chapter 3 organizational cost flows cost accounting traditions and innovations barfield, raiborn,...
TRANSCRIPT
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Chapter 3
Organizational Cost Flows
Cost AccountingTraditions and Innovations
Barfield, Raiborn, Kinney
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Learning Objectives (1 of 2)
• List the cost classifications
• Describe the conversion process in service and manufacturing companies
• Explain assumptions about cost behavior
• Analyze mixed costs– high-low method – least squares regression analysis
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Learning Objectives (2 of 2)
• List product cost categories
• Allocate overhead costs
• Describe the cause and treatment of underapplied and overapplied overhead
• Prepare Statements of Cost of Goods Manufactured and Sold
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Cost
Monetary measure of resources
given up to attain an objective
(such as acquiring a good or service)
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Cost Categories
• Time of incidence
• Reaction to changes in activity
• Classification on the financial statements
• Impact on decision making
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Cost Categories
• Time of incidence– Historical– Budgeted
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Cost Categories
• Time of incidence
• Reaction to changes in activity– Variable– Fixed– Mixed – Step
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Cost Categories
• Time of incidence
• Reaction to changes in activity
• Classification on the financial statements– Unexpired – Expired– Product– Period
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Product Costs• Direct material
– Part of a product
• Direct labor– Labor used to manufacture a product or
perform a service
• Overhead– Indirect production cost
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Period Costs• Selling and administrative costs
• Distribution costs– Cost to warehouse, transport, and/or deliver a
product or service– Major impact on managerial decision making
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Purchaseraw materialsor supplies
Input
Product orService
Output
Conversion ProcessChange Inputs into Outputs
CONVERSION
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Low Degree of Conversion
• Department stores
• Gas stations
• Jewelry stores
• Travel agencies
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Moderate Degree of Conversion
• Florists
• Meat markets
• Oil-change businesses
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High Degree of Conversion
• Manufacturing
• Construction
• Agriculture
• Architecture
• Auditing
• Mining
• Printing
• Restaurants
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Service CompanySignificant amount of laborTangible or intangible output
Purchasesupplies
Use supplies,labor, overhead
to provide serviceSell to
customer
Input
Output
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Retail CompanyPurchase finished goodsResell to customers
Purchaseproductsfor resale
Warehouseand/or display
Sell tocustomer
InputOutput
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ManufacturerSignificant amount of labor and machinery Tangible output
Purchaseraw materialsand supplies
Finishedproduct
Sell tocustomer
Input Output
Production Center
add labor and overhead
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Cost Accumulation in aManufacturing Company
MaterialsInventory
Work in ProcessInventory
FinishedGoods
Inventory
Cost of GoodsSold
Balance SheetIncome
Statement
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Fixed Cost
Variable Cost
Cost Reaction to Changes in Activity
Unit Total
$
Units
$
$
$
Units
Units Units
Within the relevant range
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Step Cost
Mixed Cost
Cost Reaction to Changes in Activity
$
$
Units
Unitsfixed
Within the relevant range
variable
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Determining Cost Behavior
• Cost Predictor– Activity accompanied
by consistent, observable changes in a cost item
– Predicts but may not cause the cost to change
• Cost Driver– Activity that has a direct
cause-effect relationship on cost
– Directly causes the cost to change
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Separating Mixed Costs
y = a + bX
y = total costa = fixed portion of total costb = variable costX = activity base to which y is related
Use formula for a straight line
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Separating Mixed Costs
• High-Low Method– Actual cost observations– Considers only two data points
• highest and lowest levels of activity– Outliers should be disregarded when analyzing
mixed costs
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CostVolumeHighLow
10,0002,000
$25,0009,000
Difference 8,000 $16,000
= $2/unit Variable cost per unit$16,000
8,000
25,000 = a + (2)(10,000) a = 5,000 Fixed cost
Y = 5,000 + 2X
Using the High Low Method
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Product Cost
• Cost object - anything to which costs are attached or related
• Direct cost - traceable to a cost object
• Indirect cost - not conveniently or practically traceable to a cost object– treated as overhead
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Product Cost - Direct
• Direct Material– Distinctly and conveniently traced to cost object
• Direct Labor – to manufacture a product or perform a service – includes wages paid to direct labor employees,
