ma chapter 1
DESCRIPTION
• A target cost per unit is the estimated long-run cost per unit of a product (or service) that, when sold at the target price, enables the company to achieve the target operating income per unit. A target cost per unit is the estimated unit long-run cost of a product that will enable a company to enter or to remain in the market and compete profitably against its competitors.In this case, to compete the competitors and maintain company’s market share and profits, Product Manager estimates the C1 to have manufacturing cost of approximately £680 and C2 to have a manufacturing cost of approximately £390. To achieve the target cost, they conduct to revise the cost of C1 and C2 by reducing cost production per unit:TRANSCRIPT
242015
1
Prepared by
Ms Dao Nam Giang
Associate Dean of Accounting and Auditing Faculty (namgiangrivergmailcom)
OVERVIEW
Class rules
Team learning approachgroup - based instructional format
Assessment
Course materials
Course objects
Learning outcomes
Studying progress
Class rules Please be on time (an acceptable margin of 5 minutes)
Kindly turn off all cell phones during the lecture
Attendance is important and will be taken in different ways
Class interaction be prepared for your lessons and actively
participate in the lecture
Questions and comment box
Basis of respect
bull Stay and interact with others silently Once the lecture starts You
are not allowed to leave the lecture room and do other tasks
bull Share freely with others your thoughts and feelings in a friendly
or cordial manner You may raise your hands to signify your
intention to give an opinion in case somebody is still talking
bull Letrsquos give due courtesy to those who are speaking
242015
2
Team leaning approach Study group 3 to 5 students leader exchange
information and keep contacted
Study group will be maintained during the semester and will assigned different tasks every one or two weeks
Pre ndash lecture quizzes
Assessment 2 assignments
First assignment be submitted week 9 - Individual assignment + oral exams and progress tests
Second assignment be submitted week 16 - Individual assignment + oral exams and progress tests
Short progress tests during the course
Focus on 1 or 2 learning outcomes
The result will be used as a substitute for the oral examinations (done correctly 70 or more of each test -gt not be questioned on the related outcomes in the oral exam)
Course materials Text book
Handouts and exercises (will be send to your classrsquo email)
Incomplete notes so you are required to print out and bring the handout with you to the class
Other reading introduced in each chapter
242015
3
Course objectives
Accounting provide information about economic activities of one organization to interested users
Financial Accounting vs Management accounting
A A field of accounting that provides economic and financial field of accounting that provides economic and financial information for managers and other internal usersinformation for managers and other internal users
Also Also calledcalled Managerial Accounting
Definition of Management AccountingManagement Accounting
Course objectives Provide learners with the understanding and ability to
use cost information for budgeting and forecasting purposes in the management of business
How cost data is collected compiled and analysed and processed into useful information
Deal with budgetary planning and control how to prepare forecasts and budgets and to compare these to actual business results
Consider different costing and budgetary systems and the causes of resulting variances possible implications and corrective action
Learning outcomes1 Be able to analyze cost information within a business
11 Classify different types of cost
12 Using different costing methods
13 Calculate costs using appropriate techniques
14 Analyse cost data using appropriate techniques
2 Be able to propose methods to reduce costs and
enhance value within a business
21 Prepare and analyze routine cost report
22 Use performance indicators to identify potential improvements
23 Suggest improvements to reduce cost enhance value and
quality
242015
4
Learning outcomes3 Be able to prepare forecasts and budgets for a business
31 Explain the purpose and nature of the budgeting process
32 Select appropriate budgeting methods for the organization
and its needs
33 Prepare budgets according to the chosen budgeting method
34 Prepare a cash budget
4 Be able to Monitor performance against budgets within
a business41 Calculate variances identify possible causes and recommend
corrective actions
42 Prepare an operating statement reconciling budgeted and
actual results
43 Report findings to management in accordance with identified
responsibility centers
Week Content
1 Chapter 1 Cost accounting classification and behavior
