Professional Documents
Culture Documents
Kinney8e PPT Ch02
Kinney8e PPT Ch02
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Learning Objectives
Why are costs associated with a cost object?
What assumptions do accountants make about cost
behavior, and why are such assumptions necessary?
How are costs classified on financial statements, and why
are such classifications useful?
How does the conversion process occur in manufacturing
and service companies?
What are the product cost categories, and what items
comprise those categories?
How and why does overhead need to be allocated to
products?
HowCengage
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is costLearning.
of goods All manufactured
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scanned,
preparingin an
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whole statement?
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Cost
Monetary
© measure
2011 Cengage of resources
Learning. All Rightsgiven up to attain
Reserved. May notanbeobjective (such as
copied, scanned,
acquiring
or duplicated, in whole a good
or in part, or delivering
except a service)
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protected website for classroom use.
Cost Categories
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Association with a Cost Object
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Reaction to Changes in Activity
Variable
Fixed
Mixed
Step
$
$
# of Units # of Units
Within the
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relevant range
or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
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Cost Reaction to Changes in Activity
# of Units # of Units
Unit $ Unit $
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# of
or duplicated, Units
in whole or inrelevant range
part, except for # of Units
use as permitted in a license
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Total and Unit Cost Behavior
Total Cost Unit Cost
variable
$ $
fixed
# of Units # of Units
Within the
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relevant range
or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
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Determining Cost Behavior
Cost Predictor Cost Driver
Activity accompanied Activity that has a
by consistent, direct cause-effect
observable changes in relationship on cost
a cost item
Product costs
Direct material—Measurable part of a product
Direct labor—Labor used to manufacture a
product or perform a service
Overhead—Indirect production cost
First appear on the balance sheet in
inventory accounts
Transferred to the income statement when
product
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Learning.
or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
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Period Costs
Period costs
Selling and administrative costs
Distribution costs
Cost to warehouse, transport, and/or deliver a product or
service
Major impact on managerial decision making
Appear on the income statement when
incurred
Expensed
© 2011 when
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The Conversion Process
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The Conversion Process
Input Output
Purchase Product or
raw materials Service
or supplies
CONVERSION
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Degrees of Conversion
Low Moderate High
Moderate
Low High
Department stores Manufacturing
Auditing
Moderate
Mining
Florists
Printing
Meat markets
Restaurants
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Oil-change businesses
or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
protected website for classroom use.
Service Company
Input
Purchase
supplies
Significant amount of labor
Tangible or intangible output
Use supplies,
labor, overhead Output
to provide service
Sell to
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Retail Company
Input
Output
Purchase
Warehouse
products
and/or display
for resale
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Manufacturer
Significant amount of labor and machinery
Tangible output
Input Output
Purchase Finished
raw materials product
and supplies
Production
Center Sell to
add labor and
overhead
customer
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Cost Accumulation in a
Manufacturing Company
Materials
Inventory
Work in Process
Inventory
Finished Goods Cost of
Inventory Goods Sold
Income
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Product Cost—Direct
Direct Material
Conveniently and economically traced
to cost object
Direct Labor
To manufacture a product or perform a service
Includes wages paid to direct labor employees,
© 2011retirement benefits
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Product Cost—Indirect
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Product Cost Behavior
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Overhead Cost Allocation
Assign indirect costs to one or more
cost objects
To determine full absorption cost (GAAP)
To motivate management
To compare alternative courses of action for
planning, controlling, and decision making
Allocation process should be
rational and systematic
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Overhead Cost Allocation
Overhead Actual
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Allocating Overhead:
Actual Cost System
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Allocating Overhead:
Actual vs. Normal
Product Cost Actual Cost Normal Cost
System System
Direct Materials Actual Actual
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distributed with a certain product or service or otherwise on a password-
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or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-
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Flow of Product Costs
Raw Materials Inventory XXX
Accounts Payable XXX
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distributed with a certain product or service or otherwise on a password-
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Flow of Product Costs
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distributed with a certain product or service or otherwise on a password-
protected website for classroom use.
Flow of Product Costs
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Statement of Cost of Goods
Manufactured—Raw Materials
Used
Beginning balance $ 73,000
Purchases of materials 280,000
Raw materials available $353,000
Ending balance <69,000>
Total raw materials used $284,000
To© 2011
Statement of Cost
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Statement of Cost of Goods
Manufactured
Beginning work in process $145,000
Raw materials used $284,000
Direct labor 436,000
Variable overhead 115,200
Fixed overhead 98,880
Current period manufacturing costs 934,080
Total costs to account for $1,079,080
Ending work in process <20,880>
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Cost of goods
or duplicated, manufactured
in whole or in part, except for use as permitted in a$1,058,200
license
distributed with a certain product or service or otherwise on a password-
protected website for classroom use.
Schedule of Cost of Goods Sold
Beginning Finished Goods $ 87,400
Cost of Goods Manufactured 1,058,200
Cost of Goods Available for Sale $1,145,600
Ending Finished Goods <91,600>
Cost of Goods Sold $1,054,000
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Ethical Issues
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