Managerial AccountingReview Session: key terms and concepts

Classifications of CostsManufacturing costs are often combined as follows:Direct MaterialsDirect LaborManufacturing OverheadPrime CostConversion Cost

Quick Check Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.)A. Depreciation on factory forklift trucks.B. Sales commissions.C. The cost of a flight recorder in a Boeing 767.D. The wages of a production shift supervisor.

Quick Check Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.)A. Depreciation on factory forklift trucks.B. Sales commissions.C. The cost of a flight recorder in a Boeing 767.D. The wages of a production shift supervisor.

Product Costs Versus Period Costs 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.InventoryCost of Good SoldBalance SheetIncome StatementSaleExpenseIncome Statement

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.

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.

Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of business activity.Total variable costs change when activity changes.Total fixed costs remain unchanged when activity changes.

Cost Classifications for Predicting Cost Behavior

Sheet1

Behavior of Cost (within the relevant range)

CostIn TotalPer Unit

VariableTotal variable cost changesVariable cost per unit remains

as activity level changes.the same over wide ranges

of activity.

FixedTotal fixed cost remainsFixed cost per unit goes

the same even when thedown as activity level goes up.

activity level changes.

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Opportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

Sunk Costs Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

Types of Costing Systems Used to Determine Product CostsProcess CostingJob-order Costing Many different products are produced each period. Products are manufactured to order. Cost are traced or allocated to jobs. Cost records must be maintained for each distinct product or job.Chapter 4

Types of Costing Systems Used to Determine Product CostsProcess CostingJob-order Costing Typical job order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms

Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.Estimated total manufacturing overhead cost for the coming periodEstimated total units in the allocation base for the coming periodPOHR =Ideally, the allocation base is a cost driver that causes overhead.

Application of Manufacturing Overhead

Raw MaterialsMaterialPurchasesDirect MaterialsDirect MaterialsMfg. OverheadIndirect MaterialsJob-Order System Cost FlowsWork in Process (Job Cost Sheet)Indirect MaterialsActualApplied

Job-Order System Cost FlowsDirect LaborMfg. OverheadSalaries and Wages PayableWork in Process (Job Cost Sheet)Direct MaterialsOverhead Applied to Work in ProcessIndirect LaborDirect LaborOverhead AppliedIndirect LaborIndirect MaterialsActualAppliedIf actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

Cost of Goods Mfd. Finished GoodsCost of Goods Sold Cost of Goods Mfd. Cost of Goods SoldCost of Goods Sold Job-Order System Cost FlowsWork in Process (Job Cost Sheet)Direct MaterialsDirect LaborOverhead Applied

Assigning Costs UsingWeighted-Average CostingNow lets examine the five-step process.Beginning Inventory 250 units1,000 units startedEnding Inventory 150 units1,250 units1,100 units completed

Weighted Average ExampleBeginning Work in Process 250 Units 100% CompleteEnding Work in Process 150 Units 100% Complete1,000 Units Started850 Units Started and CompletedMaterials1,100 Units Completed 150 Equivalent Units150 100%1,250 Equivalent units of production

Weighted Average ExampleBeginning Work in Process 250 Units 80% CompleteEnding Work in Process 150 Units 33 1/3% Complete1,000 Units Started850 Units Started and CompletedConversion1,100 Units Completed 50 Equivalent Units150 .333%1,150 Equivalent units of productionWork to Complete Process 20%250 Units

CVP: The Profit Equation(P X) - [(V X) + F]=(P V)X F=

Finding Target Volumes

Break-Even in UnitsLets use the Hap Bikes information again.Contribution margin ratio

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Total

Per Unit

Percent

Sales (500 bikes)

250000.0

500.0

1.0

Less: variable expenses

150000.0

300.0

0.6

Contribution margin

100000.0

200.0

0.4

Less: fixed expenses

80000.0

Net income

20000.0

Using CVP to Analyze Different Cost Structures

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High Variable Company

%

Hi Fixed Company

%

(50,000 units)

(50,000 units)

Sales

Variable costs

400000.0

0.8

100000.0

0.2

Contribution margin

100000.0

0.2

400000.0

0.8

Fixed costs

40000.0

0.08

340000.0

0.68

Operating profit

60000.0

0.12

60000.0

0.12

Break-even units

20000.0

42500.0

Contribution margin

per unit

2.0

8.0

Margin of SafetyExcess of projected (or actual) sales over the break-even volume.The amount by which sales can fall before the company is in the loss area of the break-even graph. Sales Break-even volume sales volume= Margin of Safety

Identifying Relevant CostsCosts that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs.Unavoidable costs are never relevant and include:Sunk costs.Future costs that do not differ between the alternatives.

Quick Check Colonial Heritage makes reproduction colonial furniture from select hardwoods.

The companys supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand?a. Yesb. No

Chairs

Tables

Selling price per unit

$80

$400

Variable cost per unit

$30

$200

Board feet per unit

2

10

Monthly demand

600

100

Quick Check

The companys supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits?a. 500 chairs and 100 tablesb. 600 chairs and 80 tablesc. 500 chairs and 80 tablesd. 600 chairs and 100 tables

Chairs

Tables

Selling price per unit

$80

$400

Variable cost per unit

$30

$200

Board feet per unit

2

10

Monthly demand

600

100

Ask what B and C would be. Then ask them to identify one DL, DM, OH cost in their company.