2 Chapter 2 Material and labor cost
3 Chapter 3 Overhead apportionment and absorption
4 Chapter 4 Marginal and absorption costing
5 Chapter 6 Costing system
6 Chapter 7 Process costing (I)
7 Chapter 5 Price value and quality and checking draft
8 Chapter Review and checking draft
9 Submit assignment 1 and oral examination
10 Chapter 7 Process costing (II)
11 Chapter 8 Budgeting
12 Chapter 8 Budgeting
13 Chapter 9 Standard costing and variance analysis
14 Chapter 10 Responsibility accounting
15 Review and checking draft
STY
DY
ING
PR
OG
RES
S
Warm up activity How does the course related to other subjects that you
have studied
Discuss to form your study group
242015
5
Managing financial resources and decisions
Management accounting
Financial reporting
Review on MFRS Chapter 1- 3 different assets and liabilities
(sources of finances) of a business
Chapter 5 Basis procedures in accounting
Chapter 7 Cost terms and cost classification
Chapter 4 Stocks and cash
Chapter 9 Pricing decisions
Chapter 6 Evaluating financial performance
Chapter 8 Budgets
Activity 1 Review of basis terms in accounting
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
2
Team leaning approach Study group 3 to 5 students leader exchange
information and keep contacted
Study group will be maintained during the semester and will assigned different tasks every one or two weeks
Pre ndash lecture quizzes
Assessment 2 assignments
First assignment be submitted week 9 - Individual assignment + oral exams and progress tests
Second assignment be submitted week 16 - Individual assignment + oral exams and progress tests
Short progress tests during the course
Focus on 1 or 2 learning outcomes
The result will be used as a substitute for the oral examinations (done correctly 70 or more of each test -gt not be questioned on the related outcomes in the oral exam)
Course materials Text book
Handouts and exercises (will be send to your classrsquo email)
Incomplete notes so you are required to print out and bring the handout with you to the class
Other reading introduced in each chapter
242015
3
Course objectives
Accounting provide information about economic activities of one organization to interested users
Financial Accounting vs Management accounting
A A field of accounting that provides economic and financial field of accounting that provides economic and financial information for managers and other internal usersinformation for managers and other internal users
Also Also calledcalled Managerial Accounting
Definition of Management AccountingManagement Accounting
Course objectives Provide learners with the understanding and ability to
use cost information for budgeting and forecasting purposes in the management of business
How cost data is collected compiled and analysed and processed into useful information
Deal with budgetary planning and control how to prepare forecasts and budgets and to compare these to actual business results
Consider different costing and budgetary systems and the causes of resulting variances possible implications and corrective action
Learning outcomes1 Be able to analyze cost information within a business
11 Classify different types of cost
12 Using different costing methods
13 Calculate costs using appropriate techniques
14 Analyse cost data using appropriate techniques
2 Be able to propose methods to reduce costs and
enhance value within a business
21 Prepare and analyze routine cost report
22 Use performance indicators to identify potential improvements
23 Suggest improvements to reduce cost enhance value and
quality
242015
4
Learning outcomes3 Be able to prepare forecasts and budgets for a business
31 Explain the purpose and nature of the budgeting process
32 Select appropriate budgeting methods for the organization
and its needs
33 Prepare budgets according to the chosen budgeting method
34 Prepare a cash budget
4 Be able to Monitor performance against budgets within
a business41 Calculate variances identify possible causes and recommend
corrective actions
42 Prepare an operating statement reconciling budgeted and
actual results
43 Report findings to management in accordance with identified
responsibility centers
Week Content
1 Chapter 1 Cost accounting classification and behavior
2 Chapter 2 Material and labor cost
3 Chapter 3 Overhead apportionment and absorption
4 Chapter 4 Marginal and absorption costing
5 Chapter 6 Costing system
6 Chapter 7 Process costing (I)
7 Chapter 5 Price value and quality and checking draft
8 Chapter Review and checking draft
9 Submit assignment 1 and oral examination
10 Chapter 7 Process costing (II)
11 Chapter 8 Budgeting
12 Chapter 8 Budgeting
13 Chapter 9 Standard costing and variance analysis
14 Chapter 10 Responsibility accounting
15 Review and checking draft
STY
DY
ING
PR