production bonuses, payroll taxes– may include holiday and vacation pay,
insurance, retirement benefits
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Product Cost - Indirect
• Overhead - indirect production costs– Fringe benefits, if cannot be easily traced to
product– Overtime, if due to random scheduling– Cost of quality
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Product Cost Behavior
• Direct Material Variable
• Direct Labor Variable
• Overhead Variable, fixed, mixed
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Overhead Cost AllocationAssign indirect costs to one
or more cost objects• To determine full cost (GAAP)• To motivate management• To compare alternative courses of action for
planning, controlling, and decision making
Allocation process should be
rational and systematic
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Allocating OverheadActual Cost System
Product Cost
• Direct Materials
• Direct Labor
• Overhead
Cost Used
• Actual
• Actual
• Actual
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Allocating OverheadActual Cost System
• The Actual Cost System is not timely
• All costs must be known before calculating product cost
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Allocating OverheadActual vs. Normal
Product Cost
Direct Materials
Direct Labor
Overhead
Actual Cost System
Actual
Actual
Actual
Normal Cost System
Actual
Actual
Predetermined
Overhead Rate
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Predetermined Overhead Rate
• Allows overhead to be assigned during the period
• Compensates for fluctuations– that are not related to activity level– in activity level that do not affect fixed
overhead
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Predetermined Overhead Rate
Total budgeted overhead
Activity level(Volume)
A budgeted, constant charge per unit of activity used to assign overhead to
production or services
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Predetermined Overhead Rate
Total budgeted overhead
Activity level(Volume)
$500,000
100,000machine hours
= $5 per machine
hour
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The Activity Level(The Denominator)
• Relationship between the overhead cost and the activity– production volume– direct labor hours– direct labor cost– machine hours
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Overhead Account(Combined)
Actual Overhead Applied Overhead
Record actual overhead
Variable Overhead 15,000
Fixed Overhead 10,000
Various Accounts 25,000
Variable 15,000
Fixed 10,000
Recording and Applying Overhead
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Overhead Account(Combined)
Actual Overhead Applied Overhead
Applying overhead
Work in Process 23,000
Variable Overhead 12,000
Fixed Overhead 11,000
Variable 15,000
Fixed 10,000
Variable 12,000
Fixed 11,000
Recording and Applying Overhead
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Overhead Account(Combined)
Actual Overhead Applied Overhead
Variable 15,000
Fixed 10,000
25,000
Variable 12,000
Fixed 11,000
23,000
Recording and Applying Overhead
Overhead is underapplied$25,000 of overhead was incurred Only $23,000 was applied to Work in Process
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Disposing of Overhead Differences
• Immaterial– Cost of Goods Sold
• Material– Work in Process– Finished Goods– Cost of Goods Sold
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Alternative Capacity Level
• Capacity measure of volume or some other activity base
• Alternative measures:– Theoretical– Practical– Normal– Expected
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Flow of Product Costs
Raw Materials Inventory
Accounts Payable
Work in Process Inventory
Raw Materials Inventory
Work in Process Inventory
Salaries/Wages Payable
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Flow of Product Costs
Fixed Overhead Control (actual)
Salaries/Wages Payable
Variable Overhead Control (actual)
Utilities Payable
Work in Process Inventory
Variable Overhead Control (applied)
Fixed Overhead Control (applied)
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Flow of Product Costs
Finished Goods Inventory
Work in Process Inventory
Accounts ReceivableSales
Cost of Goods SoldFinished Goods Inventory
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Statement of Cost of Goods Manufactured
• Beginning work in process xxxx– Raw materials used xxx– Direct labor xxx– Variable overhead xxx– Fixed overhead xxx
• Current period manufacturing costs xxxx
• Total costs to account for xxxx
• Ending work in process <xxxx>
• Cost of goods manufactured xxxx
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Statement of Cost of Goods Manufactured
Raw Materials Used
Beginning raw materials xxx
Purchases of raw materials xxx
Raw materials available xxx
Ending raw materials <xxx>
Total raw materials used xxx
To Statement of Cost of Goods Manufactured
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Schedule of Cost of Goods Sold
Beginning Finished Good xxxx
Cost of Goods Manufactured xxxx
Cost of Goods Available for Sale xxxx
Ending Finished Goods xxxx
Cost of Goods Sold xxxx
From Schedule of Cost of Goods Manufactured
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Questions
• What is the difference in the conversion process for a service company and a manufacturing company?
• In a normal cost system, how are overhead costs allocated to products and services?
• How is cost of goods manufactured calculated?