Chap002 7e Edited

7/31/2019 Chap002 7e Edited

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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Basic CostManagement Conceptsand Accounting for MassCustomization Operations

Chapter 2


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LearningObjective

1


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Process of Management

DecisionMaking

DirectingControl

PlanningStrategyFormulation

Managers need cost information toperform each of these functions.


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What Do We Mean By a Cost?

A cost

is the measure ofresources givenup to achieve a

particular purpose.


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LearningObjective

2


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Product Costs, Period Costs and Expenses

Product costs are costs associated with goods forsale until the time period during which the productsare sold, at which time the costs become expenses.

Period costs are costs that are expensed during thetime period in which they are incurred.

Expenses are the consumption of assets for thepurpose of generating revenue.


7/55Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LearningObjective

3


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Product Costs

Cost of goods sold

Period Costs

Operating expenses

Cost Classifications on FinancialStatements Income Statement


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Merchandiser

Current Assets Cash Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses

InventoriesRaw Materials

Work in Process

Finished Goods

Cost Classifications on FinancialStatements Balance Sheet


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Merchandiser


Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Those materialswaiting to beprocessed.


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Merchandiser


Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Partially complete

products

material towhich some labor

and/or overhead hasbeen added.


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Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Completed productsawaiting sale.



LearningObjective

4


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Types of Production Processes

Type of Production Description of Example ofProcess Process Manufacturer

Job Shop Low volume Disney

Little standardization

Unique products

Batch Multiple products Caterpillar

Low volume

Assembly Line A few major products Ford

Higher volume

Mass Customization High volume Dell

Many standardized components

Customized combination of components

Continuous Flow High volume Exxon

Highly standardized commodity products



LearningObjective

5


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Manufacturing Costs

TheProduct

DirectLabor

DirectMaterial

ManufacturingOverhead


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Direct Material

Example:Steel used tomanufacture

the automobile.

Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.


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Cost of salaries, wages, and fringebenefits for personnel who work

directly on manufactured products.

Direct Labor

Example:Wages paid to an

automobile assemblyworker.


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All other manufacturing costs

Manufacturing Overhead

Materials used to support

the production process.Examples: lubricants andcleaning supplies used in anautomobile assembly plant.

IndirectLabor

IndirectMaterial

OtherCosts


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Cost of personnel who

do not work directly onthe product. Examples:maintenance workers,janitors and security

guards.

IndirectLabor

IndirectMaterial

OtherCosts


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Examples: depreciation

on plant and equipment,property taxes,insurance, utilities,

overtime premium, andunavoidable idle time.

IndirectLabor

IndirectMaterial

OtherCosts


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Classifications of Costs inManufacturing Companies

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:

DirectMaterial

DirectLabor



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Manufacturing Cost Flows


Direct Material

Direct LaborWork inProcess

Inventory


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Direct Material

Direct Labor

FinishedGoods

Inventory

Work inProcess

Inventory


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Direct Material

Direct Labor

FinishedGoods

Inventory

Cost ofGoods

Sold

Work inProcess

Inventory


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Learning

Objective6

Exh


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Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Raw material used 134,980$

Direct labor 50,000

Total manufacturing overhead 230,000

Total manufacturing costs 414,980$

Add: Work-in-process inventory, January 1 120

Subtotal 415,100$

Deduct: Work-in-process inventory, December 31 100

Cost of goods manufactured 415,000$

Schedule of Cost of GoodsManufactured

Exh.

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Exh


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Direct labor 50,000




Subtotal 415,100$




Computation of Cost of Raw Material Used

Raw-material inventory, January 1 6,000$

Add: Purchases of raw materials 134,000

Raw material available for use 140,000

Deduct: Raw material inventory, December 31 5,020


Exh.

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Exh


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Direct labor 50,000




Subtotal 415,100$




Include all direct laborcosts incurred during the

current period.

Exh.

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S h d l f C f G d

Exh.


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Direct labor 50,000




Subtotal 415,100$



Schedule of Cost of GoodsManufacturedComputation of Total Manufacturing Overhead

Indirect material 10,000$

Indirect labor 40,000Depreciation on factory 90,000

Depreciation on equipment 70,000

Utilities 15,000

Insurance 5,000

Total manufacturing overhead 230,000$

Exh.

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S h d l f C t f G d

Exh.