OG
RES
S
Warm up activity How does the course related to other subjects that you
have studied
Discuss to form your study group
242015
5
Managing financial resources and decisions
Management accounting
Financial reporting
Review on MFRS Chapter 1- 3 different assets and liabilities
(sources of finances) of a business
Chapter 5 Basis procedures in accounting
Chapter 7 Cost terms and cost classification
Chapter 4 Stocks and cash
Chapter 9 Pricing decisions
Chapter 6 Evaluating financial performance
Chapter 8 Budgets
Activity 1 Review of basis terms in accounting
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
3
Course objectives
Accounting provide information about economic activities of one organization to interested users
Financial Accounting vs Management accounting
A A field of accounting that provides economic and financial field of accounting that provides economic and financial information for managers and other internal usersinformation for managers and other internal users
Also Also calledcalled Managerial Accounting
Definition of Management AccountingManagement Accounting
Course objectives Provide learners with the understanding and ability to
use cost information for budgeting and forecasting purposes in the management of business
How cost data is collected compiled and analysed and processed into useful information
Deal with budgetary planning and control how to prepare forecasts and budgets and to compare these to actual business results
Consider different costing and budgetary systems and the causes of resulting variances possible implications and corrective action
Learning outcomes1 Be able to analyze cost information within a business
11 Classify different types of cost
12 Using different costing methods
13 Calculate costs using appropriate techniques
14 Analyse cost data using appropriate techniques
2 Be able to propose methods to reduce costs and
enhance value within a business
21 Prepare and analyze routine cost report
22 Use performance indicators to identify potential improvements
23 Suggest improvements to reduce cost enhance value and
quality
242015
4
Learning outcomes3 Be able to prepare forecasts and budgets for a business
31 Explain the purpose and nature of the budgeting process
32 Select appropriate budgeting methods for the organization
and its needs
33 Prepare budgets according to the chosen budgeting method
34 Prepare a cash budget
4 Be able to Monitor performance against budgets within
a business41 Calculate variances identify possible causes and recommend
corrective actions
42 Prepare an operating statement reconciling budgeted and
actual results
43 Report findings to management in accordance with identified
responsibility centers
Week Content
1 Chapter 1 Cost accounting classification and behavior
2 Chapter 2 Material and labor cost
3 Chapter 3 Overhead apportionment and absorption
4 Chapter 4 Marginal and absorption costing
5 Chapter 6 Costing system
6 Chapter 7 Process costing (I)
7 Chapter 5 Price value and quality and checking draft
8 Chapter Review and checking draft
9 Submit assignment 1 and oral examination
10 Chapter 7 Process costing (II)
11 Chapter 8 Budgeting
12 Chapter 8 Budgeting
13 Chapter 9 Standard costing and variance analysis
14 Chapter 10 Responsibility accounting
15 Review and checking draft
STY
DY
ING
PR
OG
RES
S
Warm up activity How does the course related to other subjects that you
have studied
Discuss to form your study group
242015
5
Managing financial resources and decisions
Management accounting
Financial reporting
Review on MFRS Chapter 1- 3 different assets and liabilities
(sources of finances) of a business
Chapter 5 Basis procedures in accounting
Chapter 7 Cost terms and cost classification
Chapter 4 Stocks and cash
Chapter 9 Pricing decisions
Chapter 6 Evaluating financial performance
Chapter 8 Budgets
Activity 1 Review of basis terms in accounting
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
4
Learning outcomes3 Be able to prepare forecasts and budgets for a business
31 Explain the purpose and nature of the budgeting process
32 Select appropriate budgeting methods for the organization
and its needs
33 Prepare budgets according to the chosen budgeting method
34 Prepare a cash budget
4 Be able to Monitor performance against budgets within
a business41 Calculate variances identify possible causes and recommend
corrective actions
42 Prepare an operating statement reconciling budgeted and
actual results
43 Report findings to management in accordance with identified
responsibility centers
Week Content
1 Chapter 1 Cost accounting classification and behavior
2 Chapter 2 Material and labor cost
3 Chapter 3 Overhead apportionment and absorption
4 Chapter 4 Marginal and absorption costing
5 Chapter 6 Costing system
6 Chapter 7 Process costing (I)
