COMM294

bySarahWang

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TableofContents

1. CostTerms,ConceptsandClassifications2. Job-OrderCosting3. ActivityBasedCosting4. CostBehaviour5. Cost-Volume-ProfitAnalysis

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CostTerms,ConceptsandClassifications

ManufacturingCosts=PRODUCTCOSTS• Recordedasinventorywhenincurred(akainventoriablecosts)• ExpensedasCOGSwhenproductissold

• DirectMaterials(DM)

o Rawmaterialsandotherpartsthatcanbedirectlytracedtoaproduct

o E.g.Wood,copper,fabric,stereosforcars

• DirectLabour(DL)o “Touchlabour”thatcanbetracedtothecreationofa

product/serviceo E.g.Assemblylineworker,hairdresser

• ManufacturingOverhead(MOH)

o Factory-relatedcostsincurredtomakeaproduct,butcannotbedirectlytracedtospecificunitsproduced

o IncludesIndirectLabourandIndirectMaterialso E.g.Janitors,securityguards,manufacturingmanager’s

salary,machinelubricants,electricitytopowerthefactory

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ClassificationofManufacturingCosts• PrimeCosts

o DMandDLo Directlytraceabletoproduct

• ConversionCostso DLandMOHo Costsincurredtoconvertrawmaterialsintofinishedgoods

Non-ManufacturingCosts=PERIODCOSTS• Notpartofthemanufacturingprocess,soitcannotbeassignedto

aspecificproduct• Expensedinperiodincurred• IncludesSelling,General&Administrativecosts• E.g.Salescommissions,deliverycostsforfinishedgoods,CEO

salary,electricitytopowertheHQ

Tip:• Factoryrelated=Manufacturing(Product)• Headquarter/Salesofficerelated=Non-Manufacturing(Period)

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CostClassificationsforPredictingCostBehaviour• VariableCosts(VC)

o Coststhatvaryindirectproportiontothelevelofactivity/costdriver

• FixedCosts(FC)o Coststhatremainconstantregardlessofthelevelofactivity

(withinarelevantrange)• MixedCosts

o Includebothvariableandfixedcostso SeparateVCandFCportionsusingtheHigh-LowMethod

CostClassificationsforDecisionMaking• DifferentialCosts/IncrementalCosts

o Acostthatdiffersbetween2alternativeso Relevantfordecision-making

• OpportunityCostso Valueofthebestalternativeforgoneo Relevantfordecision-makingbutdoesnotshowupon

financialstatements• SunkCosts

o Costsincurredinthepastandirreversibleo NOTrelevantfordecision-makingo E.g.Depreciation/Amortization

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Question1:CostClassificationPleasecategorizethefollowingcostsfortheCUSAgendamanufacturingplant: ProductCosts Period

Costs

Direct Indirect

VC FC DM DL MOH SG&A Opp SunkWagesofworkerswhoassembletheagendas,$13/hr

Supervisor’ssalary,$3,000/month

Papertoproduceagendas,$5/unit

Factoryrent,$2,500/month Salesofficerent,$2,600/month

Depreciationoffactorybuilding,$8,000/year

DepreciationofHQ,$9,000/year

Shippingcost,$7/unit

Advertisingcost,$3,000/month

Electricityforthefactory,$5/unit

CEOsalary,$180,000/year Rentalrevenueforgone,$20,000/year

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InventoryEquations(VeryUseful!)BasicEquation:BeginningBalance+Additions=EndingBalance+WithdrawalsRawMaterials:BeginningRM+Purchases=EndingRM+DMusedWork-in-Process(WIP):BeginningWIP+Manufacturingcosts=EndingWIP+COGMManufacturingcosts=DMused+DL+MOHappliedFinishedGoods:BeginningFG+COGM=EndingFG+COGSCOGAS=BeginningFG+COGM

RawMaterialsInventory

Work-in-ProcessInventory

FinishedGoodsInventory

DR.(+) CR.(-) DR.(+) CR.(-) DR.(+) CR.(-)Beg.Bal. Beg.Bal. Beg.Bal.

Purchases DM COGM DMused DL COGS

IDMused MOH End.Bal. End.Bal. COGM

End.Bal.

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Question2:InventoryEquationsManufacturerLtd.providesyouwiththefollowinginventorybalances: BeginningBalance EndingBalanceRawMaterials $80,000 $45,000Work-in-Process 110,000 210,000FinishedGoods 230,000 245,000

Thecostofrawmaterialsusedfortheyearwas$175,000andtheyspent$230,000ondirectlabour.Theyallocated$380,000inmanufacturingoverheadandincurred$90,000insellingandadministrativeexpenses.

a) HowmuchdidManufacturerLtd.spendtopurchaserawmaterialsduringtheyear?

b) WhatarethetotalmanufacturingcostsfortheyearatManufacturerLtd.?

c) DetermineCostofGoodsSoldfortheyear.

