cost classifications external reporting predicting cost behavior assigning costs to cost objects ...
TRANSCRIPT
AUSSIE PIES (A)
Cost Classifications
Cost Classifications
External reporting Predicting cost behavior Assigning costs to cost objects Decision making
Cost Classifications
External reporting Product vs. period costs
Predicting cost behavior Variable vs. fixed costs
Assigning costs to cost objects Direct vs. indirect costs
Decision making Relevant vs. irrelevant costs
LET’S DEFINE ALL OF THE COSTS MENTIONED IN THE CASE.
WHO CAN GIVE ME ONE COST MENTIONED IN THE CASE?
Aussie Pies’ Costs
Ingredients Utilities for cooking Utilities for lighting the store Pie boxes Rent on store Rent on cooking equipment Rent on fixtures Chefs salaries Sales assistant salary
Let’s start by looking at these costs from an external reporting perspective.
Cracker Barrel
The Cheesecake Factory
The Cheesecake Factory
Cost Classification Summary
Product
Period
Variable
Fixed
Direct
Indirect
Relevant
Irrelevant
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Product vs. Period Costs(external reporting)
Product Period
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Product vs. Period Costs(external Reporting)
Product Period
Ingredients √
Utilities for cooking √
Utilities for lighting in store √
Pie boxes √
Rent on store √
Rent on cooking equipment √
Rent on fixtures √
Chefs salaries √
Sales assistant salary √
What are the profit implications of treating a cost such as utilities for
cooking as a period cost rather than a product cost?
Product Costs(excluding raw materials inventory)
Product Costs(excluding raw
materials)
Cost of goods sold
Ending work in process inventory or
ending finished goods inventory
Period Costs
Selling & Admin. expense
Income StatementBalance Sheet
Does a restaurant have work in process or finished goods
inventory?
A Matching Perspective
Why not include the rental cost of cooking equipment in COGS?
A Matching Perspective
Why not include the rental cost of cooking equipment in COGS? A manufacturer treats manufacturing
equipment depreciation as a product cost because some units may be produced in the current period but not sold until a later period.
A Matching Perspective
Why not include the rental cost of cooking equipment in COGS? A manufacturer treats manufacturing
equipment depreciation as a product cost because some units may be produced in the current period but not sold until a later period.
A software developer incurs costs to develop products that will be sold in a later period. So in these two instances there is a need to
match costs with revenues.
A Matching Perspective
Why not include the rental cost of cooking equipment in COGS? A manufacturer includes equipment depreciation in
product cost because some units may be produced in the current period but not sold until a later period.
A software developer incurs costs to develop products that will be sold in a later period. So in these two instances there is a need to match
costs with revenues. There is no such matching concern with a
restaurant. Furthermore, cost of goods sold is more useful if not confounded with various non-food costs.
From an external reporting perspective, what would be Aussie Pie’s unit product cost?
Unit Product Cost
Amount
Ingredients
Pie boxes
Unit product cost
Unit Product Cost
Amount
Ingredients $1.20
Pie boxes $0.02
Unit product cost $1.22
Let’s look at Aussie Pies’ costs from a cost behavior standpoint.
Variable vs. Fixed Costs
(with respect to the number of pies produced)
Variable Fixed
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Variable vs. Fixed Costs
(with respect to the number of pies produced)
Variable Fixed
Ingredients √
Utilities for cooking √
Utilities for lighting in store √
Pie boxes √
Rent on store √
Rent on cooking equipment √
Rent on fixtures √
Chefs salaries √
Sales assistant salary √
WHAT ARE AUSSIE PIE’S FIXED COST PER MONTH?
Fixed Costs
Amount
Utilities for lighting in store
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Total fixed costs
Fixed Costs
Amount
Utilities for lighting in store $300
Rent on store 11,900
Rent on cooking equipment 8,000
Rent on fixtures 5,000
Chefs salaries 3,600
Sales assistant salary 1,200
Total fixed costs $30,000
WHAT ARE AUSSIE PIE’S VARIABLE COSTS PER PIE?
Variable Costs
Amount
Ingredients $1.20
Utilities 0.03
Packaging 0.02
Total variable cost per pie $1.25
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
10,000 units
15,000 units
20,000 units
25,000 units
30,000 units
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
$1.25
10,000 units
$1.25
15,000 units
$1.25
20,000 units
$1.25
25,000 units
$1.25
30,000 units
$1.25
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
$1.25 $30,000
10,000 units
$1.25 $30,000
15,000 units
$1.25 $30,000
20,000 units
$1.25 $30,000
25,000 units
$1.25 $30,000
30,000 units
$1.25 $30,000
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
$6,250 $1.25 $30,000
10,000 units
$12,500 $1.25 $30,000
15,000 units
$18,750 $1.25 $30,000
20,000 units
$25,000 $1.25 $30,000
25,000 units
$31,250 $1.25 $30,000
30,000 units
$37,500 $1.25 $30,000
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
$6,250 $1.25 $30,000 $6.00
10,000 units
$12,500 $1.25 $30,000 $3.00
15,000 units
$18,750 $1.25 $30,000 $2.00
20,000 units
$25,000 $1.25 $30,000 $1.50
25,000 units
$31,250 $1.25 $30,000 $1.20
30,000 units
$37,500 $1.25 $30,000 $1.00
Cost Behavior
Total VC VC/Unit Total FC FC/Unit Cost/Unit
5,000 units
$6,250 $1.25 $30,000 $6.00 $7.25
10,000 units
$12,500 $1.25 $30,000 $3.00 $4.25
15,000 units
$18,750 $1.25 $30,000 $2.00 $3.25
20,000 units
$25,000 $1.25 $30,000 $1.50 $2.75
25,000 units
$31,250 $1.25 $30,000 $1.20 $2.45
30,000 units
$37,500 $1.25 $30,000 $1.00 $2.25
Let’s look at the topic of assigning costs to cost objects.
