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EMBA 5403 Managerial WK 2
EMBA 5403 Managerial WK 2
Types of Costs
The opportunity cost is the monetary amount associated with the next best use of the resource.
differential costs- (benefits) costs or benefits that change between/among alternatives Irrelevant costs -Costs that dont change are irrelevant to the decision Choose the alternatives where differential benefits exceed differential costs Opportunity costs Sunk costs Controllable been incurred and Costs that have already /avoidable cannot be costs/discretionary costs Fall 2010 Mugan 2/82 changed no matter what action is taken in the future.
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Classifications of Costs
Behavior how costs react to changes in underlying cost driver Function related to production or sales
Product or Period Product costs Direct Material Direct Labor Factory Overhead Variable or Fixed
Traceability (cost of tracing cost to a cost driver directly should be lower than the benefits.
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Non-manufacturing Costs
Marketing or Selling Costs Administrative Costs
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Period costs include all marketing or selling costs and administrative costs.
Expense
Balance Sheet
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Income Statement
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Income Statement
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Work In Process
Direct materials
+ =
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Work In Process
Beginning work in process inventory Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs
+ =
Prime Costs
Conversion Costs
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Work In Process
Beginning work in process inventory Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs
+ =
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Work In Process
Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured
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+ =
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Finished Goods
Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory Cost of goods sold
+ = =
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Finished Goods
Period Costs
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Total Dollars
Marginal Costs are the costs to produce one more additional unit of output=slope.
Exceeding Capacity
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Relevant Range
Total Dollars
Relevant Range
Total Cost
The relevant range is the portion of the curvilinear total cost curve that appears in the normal operations area.
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Startup Range
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Output
Normal Operation s Exceeding Capacity
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Total Cost
Relevant Range
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Activity
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Fixed
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A merchandising company usually will have a high proportion of variable costs like cost of sales.
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Discretionary
May be altered in the shortterm by current managerial decisions
Examples
Depreciation on Equipment and Real Estate Taxes
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Examples
Advertising and Research and Development
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Mixed Costs
Y
Total Mobile Phone Cost
Fixed Monthly
Phone Charge
X Activity (minutes)
Fixed Monthly
Phone Charge
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Mixed Costs
The 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
Y
Total Mobile Phone Cost
Activity (minutes)
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* * * *
0 1 2
Cost
* ** * **
X
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3
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Activity - output
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* * * *
0 1 2
Cost
* ** * **
X
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3
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Activity - output
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* * * *
0 1 2
Cost
* ** * **
X
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3
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Activity - output
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Total Cost at 0.8 units Less: Fixed cost Estimated total variable cost 0.8 units
11 TL 10 TL 1 TL
TL1 0.8
Y = TL10 + TL1.25X
Total cost
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Number of units
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Indirect costs
Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead
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Differential revenue is: TL2,000 TL1,500 = TL500 Differential cost is: Mugan TL 300
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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 this program, you could save TL 10,000 per year. Your opportunity cost?
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Sunk Costs
Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions.
Example: You bought an automobile that cost TL10,000 two years ago. The TL10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the TL10,000 cost.
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Summary of the Types of Cost Classifications Financial reporting Predicting cost behavior Assigning costs to cost objectsproducts- determining unit costs Decision making
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Idle Time
Machine Breakdowns Power Failures Material Shortages
The labor costs incurred during idle time are ordinarily treated as manufacturing overhead.
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Overtime
The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead.
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Unit Costs
Direct Material- determined as actual usage of materials or by engineering estimates (standard costs) Direct Labor- determined as actual usage of materials or by engineering estimates (standard costs) MOVH common production costs assigned to each unit Unit cost = DM + DL + MOVH per unit
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Traditional ABC
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Other companies treat fringe benefit expenses of direct laborers as additional direct labor costs.
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Continue
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Numerical Example
Management at THD believes that indirect costs are actually caused by the following five activities:
Activity Machine setups Quality inspections Production orders Machine-hours worked Material receipts Total Estimated Costs 255,000 TL 160,000 TL 81,000 TL 314,000 TL 90,000 TL 900,000 TL
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Activity Costs Machine setups 255,000 TL Quality inspections 160,000 Production orders 81,000 Machine-hours worked 314,000 Material receipts 90,000
= = = = =
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= = = = =
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Reconciliation check
Reconciliation Indirect costs assigned to Product A Indirect costs assigned to Product B Total indirect costs assigned
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UNIT COSTS Direct Material Direct Labor ( DLH x 30 TL / DLH) Manufacturing Overhead Unit Cost
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Product A Product B
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Advantages of ABC
Activity-based costing is very useful in firms . . .
With multiple products and services. That have products and services that use indirect activities in different ways.
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ABC ignores the difference between the fixed and variable costs of an activity.
ABC is more costly because additional measurements and observations must be made.
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Quality of Conformance
When the overwhelming majority of products produced conform to design specifications and are free from defects.
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Appraisal Costs
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Appraisal Costs
Testing & inspecting incoming materials Final product testing Depreciation of testing equipment
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Ventura Company Quality Cost Report For Years 1 and 2 Year 2 Amount Percent* Prevention costs: Systems development Quality training Supervision of prevention activities Quality improvement Total prevention cost Appraisal costs: Inspection Reliability testing Supervision of testing and inspection Depreciation of test equipment Total appraisal cost Internal failure costs: Net cost of scrap Rework labor and overhead Downtime due to defects in quality Disposal of defective products Total internal failure cost External failure costs: Warranty repairs Warranty replacements Allowances Cost of field servicing Total external failure cost Total quality cost Fall 2010 $ 400,000 210,000 70,000 320,000 1,000,000
0.80% $ 270,000 0.42% 130,000 0.14% 40,000 0.64% 210,000 2.00% 650,000
0.80% 900,000 1.74% 2,300,000 0.26% 630,000 1.20% 1,320,000 4.00% 5,150,000 15.00% $ 9,000,000 Mugan
Quality cost reports provide an estimate of the financial consequences of the companys current defect rate.
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7 6 5 4 3 2 1 0 Appraisal Prevention 1 Year Prevention 2 Internal Failure Appraisal Internal Failure External Failure External Failure
External Failure
External Failure
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http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
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http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
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Introduction
Growth
Maturity
Decline
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http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
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http://www.ee.unb.ca/powereng/courses/E E2703/EE2703_DetailedDesign2.pdf
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http://www.ee.unb.ca/powereng/courses/E E2703/EE2703_DetailedDesign2.pdf
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Appendix
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1. In the Known_ys box enter C4:C19 for the range. 2. In the Known_xs box enter D4:D19 for the range.
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1. In the Known_ys box enter C4:C19 for the range. 2. In the Known_xs box enter D4:D19 for the range.
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