7 Chapter 5 Price value and quality and checking draft
8 Chapter Review and checking draft
9 Submit assignment 1 and oral examination
10 Chapter 7 Process costing (II)
11 Chapter 8 Budgeting
12 Chapter 8 Budgeting
13 Chapter 9 Standard costing and variance analysis
14 Chapter 10 Responsibility accounting
15 Review and checking draft
STY
DY
ING
PR
OG
RES
S
Warm up activity How does the course related to other subjects that you
have studied
Discuss to form your study group
242015
5
Managing financial resources and decisions
Management accounting
Financial reporting
Review on MFRS Chapter 1- 3 different assets and liabilities
(sources of finances) of a business
Chapter 5 Basis procedures in accounting
Chapter 7 Cost terms and cost classification
Chapter 4 Stocks and cash
Chapter 9 Pricing decisions
Chapter 6 Evaluating financial performance
Chapter 8 Budgets
Activity 1 Review of basis terms in accounting
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
5
Managing financial resources and decisions
Management accounting
Financial reporting
Review on MFRS Chapter 1- 3 different assets and liabilities
(sources of finances) of a business
Chapter 5 Basis procedures in accounting
Chapter 7 Cost terms and cost classification
Chapter 4 Stocks and cash
Chapter 9 Pricing decisions
Chapter 6 Evaluating financial performance
Chapter 8 Budgets
Activity 1 Review of basis terms in accounting
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
6
Content Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision makingdifferential cost analysis
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
7
Cost concepts Cost ndash sacrificed resource to achieve a specific
objective
Cost accounting measure and reports financial and non financial information relating to the cost of acquiring or utilizing resources in an organization Cost accounting provide information to assist
Establishing stock valuation profit and balance sheet items
Planning
Control
Decision making
Cost concepts Cost unit a unit of product or service to which costs can be
related The cost unit is the basic control unit for costing purposes Can you give some examples
Cost centre cost pool a location or a function or an activity or an item of equipment Each cost centre act as a collecting place for certain cost before they are analyzed further In production department the department itself a machine or
group of machines in the department a foremanrsquos group a workbench
Production ldquoservicerdquo or ldquoback-uprdquo departments (maintenance storehellip)
Administration sales or distribution departments (personnel accounting purchasinghellip
Cost centre of shared costs for directly allocated (rent rates heating lighting)
Cost concepts - example Chocolate cakes production
Cost unit Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
8
Cost concepts
Cost centers 1
Cost centers 2
Cost centers 3
Cost unit 1
Cost unit 2
cost
Hanoi 11-16 December 2005 24
Direct costs vs Indirect costs Direct Costs
Costs that can be easily and conveniently traced in full to the product service or department that is being costed
Example Parts Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product providing a service or running a department but cannot be traced directly and in full to the product service or department Ex Electricity Rent
Instead of being traced these costs are allocated to a cost object in a rational and systematic manner
Direct and indirect cost - examples
SHOP RESTAURANT
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
9
Cost Behaviorbull Cost behavior the variability of input costs with
bull
bull Cost behavior the variability of input costs with activity undertaken
bull Level of activity amount of work done or the number of events occurred
bull The volume of production in a period
bull The number of item sold
bull The value of items sold
bull The number of invoices issued
bull hellip
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes the same over wide ranges
of activity
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up
activity level changes
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
10
Step Costs
A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but A step cost is a cost which is fixed in nature but only within certain levels of activityonly within certain levels of activity
-- Rent depreciation maintenancehellipRent depreciation maintenancehellip
Volume
Co
st
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
A mixed cost has both fixed and variable
costs
A mixed cost has both fixed and variable
components Consider your telephone costs
Mixed Costs semi-variable costs
Fixed Monthly
Charge
Variable
Cost per minutes talked
Activity (minutes talked)
To
tal
tele
ph
on
e b
ill
X
Y
Mixed Costs semi-variable costsThe total mixed cost line can be expressed
