acct 2302 fundamentals of accounting ii spring 2011 lecture 2 professor jeff yu
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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu. Review: what do managers do and how MA can help. Formulating long-and short-term plans (Planning). Begin. Comparing actual to planned performance (Controlling). - PowerPoint PPT PresentationTRANSCRIPT
ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 2
Professor Jeff Yu
DecisionMaking
Formulating long-and short-term plans
(Planning)
Formulating long-and short-term plans
(Planning)
Measuring performance (Controlling)
Measuring performance (Controlling)
Implementing plans (Directing and
Motivating)
Implementing plans (Directing and
Motivating)
Comparing actual to planned performance
(Controlling)
Comparing actual to planned performance
(Controlling)
Begin
Review: what do managers do and how MA can help
MA provides information that help managers make decisions throughout the planning and control cycle.
Review: Managerial vs. Financial Accounting
Financial Accounting
Managerial Accounting
Users
Time Focus
Emphasis Verifiability and Precision
Subject The whole Organization
Requirement Follow GAAP
Chapter 2: Today’s Agenda
Introduce cost terms, concepts and classifications
I organize our discussions according to the three major course themes:
How costs behave?
How accounting system reports costs?
Economic costs vs. Accounting costs
How costs behave?
Cost is a sacrifice; In accounting, a measurable cost is typically the relinquishment of a measurable asset or the creation of a measurable liability.
Cost Behavior: how a cost will react to a change in activity level.
Cost Driver: The activity causing a cost to change. e.g., units produced, units sold, hours worked, etc.
Consider the Rollerblade manufacturer: Each rollerblade produced requires one set of wheels. If rollerblade production increases 10%, how will that affect the total cost of wheels required for production?
Rollerblades produced
Tota
l co
st o
f
wh
eels
Total Variable Cost
Suppose the Rollerblade manufacturer rents a factory in which to produce the rollerblades. How will the monthly factory rental cost change as the number of rollerblades produced increases?
Rollerblades produced
Tota
l co
st o
f
fact
ory
ren
tal
Total Fixed Cost
Rollerblades produced
Per
un
it w
heel co
st
Consider again the Rollerblade manufacturer: If rollerblade production increases 10%, how much will the cost per unit cost of wheels change?
Pairs of Rollerblades
producedPer unit
wheel costTotal wheel
cost1 $5 $5
10 $5 $50400 $5 $2,000500 $5 $2,500
Variable Cost Per Unit
Rollerblades produced
How does the factory rental cost per unit of rollerblade change as the number of rollerblades produced increases?
Pairs of Rollerblades
producedMonthly
rental costPer unit
rental cost1 $1,000 $1,000
10 $1,000 $100400 $1,000 $3500 $1,000 $2
Per
Un
it R
en
tal C
ost
Fixed Cost Per Unit
Quick Check
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
Relevant Range
The range of activity within which the assumptions about cost behavior are valid.
Activity Volume
Total cost
Total cost curve
Relevant range
Summary: Cost Behavior
In Total Per Unit
Variable Cost
Fixed Cost
Within the Relevant Range, how will each of the following
cost change as activity level increases (decreases)?
Practice Problem
Luxor Company’s relevant range is 500 to 4000 units. The cost information for producing 1500 units is as follows:
Total Fixed Cost $120,000
Total Variable Cost $360,000
Total production cost $480,000
Calculate:
1) per unit variable cost if 3,000 units are produced;
2) per unit fixed cost if 2,500 units are produced;
3) Per unit production cost if 1,000 units are produced;
4) The total cost if 4,000 units are produced.
What if 5,000 units are produced?
Nale company’s relevant range is from 200 to 2000 units. In the past it produced 400 units with a total cost of $2200, and 500 units with a total cost of $2700. Now if it want to produce 800 units, what will be the expected total cost?
Practice Problem
How accounting system reports costs?
Costing: In accounting, costing is largely a matter of assigning
costs to products or services.
Absorption Costing: The costing method used to value inventories and cost of goods sold for financial reporting purposes.
Under absorption costing, all manufacturing costs are treated as product costs, all non-manufacturing costs are treated as period costs, regardless of whether they are fixed or variable.
Product vs. Period Costs
Absorption costing differentiates product and period costs based on the timing with which various costs are recognized as expenses on the income statement (according to GAAP).
Product Costs (Manufacturing Costs): Recognized as expense (cost of good sold) when
the product is sold
Period Costs (Non-Manufacturing Costs): Recognized as expense in the period incurred, no
matter the product is sold or not.
Accounting for manufacturing firm
The production process:
Purchase materials
Use Materials, Labor,Overhead to
make a product
Ready to sell to customer
Accounting:
Raw MaterialsInventory
Work-in-ProcessInventory
Finished goodsInventory
Cost of Goods Sold
Manufacturing Costs
Manufacturing Overhead
DirectLabor
DirectMaterial
Product Cost
Direct Material
Example:Steel used tomanufacture
the automobile.
