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Chap02notes PDF
Chap02notes PDF
Chapter 2
Chapter Two
The Product
Prime Conversion
Cost Cost
Marketing or Administrative
Selling Cost Cost
Sale
MegaLoMart
Merchandiser Manufacturer
Current assets Current Assets
◆ Cash Cash
◆ Receivables Receivables
◆ Prepaid Expenses Prepaid Expenses
Inventories
◆ Merchandise
Inventory Raw Materials
Work in Process
Finished Goods
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.
The Income Statement
Beginning
Additions Available
balance + $$$ = $$$$$
$$
_ Withdrawals Ending
Available
$$$$$ $$$ = balance
$$
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
B. $835,000
C. $655,000
D. Cannot be determined.
A. $1,160,000 – Ending
during the period
work in
$ 960,000
D. Cannot be determined.
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Quick Check ✓
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Variable Cost Per Unit
Telephone Charge
Per Minute
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Total Fixed Cost
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.
• Financial reporting
• Predicting cost behavior
• Assigning costs to cost objects
• Decision making
Machine Material
Breakdowns Shortages
Power
Failures
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:
Quality cost
Inspection
Reliability testing
600,000
580,000
1.20%
1.16%
560,000
420,000
1.12%
0.84%
reports provide
Supervision of testing and inspection
Depreciation of test equipment
120,000
200,000
0.24%
0.40%
80,000
140,000
0.16%
0.28%
an estimate of
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40% the financial
Internal failure costs: consequences
Net cost of scrap 900,000 1.80% 750,000 1.50%
Rework labor and overhead 1,430,000 2.86% 810,000 1.62% of the
Downtime due to defects in quality 170,000 0.34% 100,000 0.20%
Disposal of defective products 500,000 1.00% 340,000 0.68% company’s
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%
current defect
External failure costs:
Warranty repairs 400,000 0.80% 900,000 1.80% rate.
Warranty replacements 870,000 1.74% 2,300,000 4.60%
Allowances 130,000 0.26% 630,000 1.26%
Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30%
Total quality cost $ 7,500,000 15.00% $ 9,000,000 18.00%
* AsMcGraw-Hill/Irwin
a percentage of total sales. In each year sales totaled $50,000,000. Copyright © 2006, The McGraw-Hill Companies, Inc.
Quality Cost Reports: Graphic Form
$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
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Uses of Quality Cost Information