as an equation Y = a + bX
Where Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
11
Activity 3 Are the following likely to be fixed variable or mixed
cost
Telephone bill
Annual salary of the chief accountant
The management accountantrsquos annual membership fee to his professional body (paid by the company)
Cost of materials used to pack 20 units of product X into a box
Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total Plot the data points on a graph (total cost vs activity)cost vs activity)
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
The Scattergraph Method
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
12
The Scattergraph Method
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Draw a line Draw a line through the through the data points data points
points above points above
Draw a line Draw a line through the through the data points data points with about with about an equal an equal
number of number of points above points above and below and below the line the line
The Scattergraph MethodUse one Use one
data point data point to estimate to estimate
total cost total cost
Use one Use one data point data point to estimate to estimate
the totalthe totallevel of level of activity activity and the and the
total cost total cost Intercept = Fixed cost $10000
0 1 2 3 4
Ma
inte
na
nce
Co
st1
00
0rsquos
of
Do
lla
rs
10
20
0
Patient-days in 1000rsquos
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11000Total maintenance cost = $11000
The Scattergraph Method
Make a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perMake a quick estimate of variable cost perunit and determine the cost equation unit and determine the cost equation
Variable cost per unit = $1000
800= $125patient$125patient--dayday
Y = $10000 + $125XY = $10000 + $125XY = $10000 + $125XY = $10000 + $125X
Total maintenance at 800 patients 11000$
Less Fixed cost 10000
Estimated total variable cost for 800 patients 1000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
13
The High-Low MethodAssume the following hours of maintenance work
and the total maintenance costs for six months
]
The High-Low MethodThe The variable cost per variable cost per hourhour of maintenance of maintenance The The variable cost per variable cost per hourhour of maintenance of maintenance
is equal to the is equal to the change in cost change in cost divided by the divided by the
change in hourschange in hours
Hours Total Cost
High 800 9800$
Low 500 7400
Change 300 2400$
The High-Low Method
Total Fixed Cost = Total Cost Total Fixed Cost = Total Cost ndashndash Total Variable CostTotal Variable Cost
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
Total Fixed Cost Total Fixed Cost ==
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
14
The High-Low Method
Y = $3400 + $800Y = $3400 + $800XX
The Cost Equation for Maintenance
Quick Check
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units
Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is thevariable portion of sales salaries and commission
a $008 per unit
b $010 per unit
c $012 per unit
d $0125 per unit
Quick Check
Sales salaries and commissions are $10000 when Sales salaries and commissions are $10000 when 80000 units are sold and $14000 when 120000 units are sold Using the high-low method what is the fixed portion of sales salaries and commissions
a $ 2000
b $ 4000
c $10000
d $12000
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
15
Manufacturing activity
Manufacturing cost
Comparing Merchandising and Manufacturing Activities
Merchandisers
Buy finished goods
Sell finished goods
Manufacturers
Buy raw materials
Produce and sell finished goods
MegaLoMart
inventory on hand Raw materials - inventory on hand and available for use
Work in process -Work in process -partially
completed goods
Finished goods-
goods awaiting
Finished goods-completed
goods awaiting sale
Inventories of a Manufacturing Business
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
16
Manufacturing consists of activities and processes to convert raw materials into finished goods
Manufacturing costs are the cost to produce a unit of product and typically classified as
Manufacturing activityManufacturing activityManufacturing activityManufacturing activity
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Direct Materials Raw materials that become an integral part of the product
(unless used in negligible amounts andor having negligible cost)
Component parts or other materials specially purchased for a particular job order or process
Part-finished work transferred from previous process
Primary packing material (cartons and boxes)
Example What are direct materials in Example What are direct materials in producinged a car
Direct wages Wages paid for labour (either as basic hours