Direct vs. Indirect Costs
If Aussie Pies eventually opened a second store and hired two additional chefs for that store, then what would be the direct and indirect costs with respect to a specific store?
Direct vs. Indirect Costs
Direct Indirect
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Direct vs. Indirect Costs
Direct Indirect
Ingredients √
Utilities for cooking √
Utilities for lighting in store √
Pie boxes √
Rent on store √
Rent on cooking equipment √
Rent on fixtures √
Chefs salaries √
Sales assistant salary √
Let’s look at the topic of cost classifications for decision making.
Relevant vs. Irrelevant Costs Assume the Aussie Pies’ owners
claimed that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie.
Relevant vs. Irrelevant Costs Assume the Aussie Pies’ owners
claimed that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie.
Assume that Aussie Pies turned down a corporate client that wanted to buy 1,000 pies at $2.00 each because the price was below $2.25 per pie.
Comment on the wisdom of this decision.
Relevant vs. Irrelevant Costs Assume the Aussie Pies’ owners claimed
that the cost per Aussie Pie (at a volume of 30,000 units sold) is $2.25 per pie.
Assume that Aussie Pies turned down a corporate client that wanted to buy 1,000 pies at $2.00 each because the price was below $2.25 per pie.
Comment on the wisdom of this decision. Does the concept of “opportunity cost” affect
your answer?
Relevant vs. Irrelevant Costs If Aussie Pies is considering staying
open 2 additional hours everyday, what costs on the next slide would be potentially relevant to this decision?
Relevant vs. Irrelevant Costs
Relevant Irrelevant
Ingredients
Utilities for cooking
Utilities for lighting in store
Pie boxes
Rent on store
Rent on cooking equipment
Rent on fixtures
Chefs salaries
Sales assistant salary
Relevant vs. Irrelevant Costs
Relevant Irrelevant
Ingredients √
Utilities for cooking √
Utilities for lighting in store √
Pie boxes √
Rent on store √
Rent on cooking equipment √
Rent on fixtures √
Chefs salaries √
Sales assistant salary √
Assumes that Chefs would demand an increase in salary to work two extra hours everyday.
Cost Classification Summary
Product
Period
Variable
Fixed
Direct
Indirect
Relevant
Irrelevant
Ingredients √ √ √ √Utilities for cooking √ √ √ √Utilities for lighting in store √ √ √ √
Pie boxes √ √ √ √Rent on store √ √ √ √Rent on cooking equipment √ √ √ √
Rent on fixtures √ √ √ √Chefs salaries √ √ √ √Sales assistant salary √ √ √ √
Let’s take a closer look at the value of understanding cost behavior.
HOW MANY AUSSIE PIES HAVE TO BE SOLD TO BREAKEVEN?
Equation Method
(P)(Q) E (V)(Q) E F = Profit
Equation Method
($3.25)(Q ) E ($1.25)(Q) E $30,000 = 0
2Q = $30,000
Q = 15,000 pies
What is the breakeven point in sales dollars?
Equation Method
($3.25)(Q ) E ($1.25)(Q) E $30,000 = 0
2Q = $30,000
Q = 15,000 pies
15,000 pies × $3.25 = $48,750
HOW MANY AUSSIE PIES HAVE TO BE SOLD TO EARN A 20% RETURN ON SALES?
Equation Method
($3.25)(Q) E ($1.25)(Q) E $30,000 = ($0.65)Q
1.35Q = $30,000
Q = 22,223 pies
WHAT PROFIT WOULD AUSSIE PIES EARN IF IT RAISED INGREDIENTS COST BY $0.50, INVESTED $5,000 IN A MONTHLY ADVERTISING CAMPAIGN AND WAS ABLE TO SELL 25,000 UNITS AT $3.25 PER UNIT?
Equation Method
($3.25)(25,000) E ($1.75)(25,000) E $35,000 = Profit
Profit = $2,500
AUSSIE BELIEVES IT CAN SELL 20,000 PIES AT A PRICE OF $3.25. HOWEVER, BASED ON MARKET RESEARCH IT BELIEVES FOR EACH $0.25 SHIFT IN PRICE, DEMAND WILL SHIFT BY 1,500 PIES. WHAT IS THE OPTIMAL PRICE?
