Professional Documents
Culture Documents
Costs Terms, Concepts and Classifications
Costs Terms, Concepts and Classifications
11th Edition
Chapter 2
Chapter Two
Manufacturing Costs
The Product
Direct Materials
Direct Labor
Manufacturing Overhead
Classifications of Costs
Prime Conversion
Cost Cost
Non-manufacturing Costs
Marketing or Administrative
Selling Cost Cost
Sale
Quick Check
Quick Check
MegaLoMart
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses
Prepaid Expenses
Inventories
Merchandise
Inventory Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Materials waiting to
Prepaid Expenses
be processed.
Prepaid Expenses
Partially complete Inventories
Merchandise
products – some
Inventory Raw Materials
material, labor, or Work in Process
overhead has been Finished Goods
added.
Completed products
awaiting sale.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
2-8
Inventory Flows
Beginning
Additions Available
balance + $$$ = $$$$$
$$
Quick Check
Quick Check
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs are costs
+ Raw materials + Mfg. overhead incurred to
purchased = Total manufacturing convert the
= Raw materials costs
direct material
available for use
in production into a finished
– Ending raw materials product.
inventory
= Raw materials used
in production
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Work
In Process Finished Goods
Quick Check
Quick Check
Quick Check
Quick Check
B. $835,000
C. $655,000
D. Cannot be determined.
Quick Check
Quick Check
D. Cannot be determined.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check
Quick Check
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
2-19
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.
Quick Check
Quick Check
Opportunity Costs
Sunk Costs
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
Quick Check
• Financial reporting
• Predicting cost behavior
• Assigning costs to cost objects
• Decision making
Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
Overtime
Quality of Conformance
Support activities
Prevention whose purpose is to
Costs reduce the number of
defects
Incurred to identify
defective products
Appraisal Costs before the products are
shipped
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
Appraisal Costs
Prevention Costs
• Testing & inspecting
• Quality training
incoming materials
• Quality circles
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment
Ventura Company
Quality Cost Report
For Years 1 and 2
Year 2 Year 1
Amount Percent* Amount Percent*
Prevention costs:
Systems development $ 400,000 0.80% $ 270,000 0.54%
Quality training 210,000 0.42% 130,000 0.26%
Supervision of prevention activities 70,000 0.14% 40,000 0.08%
Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
$10 20
9
Quality 18
7
External External
can also 14
External External
6 Failure Failure be 12 Failure Failure
5 prepared 10
4 Internal
Failure
in 8 Internal
Failure
3 Internal
Failure
graphic 6 Internal
Failure
2
Appraisal form. 4
Appraisal
Appraisal Appraisal
1 2
Prevention Prevention Prevention Prevention
0 0
1 2 1 2
Year Year
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
End of Chapter 2