or as overtime) expended on work on the product itself
Example Wages paid to automobile assembly workersExample Wages paid to automobile assembly workers
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
17
Direct wages ndash activity 1 Classify the following labour costs as either direct or
indirect
The basic pay of direct workers (cash paid tax or other deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for working overtime)
Bonus payments under a group bonus payments scheme
Employerrsquos National Insurance contributions
Idle time of direct workers
Work on installation of equipment
Direct expenses Expenses are incurred on a specific product other than
direct material cost and direct wages
Example
The cost of special designs drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures hellip
ProductionManufacturing OverheadManufacturing costs cannot be traced directly to
specific units produced
bullIndirect materials
bull
Maintenance workers janitors and security guardsbull
bullIndirect materials bullMaterials used to support the production process bullExamples Lubricants and cleaning supplies used in the automobile assembly plant
bullIndirect labor bullWages paid to employees who are not directly involved in production work bullExamples Maintenance workers janitors and security guards
bullIndirect expenses bullRent rate Insurance of a factorybullDepreciation fuel power repairs and maintenance of plant machinery and factory buildings hellip
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
18
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Direct Materials
Used
Direct Direct Labor
Manufacturing Manufacturing Overhead
Finished Finished Goods
Goods SoldGoods Sold
MegaLoMart
Flow of Physical Goods in Production
Nonmanufacturing Costs
Selling Costsoverhead
Costs necessary to get the order and deliver
the product
Administrative Costsoverhead
All executive organizational and
clerical costs associated with the general
management of an organization
Product Costs Versus Period Costs
Inventory
Cost of Goods Sold
BalanceSheet
IncomeStatement
Sale
Product costs include direct materials direct
labor and manufacturing
overhead
Period costs are not included in product
costs They are expensed on the
income statement
Expense
IncomeStatement
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
19
Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company
A Manufacturing equipment depreciation
B Property taxes on corporate headquarters
C Direct materials costs
D Electrical costs to light the production
facility
E Sales commissions
Prime Cost and Conversion Cost
DirectMaterialDirect
MaterialDirectDirectLabor
ManufacturingManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows
Exercise The Sloane Company specializes in producing a set of
wood patio furniture consisting of a table and four chairs Cost data for the year 2012 as follow
For each item determine it is period cost or product cost direct cost or indirect cost FIXED OR VARIABLE COST
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
20
Factory labor direct $150000
Advertising $32500
Factory supervision $28000
Property taxes factory building $2000
Sales commissions $97000
Insurance factory $6500
Depreciation office equipment $5000
Lease cost factory equipment $19000
Indirect materials factory $10000
Depreciation factory building $20500
General office supplies (billing) $3500
General office salaries $73000
Direct materials used (wood bolts etc) $120000
Utilities factory $16000
Income statement Report revenues and expenses =gt net profitnet loss
Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
bull Issue how to calculate cost of goods sold
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
21
Inventory Flows
Beginningbalance to inventory
Additionsto inventory++ ==
Endingbalance
WithdrawalsWithdrawalsfrom
inventory++
Manufacturing Company
Cost of goods sold
Beg Finished goods inv 14200$
+ Cost of goods manufactured 234150
Goods available for sale 248350$
- Ending finished goods inventory (12100)
= Cost of goods sold 236250$
Schedule of Cost of Goods Manufactured
Calculates the cost of raw material direct labor and
manufacturing overhead used in production
Calculates the manufacturing costs associated with goods
that were finished during the period
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed As items are removed from raw materials inventory and placed
into the production process they are called direct
materials
Schedule of Cost of Goods Manufactured
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
22
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
ndash Ending raw materials
inventory
= Raw materials used
in production
Conversion
direct material finished
Conversion costs are costs
incurred to convert the