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
20,000 units $3.25
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25
24,500 units $2.50
23,000 units $2.75
21,500 units $3.00
20,000 units $3.25
18,500 units $3.50
17,000 units $3.75
15,500 units $4.00
14,000 units $4.25
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25 $1.25
24,500 units $2.50 $1.25
23,000 units $2.75 $1.25
21,500 units $3.00 $1.25
20,000 units $3.25 $1.25
18,500 units $3.50 $1.25
17,000 units $3.75 $1.25
15,500 units $4.00 $1.25
14,000 units $4.25 $1.25
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25 $1.25 $1.00
24,500 units $2.50 $1.25 $1.25
23,000 units $2.75 $1.25 $1.50
21,500 units $3.00 $1.25 $1.75
20,000 units $3.25 $1.25 $2.00
18,500 units $3.50 $1.25 $2.25
17,000 units $3.75 $1.25 $2.50
15,500 units $4.00 $1.25 $2.75
14,000 units $4.25 $1.25 $3.00
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25 $1.25 $1.00 $26,000
24,500 units $2.50 $1.25 $1.25 $30,625
23,000 units $2.75 $1.25 $1.50 $34,500
21,500 units $3.00 $1.25 $1.75 $37,625
20,000 units $3.25 $1.25 $2.00 $40,000
18,500 units $3.50 $1.25 $2.25 $41,625
17,000 units $3.75 $1.25 $2.50 $42,500
15,500 units $4.00 $1.25 $2.75 $42,625
14,000 units $4.25 $1.25 $3.00 $42,000
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25 $1.25 $1.00 $26,000
$30,000
24,500 units $2.50 $1.25 $1.25 $30,625
$30,000
23,000 units $2.75 $1.25 $1.50 $34,500
$30,000
21,500 units $3.00 $1.25 $1.75 $37,625
$30,000
20,000 units $3.25 $1.25 $2.00 $40,000
$30,000
18,500 units $3.50 $1.25 $2.25 $41,625
$30,000
17,000 units $3.75 $1.25 $2.50 $42,500
$30,000
15,500 units $4.00 $1.25 $2.75 $42,625
$30,000
14,000 units $4.25 $1.25 $3.00 $42,000
$30,000
Optimal Price
Volume PriceVC perUnit
CM per Unit
TotalCM
FixedCosts Profit
26,000 units $2.25 $1.25 $1.00 $26,000
$30,000
$(4,000)
24,500 units $2.50 $1.25 $1.25 $30,625
$30,000
$625
23,000 units $2.75 $1.25 $1.50 $34,500
$30,000
$4,500
21,500 units $3.00 $1.25 $1.75 $37,625
$30,000
$7,625
20,000 units $3.25 $1.25 $2.00 $40,000
$30,000
$10,000
18,500 units $3.50 $1.25 $2.25 $41,625
$30,000
$11,625
17,000 units $3.75 $1.25 $2.50 $42,500
$30,000
$12,500
15,500 units $4.00
$1.25
$2.75 $42,625
$30,000
$12,625
14,000 units $4.25 $1.25 $3.00 $42,000
$30,000
$12,000
Assume that Aussie Pies decides to pay its sales assistant a
commission of $0.06 per pie sold instead of a salary and each chef is paid a salary of $1,000 plus a
commission of $0.04 per pie sold. If Aussie Pies sells 22,000 units, how would it prepare an income statement for external reporting
purposes?
Traditional Income Statement
Amount
Sales
Cost of goods sold
Gross margin
Operating expenses:
Chefs compensation
Utilities expense
Rent expense
Selling expense
Total operating expenses
Net operating income
Traditional Income Statement
Amount
Sales (22,000 × $3.25) $71,500
Cost of goods sold (22,000 × $1.22) 26,840
Gross margin 44,660
Operating expenses:
Chefs compensation (($2,000 + (22,000 × $0.04 × 2))
$3,760
Utilities expense ($300 + (22,000 × $0.03))
$960
Rent expense ($11,900 + $8,000 + $5,000)
$24,900
Selling expense (22,000 × 0.06) $1,320
Total operating expenses $30,940
Net operating income $13,720
Given the same assumptions, how would Aussie Pies prepare a contribution format income
statement?
Contribution Margin Income Statement
Amount
Sales
Cost of goods sold
Chefs commission
Cooking utilities
Selling commission
Total variable cost
Contribution margin
Chefs salaries
Utilities expense
Rent expense
Total fixed cost
Net operating income
Contribution Margin Income Statement
Amount
Sales (22,000 × $3.25) $71,500
Cost of goods sold (22,000 × $1.22) 26,840
Chefs commission (22,000 × $0.04 × 2) 1,760
Cooking utilities (22,000 × $0.03) 660
Selling commission (22,000 × $0.06) 1,320
Total variable cost 30,580
Contribution margin 40,920
Chefs salaries 2,000
Utilities expense 300
Rent expense 24,900
Total fixed cost 27,200
Net operating income $13,720