be reduced by $15,000, so it will be credited for the $15,000.

Class: Problem #2Note that this problem looks very confusing because it has a great deal of extraneous information. It is actually not difficult if you eliminate extraneous material.It is very important to see that all that is being asked for is the application rate. Focus on that and ignore all the information that has nothing to do with the application rate.

Devonshire Corp. uses a budgeted factory overhead rate to apply overhead to production. The following data is available as of the year ended 12/31/13:Budgeted Factory Overhead $888,800Actual Factory Overhead $765,000Budgeted Direct Labor Cost $444,400Actual Direct Labor Cost $550,000

Certain end of year balances are as follows:Raw Material Inventory $333,000Work in Process Inventory $642,000Finished Goods Inventory $911,000Cost of Goods Sold $677,000

If the company uses direct labor cost to allocate overhead, compute the application rate. Note that it is based on COST not hours.

Please SHARE your work with the class.Solution to #2: CLASS,

The problem only asked for the application rate. The estimated overhead is $888,800 and the allocation base is $444,400- therefore most of you were correct that the application rate is $2 PER DOLLAR of LABOR COST. For every dollar of Labor cost we will add (apply) $2 of overhead cost.

Some problems use hours as a base and some problems use dollars as a base. You need to clearly see what the base is.If anyone does not follow please post.

Class: Problem #3 (a bit easier than #2)Happy Co estimates that its employees will work 500,000 direct labor hours during the coming year. Total overhead costs are estimated to be $9,600,000 and direct labor costs are estimated to be $12,500,000. If Happy Co. allocates overhead based on direct labor COST (per dollar, NOT per hour), what is the predetermined overhead rate?Try to do this problem even if others have answered or even if I answered the problem.

The formula of predetermined overhead rate is written above and so yes I would like to agree with Christopher as It relates to the equation calculated. Also, I realizedthe formula of predetermined overhead rate is entirely based on estimates. The overhead applied to products or job orders would, therefore, be different from the actual overhead incurred by jobs or products. This difference is eliminated at the end of the period. The elimination of difference between applied overhead and actual overhead is known as disposition of over or under applied overhead.Solution to Problem #3:CLASS: Many of you eventually were able to get this right. Very nice work.

The problem says that the cost is based on Labor COST not Labor hours so the rate is 9,600,000/12,500,000=.768 per dollar of labor Cost. (.77 is fine) The key is understanding that the rate is not per hour but rather per dollar.

My suggestion would be to remember that the allocation base can be different things depending on the particular organization and what they want to know. Since in this problem it was specified the labor cost was the allocation base, we should use the labor cost. Other problems may specify per hour.Class: Problem #4(I will post the answer Friday so you can see it. HOWEVER: Try to post your solution. The best way to learn the week 2 material is to work on problems. You do not have to do all the problems but try to understand all the problems. Future weeks will not have as many problems):

Green Co. incurred costs of $900,000 for direct materials (raw)purchased. Direct labor was $10,000 and factory overhead was $10,000 for March.

Inventories were as follows:raw materials beginning $1,000;raw materials ending $2,000

work in process beginning $190,000;work in process end $170,000

finished goods beginning $10,000;finished goods ending $10,500

What is the cost of goods manufactured?

This problem is a bit more difficult than it appears as the student needs to calculate many different items and complete a Cost of Goods Manufactured Statement. It is not enough to just calculate the last step.

SHARE your work so all can see.

A little help on Problem #4 We start with the Raw materials used. Beginning was 1,000, plus 900,000 minus 2000; therefore the materials used were 899,000.Class: SOLUTION to Problem#4:(Please postyoursolution for all to share before you review this solution. That is the best way for all of us to learn this material.)

We start with the Raw materials used. Beginning was 1,000, plus 900,000 minus 2000; therefore the materials used were 899,000.

Then what about the Work in Process? The beginning $190,000 plus the 899,000 , plus the Labor $10,000 plus the Overhead $10,000, MINUS THE END $170,000 = CURRENT MANUFACTURING COSTS of $939,000.

Thereforethe Cost of Goods Manufactured= $939,000.

The problem asks for the cost of goods manufactured. We have the answer.

(Then we add COG Manufactured plus the beginning Finished goods of $10,000 minus the ending finished goods of $10,500; we get $938,500 and that is the Cost of Goods Sold. This was not required as part of the problem but hopefully it will help you see the entire flow of the goods. It may be helpful to put this into a few T accounts.)

Please reviewClass: Problem #5At December 31, 2013,TE Inc. has a balance in the Work in Process Inventory account of $60,000. At January 1, 2013, the balance was $46,000. Current manufacturing costs for the year are $300,000. How much is cost of goods manufactured?Beginning Work in Process: $46,000Ending Work in process: $60,000Current Manufacturing Costs: $300,000

$46,000 + $300,000 - $60,000 = 286,000 (Cost of goods Manufactured)You all got the right answer!!To get the Cost of Goods Manufactured you take Beginning$46,000 +Current Manufacturing$300,000 Ending $60,000. So Cost of Goods Manufactured = $286,000

Class,One of the main points of this week is that: Once a relevant allocation base has been selected, we calculate the overhead allocation rate. This predetermined rate is based on estimates of both the manufacturing overhead and the quantity of the allocation base for the coming period.Predetermined Overhead Rate = Estimated Manufacturing Overhead Costs Estimated Allocation BaseWe use estimated data to calculate the predetermined overhead rate for several reasons. First, actual costs and activity are unknown until the end of the period. Because the price charged for a job often depends on the cost, we cannot wait until the end of the period to allocate overhead. Estimates are also used so that the allocation rate remains the same from one month to another. Seasonal fluctuations, such as increased utilities in summer months, would cause the costs of identical jobs to differ if the rate were calculated every month.Now that we have selected an allocation base and calculated the predetermined overhead rate, we can apply manufacturing overhead to jobs by multiplying this rate by the actual amount of the allocation base used by the job.