Example:Steel used tomanufacture
the automobile.
Materials that become an integral part of the product and that can be conveniently traced
directly to the product
Cost of wages for people who work directly on products.
In other words, those labor costs that can be easily traced toindividual units of product.
Example:Wages paid to an
automobile assemblyworker.
Example:Wages paid to an
automobile assemblyworker.
Direct Labor
All other manufacturing costs that cannot be traced directly to specific units produced. It includes any other costs that is related to the manufacturing process or production facility (factory).
Manufacturing Overhead
IndirectLabor
IndirectMaterial
Othermanufacturing Costs
Examples of other manufacturing costs:
Depreciation, maintenance and repairs of production equipment;
Utilities, insurance, property tax of the production facility (factory)
Examples of Manufacturing Overhead
IndirectMaterial
IndirectLabor
Wages paid to employees who are not directly involved in
production work but is associated with operating the
factory.
Examples: wages for production supervisors,
maintenance workers, janitors and security guards for the
factory
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
Cost Classification - Manufacturing Firms
PrimeCost
ConversionCost
Manufacturing costs are often combined as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
Nonmanufacturing Costs
Marketing and Selling Costs
Costs necessary to get the order and deliver the product. e.g. advertising,
shipping, sales commissions.
Administrative Costs
All executive, organizational, and clerical
costs.
DirectMaterial
DirectLabor
ManufacturingOverhead
Manufacturing Costs = Product Costs
Marketing/ Selling Costs
Administrative Costs
NonManufacturing Costs = Period Costs
Summary: Costs under Absorption Costing
Quick Check
For each of the following costs, answer whether it is:
DM, DL, MOH or Nonmanufacturing cost?
Prime and/or Conversion cost? Product or Period cost?
1). Manufacturing equipment depreciation.
2). Property taxes on corporate headquarters.
3). Wages paid to the production supervisor.
4). Electrical costs to light the production facility.
5). Wages paid to the factory machine operators.
6). The cost of a hard drive installed in a computer.
7). Sales commissions.
Cost Behavior: Accounting Costs
For each of the following costs, please specify whether it is a fixed cost or variable cost within the relevant range?
Assume the cost driver is units of product produced:
1). Direct Material
2). Direct Labor
3). Property tax of the factory building
4). Electricity consumed to make the product
Assume the cost driver is units of product sold:
1). Sales Commission
2). Cost of one advertising campaign.
Economic Costs vs. Accounting Costs
Differential Cost/Differential Revenue – Costs and revenues that differ between two (or more) alternatives
Opportunity Cost – the potential benefit given up when one alternative is selected over the next best alternative.
Sunk Cost – a cost that has already been incurred and cannot be changed by any decision now or later.
Cost classification for decision making:
Relevant costs for decision making
Every decision involves a choice between at least two alternatives.
Only differential costs and benefits are relevant in a decision. All other costs and benefits can and should be ignored.
Is Opportunity Cost a differential cost?
Is Sunk Cost a differential cost?
Practice Problem: Equipment Replacement Decision
A manager at White Co. is deciding whether to replace an old machine with a new machine. White’s sales are estimated to be $200,000 per year for the next 5 years. Fixed expenses, other than depreciation, are estimated to be $70,000 per year. Purchasing the new machine costs $90,000 and will save variable expenses of $20,000 per year during its 5-year useful life. The old machine was purchased at $72,000 and carry a remaining book value of $60,000 on the balance sheet. The disposal value of the old machine is $15,000. The old machine, if not used, could also be leased to another company for $4,000 per year for the next 5 years.
Question: for this equipment replacement decision
(1)what are differential costs and revenues over the next 5 years?
(2)What is the opportunity cost for keep using the old machine?
(3) Is there any sunk cost?
For Next Class
Read Chapter 2, focus on product cost flows
Complete the assigned HW problems
Home Work: Q1
Answer Yes or No to each of the following question:
Wage paid to factory machine operators at $10 per unit of product would be a:
(1) Period Cost?
(2) Conversion Cost?
(3) Fixed Cost?
(4) Prime Cost?
Home Work: Q2
Karvel Co.’s relevant range is 100 to 5000 units.
Last year 2,000 units were produced with
total production cost of $240,000, among which total fixed cost is $60,000 and total variable cost is $180,000.
Q: What will be the per unit production cost if 1,000 units are produced this year?
Home Work: Q3
Mastang Co.’s relevant range is 0 to 1000 units. In April it produced 400 units with a total production cost of $3,000. In May it produced 900 units with a total production cost of $5,500.
Q: What will be the total production cost for June if 800 units are expected to be produced?