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Job-OrderCostingTypesofCostingSystems• ProcessCosting

o Usedformassproduction(manyunitsofasingle,indistinguishableproduct)

o Assignthesameaveragecostperunit• Job-OrderCosting

o Usedforproductsthatareindividuallymanufacturedormadeinsmallbatches

o Productsaredistinguishable/identifiableo Trace/allocatecoststoeachspecificjob

§ DMandDLischargedasworkisperformed§ MOHisallocatedbasedonanestimate

AllocatingMOH

1. Determinetheallocationbase/driver(giveninanexam)

e.g.#DLH,$DL,#MH

2. Setapredeterminedoverheadrate(POHR)

POHR = &'()*+(,-/0(+1234506(7,8,6)0-&'()*+(,-/0(+19:)('05;110<+()0:=+',

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3. UsethePOHRtoassignMOHcoststojobsbasedonactualdriverlevel

MOHApplied = POHR ∗ ActualActivity

4. AdjustforvariancesbetweenthepredeterminedMOHandactualMOHincurred• ActualMOHisrecordedasaDR.• AppliedMOHisrecordedasaCR.

AppliedMOH>MOHIncurred=OVER-APPLIED• MOHaccounthasanendingCR.balance• Adjustingjournalentry:

DR.MOHCR.COGS

AppliedMOH<MOHIncurred=UNDER-APPLED• MOHaccounthasanendingDR.balance• Adjustingjournalentry:

DR.COGSCR.MOH

*EndingbalanceofMOHneedstobe0

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Question3:Job-OrderCostingCMPproducesuniquereviewpackagesbasedonrequestsbySauderstudents.FortheCOMM294reviewpackage,CMPincurred$500indirectmaterialsand#25directlabourhoursat$16perhour.MOHisallocatedtojobsbasedonthenumberofdirectlabourhours.TheMOHbudgetis$640,000andatotalof#160,000directlabourhoursareexpectedfortheentireyear.Bytheendoftheyear,CMPhasincurredtotalof#175,000directlabourhours.Inaddition,theydiscoverthatactualmanufacturingoverheadcostswere$685,000.

a) PleasehelpCMPdeterminethecostoftheCOMM294reviewpackage.

b) DidCMPoverorunderapplyMOH?Whatistheconsequenceandhowshoulditbecorrected?

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Activity-BasedCosting

• AssigningMOHbasedontheactivitiesthatdrivethecost,ratherthanusingasinglePOHRforeverything

• Everyactivitywillhaveadifferentcostdriver,whichresultsinmany“miniPOHRs”o E.g.Purchasingcostsà#purchaseorders

Machinemaintenanceà#MHStepstoActivity-BasedCosting(ABC)

1. Identifyactivities,activitycostpoolsandactivitymeasures

2. Assignoverheadcoststoactivitycostpools

3. Calculateactivityrates(“miniPOHR”)

EstimatedTotalActivity𝐂𝐨𝐬𝐭PoolEstimatedTotal𝐀𝐜𝐭𝐢𝐯𝐢𝐭𝐲AllocationBase

4. AssignMOHcostsbasedonactivitylevels

AllocatedMOH = ActivityRate ∗ ActualActivity

5. Preparemanagementreports(notaskedforinexams,butyou

maybeaskedtoprovidequalitativecommentsregardingtheuseofABCingeneralcomparedtotraditionalcosting)

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Question4:ABCJoey,ChandlerandRossshareanapartment.Theirtotalcostsfortheapartmentare$1,692permonth,whichtheysplitequally(eachroommatepays$564).Thecostscoverrent,Wi-Fi,Netflixandgroceries.Chandlerisn’taroundalotbecausehespendsalotoftimeatMonica’s.Hefeelsasifhe’spayingmorethanheshould.HesuggeststhattheyuseActivity-BasedCostingtofigureouthowmuchtheyshouldeachbepaying.Theyidentifythefollowingcosts:Rent $1,200Wi-Fi $100/monthNetflix $14/monthGroceries $378/month

Theydecidethatrentshouldbesharedequally,buttherestofthecategoriesshouldbesplitbasedonthe“activitylevel”ofeachroommate:• Ross,asaprofessor,spendsalotoftimeonthecomputer.With

allthepaleontologyresearchhedoes,heconsumesabout35GBoftheirWi-Fiusage.Joeyusesabout10GBandChandleronlyusesabout3GB.

• JoeywatchesalotofNetflix,whichtheyestimatetobeabout30hoursperweek.Rosswatchesabout4hoursperweekandChandleronlywatches1houraweek.