Can you share other important items we learned this week?The difference between cost of manufacture and total item cost. The cost of manufactured items does not take into account the starting and ending manufactured goods. cost of goods on hand would be the goods manufactured that period plus the goods that were in process at the end of last period minus the goods in process at the end of the current period. This is a good point. The beginning and ending are necessary to find out how much was used.TCO 4Given a firm's cost-volume-profit structure, determine the break-even point in terms of the units and revenue dollars to achieve a targeted pre-tax and after-tax profit goal, and analyze the impact on risk and reward factors resulting from changes in the cost structure, sales price, and volume.Key Concepts Identify common cost behavior patterns. Estimate the relationship between cost and activity using account analysis and the high-low method. Perform cost-volume-profit analysis for single products. Perform cost-volume-profit analysis for multiple products. Discuss the effect of operating leverage. Use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.

TCO5Given a firm's breakdown of product and period costs, compare and contrast the absorption costing method and the variable costing method, detailing differences related to planning, production strategy decisions, and performance evaluation.Key Concepts Explain the difference between full (absorption) and variable costing. Prepare an income statement using variable costing. Discuss the effect of production on full and variable costing income. Explain the impact of JIT (just-in-time) on the difference between full and variable costing income. Discuss the benefits of variable costing for internal reporting purposes.CLASS: Since the break-even point represents the point at which the company makes zero profit, why would a company have any interest in it? How could managers use the break-even point when introducing a new product?The break-even point is where the cost of doing business and the income from the business is at the "0" point. The business neither makes a profit or a loss.The break-even point is the point where the revenue generated from the sale of product is equal to the costs of production and materials. There is no profit or loss. A company would have interest in the break-even point to ensure the product is generating enough sales to generate a profit. If the sales are sluggish then the company may need to do additional marketing or discontinue the production of the product if it not selling. A manager would be interested in the break-even point for the product to ensure sales are high enough to generate a profit and the manager would be in charge of production so they need to be aware of the break-even point and number of units sold to make sure they are accounting for unusable or damaged units which will impact the break-even point.CLASS: Problem#2: This problem uses the ideas we have learned in week 1 and now week 3.You just started to work for a new company that sells tee shirts that reads " I Passed Accounting". Selling price is $10 per shirt; variable cost is $4 per shirt and fixed costs are $36,000. Compute the number of tee shirts to A) break-even; and the number B) to earn a profit of $24,000.

(HELP: I hope you can see that every shirt needs exactly $4 of materials and labor and other variable expenses. That won't change per unit but will increase in total as we make more shirts. Our fixed cost of rent and other fixed costs won't change in total but will change per unit as we make more units. The rent and insurance and other Fixed expenses will stay at exactly $36,000 in this problem.)Profit=SP(x)VC(x)TFCSP = $10, VC = $4, TFC = 36,000Break Even Point = 6,000 Units0 = 10(x) - 4(x) - 36,0000 = 6(x) - 36,000X = 6000Profit of $24,000 = 10,000 Units24,000 =10(x) - 4(x) - 36,00024,000 = 6(x) 36,00060,000 = 6(x)10,000 = XClass: Solution to #2(most of you were able to figure this out. Review only after you have tried it. Post your work even though an answer is already posted.)Profit = SP(x) - VC(x) - TFCa) break-even: (point where the profit is zero)0= 10(x)-4(x)-36,000---> 0=10x-4x-36,000 ---> 0=6x-36,0006x= 36,000 ---> x=6,0006,000 T-Shirts made and sold.B) To earn a profit of $24,000:24,000 = 10(x)-4(x) - 36,000 ---> 24,000 = 6(x)-36,000 ---> 24,000+36,000 = 6x ---> x=10,000the company would have to sell 10,000 T-Shirts to earn a profit of $24,000

Problem #3assume we are manufacturing a product.Assume the sales price per unit is $60 and the variable cost is $20 per unit and the fixed cost is $80,000; a) how many units would we need to sell to breakeven? b) How many units would we need to sell to earn a profit of $120,000? c) How many units do we need to sell to double that profit to $240,000? d) Why didn't the number of units double from Part B to Part C? What do we (the manufacturing company) learn about our costs from this?

Class: Solution to Problem # 3: (Please post your solution before reviewing even though I posted my solution. Share your work). This is what I would put on a blackboard--Step by step.Profit = SP(x) - VC(x) - TFCwhere "x" = Quantity of units produced and soldSP = Selling price per unitVC = Variable cost per unitTFC = Total fixed cost

A: Compute the # of sales needed to break evenHere we set profit = to zero, because the break-even point is where no loss is incurred and no profit is earned.$0.00 = $60(x) - $20(x) - $80,000.00$0.00 = $40(x) - $80,000.00+ $80,000.00 + $80,000.00---------------- ----------------$80,000.00 = $40(x)__________ _________