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Direct labor 50,000




Subtotal 415,100$




Beginning work-in-process inventory iscarried over from the

prior period.

Exh.

2-9

S h d l f C t f G d

Exh.


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Direct labor 50,000




Subtotal 415,100$




Ending work-in-process inventorycontains the cost of unfinished goods,and is reported in the current assets

section of the balance sheet.

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I St t t fExh.


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Income Statement for aManufacturer


Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$

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I St t t f

Exh.


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Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$

Income Statement for aManufacturerComet Computer Corporation

Schedule of Cost of Goods Sold

For the Year Ended December 31, 20X2

Finished-goods inventory, Jan. 1 200$

Add: Cost of goods manufactured 415,000

Cost of goods available for sale 415,200

Deduct Finished-goods inventory, Dec. 31 190

Cost of goods sold 415,010$

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Learning

Objective7


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Identifying Cost Drivers

Cost Driver Examples

Activity Cost Driver

Machining operations Machine hoursSetup Setup hours

Production scheduling Manufacturing orders

Inspection Pieces inspected

Purchasing Purchase ordersShop order handling Shop orders

Valve assembly support Customer requisitions

Activities that

cause costs to beincurred are called

cost drivers.


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Learning

Objective8


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Cost Classifications

Cost behavior meanshow a cost will reactto changes in the

level of businessactivity.


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Cost behavior meanshow a cost will reactto changes in the

level of businessactivity.

Total variable costschange when activitychanges.

Total fixed costs remainunchanged whenactivity changes.


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Total Variable Cost Example

Your total long distance telephone bill isbased on how many minutes you talk.

Minutes Talked

TotalL

ongDistance

TelephoneBill


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Variable Cost Per Unit Example

Minutes Talked

Pe

rMinute

TelephoneCharge

The cost per long distance minute talked isconstant. For example, 5 cents per minute.


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Total Fixed Cost Example

Your monthly basic telephone bill probablydoes not change when you make more local

calls.

Number of Local Calls

Mon

thlyBasic

Tele

phoneBill


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Fixed Cost Per Unit Example

Number of Local Calls

Monthly

BasicTeleph

one

Billp

erLocalCall

The average cost per local call decreases asmore local calls are made.


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Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Total variable cost changes Variable cost per unit

Variable as activity level changes. remains the same over

wide ranges of activity.

Total fixed cost remains Fixed cost per unit

Fixed the same even when the goes down as activity

activity level changes. level goes up.


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Learning

Objective9


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Direct and Indirect Costs

Direct costs Costs that can be

easily andconveniently traced to

a product ordepartment.

Example: cost ofpaint in the paint

department of anautomobile assemblyplant.

Indirect costs Costs that must be

allocated in order tobe assigned to a

product ordepartment.

Example: cost ofnational advertising

for an airline isindirect to a particularflight.


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A cost can be direct to the department,but indirect to units of product producedin the department.

Example: department managers salary.

Tracing costs directly to departments orproducts helps to identify and eliminate

non-value added costs.

Direct and Indirect Costs

Controllable and


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A cost that can be significantly influencedby a manager is a controllable cost.

Controllable andUncontrollable Costs

Cost item Manager Classificaton

Cost of food used Restaurant Controllable

in a restaurant manager

Cost of national Restaurant Uncontrollable

advertising by a manager

restaurant chain


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Learning

Objective10


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Opportunity Cost

The potential benefit that isgiven up when onealternative is selected

over another. Example: If you were

not attending college,you could be earning

$20,000 per year.Your opportunity costof attending college for oneyear is $20,000.


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Sunk Costs

All costs incurred in the past that cannot bechanged by any decision made now or in thefuture are sunk costs. Sunk costs should not be

considered in decisions. Example: You bought an automobile that cost

$12,000 two years ago. The $12,000 cost issunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $12,000cost.


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Differential Costs

Costs that differ between alternatives.

Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.

Your commuting costs are $50 per month in yourhometown and $300 per month to the city.

What is your differential cost?$300 - $50 = $250

Marginal Costs and Average


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Marginal Costs and AverageCosts

The extra costincurred to produceone additional unit.

The total cost toproduce a quantity

divided by thequantity produced.

Marginal and average costs arelargely a function of cost behavior

-- variable and fixed costs.


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Costs and Benefits of Information

Costs Benefits

More information does not mean morebenefits if information overload results.


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End of Chapter 2

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Chap002 7e Edited