direct material into a finished
product
As items are removed from raw materials inventory and placed into
As items are removed from raw materials inventory and placed into
the production process they arecalled direct materials
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
All manufacturing costs incurred
beginning balance of work in process
All manufacturing costs incurred during the period are added to the
beginning balance of work in process
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
ndash Ending raw materials ndash Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Costs associated with the goods that Costs associated with the goods that are completed during the period are
transferred to finished goods inventory
Schedule of Cost of Goods Manufactured
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
23
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
ndash Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
Cost of Goods Sold
Manufacturing Cost Flows
Selling andAdministrative
Period Costs
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work inProcess
Direct Labor
Balance SheetCosts Inventories
Income StatementExpensesMaterial Purchases Raw Materials
Quick Check
Beginning raw materials inventory was $32000 During the month $276000 of raw material was purchased A count at the end of the month revealed that $28000 of raw material was still present What is the cost of direct material used
A $276000
B $272000
C $280000
D $ 2000
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
24
Quick Check
Direct materials used in production totaled $280000 Direct labor was $375000 and factory overhead was $180000 What were total manufacturing costs incurred for the month
A $555000
B $835000
C $655000
D Cannot be determined
Quick Check
Beginning work in process was $125000 Manufacturing costs incurred for the month were $835000 There were $200000 of partially finished goods remaining in work in process inventory at the end of the month What was the cost of goods manufactured during the month
A $1160000B $ 910000C $ 760000D Cannot be determined
Quick Check Beginning finished goods inventory was $130000 The cost of goods manufactured for the month was $760000 The ending finished goods inventory was $150000 What was the cost of goods sold for the month
A $ 20000
B $740000
C $780000
D $760000
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
25
Production costProduct cost
FINISHEDFINISHED GOODSGOODS
Period Cost Cost of good sold
Cost and decision making Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysisDifferential analysis
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
26
Relevant cost Relevant cost is a future cashflow arising as a direct
consequence of a decision
Future cost cost incurred (paid or not yet paid) is irrelevant
Cashflows
Arises as a direct consequence of a decision costs differ under some or all the alternativesavailable opportunities ndash incremental costdifferential costs
Some times expressed as opportunity cost ndash the benefit foregone by choosing one opportunity instead of the next best alternative
Non relevant cost Sunk costs cannot be changed by any decision
They are not differential costs and should be ignored when making decisions (Paid)
Committed costs future cash outflow that will be incurred anyway whatever decision is taken now about alternative opportunities
Notional costsImputed cost no actual cash expense incurred Notional rent charged to the branch for the use of the
buildings owned by the company
Notional interest charges on capital used by the branch
JamCo currently sells 100000 units of its product The company has revenue and costs
as shown below
Per Unit Total
Sales 1000$ 1000000$
Direct materials 350 350000
Direct labor 220 220000
Factory overhead 110 110000
Selling expenses 140 140000
Administrative expenses 080 80000
Total expenses 900$ 900000$
Operating income 100$ 100000$
Example 1
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making
242015
27
JamCo is approached by an overseascompany that offers to purchase
10000 units at $850 per unit
If JamCo accepts the offer total factoryoverhead will increase by $5000 total selling
expenses will increase by $2000 and total administrative expenses will increase
by $1000
Should JamCoaccept the offer
Special Order Decisions
OserCo has 10000 defective units thatcost $100 each to make The units can be
scrapped now for $40 each or rebuilt at an additional cost of $80 per unit
If rebuilt the units can be sold for the normal selling price of $150 each Rebuilding the 10000
defective units will prevent the production of 10000 new units that would also sell for $150
Should OserCo scrap or rebuild
Example 2
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to Cost
Objects
Decision Making