chap02notes.ppt
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
11thEditionChapter 2
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Costs Terms, Concepts andClassifications
Chapter Two
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
ManufacturingOverhead
Manufacturing Costs
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing costs that cannotbe traced directlto specific units produced!
Manufacturing #$erhead
Examples: %ndirect labor and indirect materials
Examples: %ndirect labor and indirect materials
Wages paid to emploees!ho are not directl
in$ol$ed in production!or"&Examples: maintenance
!or"ers, 'anitors andsecurit guards&
Materials used to supportthe production process&
Examples:lubricants andcleaning supplies used in theautomobile assembl plant&
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Classifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
"rimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows#
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.uic" Chec"
(f our inventor balance at the beginning of themonth was 01$$ ou bought 01 during themonth$ and sold 0 during the month$ what would
be the balance at the end of the month*+! 01$!
&! 0 3!
C! 01$2!
D! 0 2!
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Manufacturing Wor"
?a! Materials Costs %n Process
/eginning ra! Direct materials
materials in$entor 6 Direct labor
6 ?a! materials 6 Mfg& o$erhead purchased < Total manufacturing
< ?a! materials costs
a$ailable for use
in production
0 Ending ra! materials
in$entor< ?a! materials used
in production
Con$ersioncosts are costs
incurred tocon$ert the
direct materialinto a finished
product&
Con$ersioncosts are costs
incurred tocon$ert thedirect materialinto a finished
product&
Product Cost >lo!s
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing Cost >lo!s
>inished-oods
Cost of
-oods*old
*elling and
Administrati$e
"eriod Costs*elling and
Administrati$e
Manufacturing#$erhead
Wor" inProcess
Direct Labor
&alance 'heet Costs (nventories
(ncome'tatementE-penses
Material Purchases ?a! Materials
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Direct materials used in production totaled023$! Direct labor was 079$ andfactor overhead was 013$! )hat were
total manufacturing costs incurred for themonth*
+! 0999$
&! 039$C! 0899$
D! Cannot be determined!
.uic" Chec"
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.uic" Chec"
&eginning wor% in process was 0129$!Manufacturing costs incurred for the monthwere 039$! There were 02$ of
partiall finished goods remaining in wor%in process inventor at the end of themonth! )hat was the cost of goodsmanufactured during the month*
+! 01$18$&! 0 :1$C! 0 78$D! Cannot be determined!
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
&eginning wor% in process was 0129$!Manufacturing costs incurred for the monthwere 039$! There were 02$ of
partiall finished goods remaining in wor%in process inventor at the end of themonth! )hat was the cost of goodsmanufactured during the month*
+! 01$18$&! 0 :1$C! 0 78$D! Cannot be determined!
.uic" Chec"
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.uic" Chec"
&eginning finished goods inventor was01$! The cost of goods manufacturedfor the month was 078$! +nd the ending
finished goods inventor was 019$!)hat was the cost of goods sold for themonth*
+! 0 2$!
&! 07;$!C! 073$!
D! 078$!
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.uic" Chec"
&eginning finished goods inventor was01$! The cost of goods manufacturedfor the month was 078$! +nd the ending
finished goods inventor was 019$!)hat was the cost of goods sold for themonth*
+! 0 2$!
&! 07;$!C! 073$!
D! 078$!
01$ 4 078$ 5 03:$
03:$ 6 019$ 5 07;$
Cost Classifications for Predicting Cost
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Cost Classifications for Predicting Cost/eha$ior
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Total >ixed Cost
=our monthl basic telephone billprobabldoes not change when ou ma%e more local
calls!
>umber of Local Calls
Mon
thl&asic
Tele
phone&ill
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Cost Classifications for Predicting Cost
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Cost Classifications for Predicting Cost/eha$ior
/eha$ior of Cost !ithin the rele$ant range;
Cost %n Total Per @nit
ariable Total $ariable cost changes ariable cost per unit remainsas acti$it le$el changes& the same o$er !ide ranges
of acti$it&
>ixed Total fixed cost remains A$erage fixed cost per unit goes
the same e$en !hen the do!n as acti$it le$el goes up&
acti$it le$el changes&
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Cost Classifications for Decision
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Ever decision involves a choice between atleast two alternatives!
Onl those costs and benefits that differbetween alternatives are relevant in a decision!+ll other costs and benefits can and should be
ignored!
Cost Classifications for DecisionMa"ing
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# t it C t
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#pportunit Costs
The potential benefit that is givenup when one alternative isselected over another!
