chap02notes.ppt

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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

11thEditionChapter 2


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Costs Terms, Concepts andClassifications

Chapter Two


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The ProductThe Product

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead


Manufacturing Costs


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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&


7/67Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Classifications of Costs

DirectMaterialDirect

MaterialDirectLaborDirectLabor



"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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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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&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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.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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