• Joeyeatsalotathome(andingeneral).Heeatsabout20mealsattheapartmenteachweek.Rosseatsathomearound15mealsaweek,whileChandleronlyhasabout8meals.

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UsingABC,figureouttheactualcostperroommate.

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CostBehaviour

High-LowMethodAmethodtoestimatethevariablecosts(VC)andfixedcosts(FC)whengiventotalcosts(TC)intwoormoretimeperiods.Steps:

1. Identifythehighestandlowestlevelsofactivity

2. Identifythetotalcostsrelatingtothoselevelsofactivity

3. Calculatethechangeincostandchangeinactivity

VariableCost =∆Cost

∆Activity

4. Calculatefixedcostusingeitherthehighpointorlowpoint

FixedCost = TotalCost − TotalVariableCost

5. WritecostequationintheformatY=a+bX

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Question5:High-LowMethodTheCUShasprovidedyouwiththefollowingdatafromitsoperationsofprintingagendasoverthepastfewyears.PredictthetotalcosttheCUSwillincurifitexpectstoprint#1,375agendasin2019.Year #Agendasprinted TotalCost

2013 1,000 $13,890

2014 1,100 14,230

2015 1,250 15,500

2016 1,400 17,490

2017 1,300 16,290

2018 1,350 16,980

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Cost-Volume-Profit(CVP)Analysis

ContributionMargin(CM)• Amountremainingfromsalesrevenueafterallvariableexpenses

havebeendeducted

Total PerUnitContributionMargin

SalesRevenue–VariableCosts

UnitSellingPrice–UnitVariableCost

CMRatio TCM/SalesRevenue UCM/USPBreak-EvenAnalysis• AtBreak-Even,ContributionMargin=FixedCostsà

NetIncome=0

• EquationMethodProfit = Sales − VariableCosts − FixedCosts

• ContributionMarginMethod

BEpoint #units =FixedCosts

UCM

BEpoint $ =FixedCostsCMRatio

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TargetProfitAnalysis• Usedtodeterminethesalesvolumeneededtoachieveacertain

targetprofit

𝐔𝐧𝐢𝐭salestoattaintargetprofit =FixedCosts + TargetProfit

UCM

𝐃𝐨𝐥𝐥𝐚𝐫salestoattaintargetprofit =FixedCosts + TargetProfit

CMRatio

𝐁𝐞𝐟𝐨𝐫𝐞 − 𝐭𝐚𝐱TargetProfit =𝐀𝐟𝐭𝐞𝐫 − 𝐭𝐚𝐱TargetProfit

(1 − Taxrate)

Tip:AlwaysdotheproblemusingBefore-TaxTargetProfitMarginofSafety• Excessofbudgeted/actualsalesoverthebreak-evenvolumeof

sales

MarginofSafety $ = TotalSales − BreakevenSales

MarginofSafety % =TotalSales − BreakevenSales

TotalSales

MarginofSafety #units =TotalSales − BreakevenSales

USP

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CostStructure• CostStructure:relativeproportionoffixedandvariablecosts

o HighFC(andlowVC)§ Incomeishigheringoodyearsandlowerinbadyears

comparedtocompanieswithlowFCo HighVC(andlowFC)

§ Incomeismorestableacrossgoodandbadyears

OperatingLeverage• Howsensitivenetincomeistoa%changeinsales

DegreeofOperatingLeverage(DOL) =ContributionMargin

NetIncome

• Interpretation:IfDOL=5,a10%increaseinsaleswillresultina

50%increaseinincome

SalesMix(Multi-ProductBreak-EvenAnalysis)• SalesMix:Relativeproportioninwhichacompany’sproductsare

sold• AssumeproportionofdifferentproductsremainconstantforCVP

analysis

OverallCMRatio =TotalCMofallproducts

TotalSales

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Question6:CVPAnalysisKim’sKoffeehasdevelopedthefollowingformulatoestimateitsmonthlycosts:

TotalCosts = $28,000 + $3 ∗ #cupsofcoffeeCustomersarecharged$5percupofcoffee.Thecompanyhasataxrateof40%.

a) HowmanycupsofcoffeemustKimsellinamonthinordertobreak-even?

b) Whatisthemarginofsafety(in#cupsofcoffee)ifKimexpectstosell#19,500cupsofcoffeepermonth?

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c) IftheCMRatiodropsto25%,howmuchmustfixedcostsbereducedbytoensureKimbreakseveneachmonthat$50,000salesrevenue?

d) IfKimexpectstosell#19,500cupsofcoffeepermonth,whatpriceshouldbechargedtogenerateamonthlybefore-taxprofitof$15,000?

e) HowmanycupsofcoffeemustKimselltogenerateafter-taxprofitsof$8,500permonth?