E-ample# (f ou werenot attending college$ou could be earning
019$ per ear!=our opportunit costof attending college forone ear is 019$!
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. i " Ch "
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.uic" Chec"
'uppose ou are tring to decide whether to driveor ta%e the train to "ortland to attend a concert! =ouhave ample cash to do either$ but ou dont want towaste mone needlessl! (s the cost of the traintic%et relevant in this decision* (n other words$should the cost of the train tic%et affect the decisionof whether ou drive or ta%e the train to "ortland*
+! =es$ the cost of the train tic%et is relevant!&! >o$ the cost of the train tic%et is not relevant!
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.uic" Chec"
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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
.uic" Chec"
'uppose that our car could be sold now for09$! (s this a sun% cost*
+! =es$ it is a sun% cost!
&! >o$ it is not a sun% cost!
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%dle Time
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%dle Time
The labor costs incurredduring idle time are ordinaril
treated as manufacturingo$erhead&
Machine/rea"do!ns
Material*hortages
Po!er>ailures
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.ualit of Conformance
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.ualit of Conformance
When the o$er!helming ma'orit ofproducts produced conform to design
specifications and are free from
defects&
Pre$ention and Appraisal Costs
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Pre$ention and Appraisal Costs
Pre$entionCosts
*upport acti$ities!hose purpose is toreduce the number of
defects
Appraisal Costs
%ncurred to identifdefecti$e products
before the products areshipped
%nternal and External >ailure Costs
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%nternal and External >ailure Costs
%nternal >ailureCosts
%ncurred as a result ofidentifing defects
before the are shipped
External >ailureCosts
%ncurred as a result ofdefecti$e productsbeing deli$ered to
customers
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entura Compan.ualit Cost ?eport
>or ears 1 and 3
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.ualit costreports pro$idean estimate of
the financialconseuences
of thecompanBs
current defectrate&
Amount Percent Amount Percent
"revention costs#
'stems development ;$0 !3 27$0 !9;
Fualit training 21$ !;2 1$ !28
'upervision of prevention activities 7$ !1; ;$ !3Fualit improvement 2$ !8; 21$ !;2
Total prevention cost 1$$ 2! 89$ 1!
+ppraisal costs#
(nspection 8$ 1!2 98$ 1!12
Reliabilit testing 93$ 1!18 ;2$ !3;
'upervision of testing and inspection 12$ !2; 3$ !18
Depreciation of test e,uipment 2$ !; 1;$ !23
Total appraisal cost 1$9$ ! 1$2$ 2!;
(nternal failure costs#
>et cost of scrap :$ 1!3 79$ 1!9
Rewor% labor and overhead 1$;$ 2!38 31$ 1!82
Downtime due to defects in ,ualit 17$ !; 1$ !2
Disposal of defective products 9$ 1! ;$ !83
Total internal failure cost $$ 8! 2$$ ;!
E-ternal failure costs#
)arrant repairs ;$ !3 :$ 1!3
)arrant replacements 37$ 1!7; 2$$ ;!8
+llowances 1$ !28 8$ 1!28
Cost of field servicing 8$ 1!2 1$2$ 2!8;
Total e-ternal failure cost 2$$ ;! 9$19$ 1!
Total ,ualit cost 7$9$0 19! :$$0 13!
G +s a percentage of total sales! (n each ear sales totaled 09$$!
ear 3 ear 1
>or ears 1 and 3
.ualit Cost ?eports: -raphic >orm
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.ualit Cost ?eports: -raphic >orm
514
F
9
G
=
8
2
7
3
1Appraisal
4Pre$ention Pre$ention
1 3
ear
.ualitCost:inmillions;
Appraisal
%nternal
>ailure
External
>ailure
%nternal
>ailure
External
>ailure
34
19
1=
12
13
14
9
=
2
3Appraisal
4Pre$ention Pre$ention
1 3
ear
.ualitCostasaPercent
ageof*ales
Appraisal
%nternal
>ailure
External
>ailure
%nternal
>ailure
External
>ailure
.ualitreportscan also
beprepared
in
graphicform&
@ses of .ualit Cost %nformation
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@ses of .ualit Cost %nformation
Help managers see thefinancial significance of
defects&
Help managers identifthe relati$e importance of
the ualit problems&
Help managers see!hether their ualit
costs are poorl
distributed&
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End of Chapter 3
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End of Chapter 3
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