Agenda

Review: Some vocabulary, cost behavior, simple (traditional) product costing, the flow of costs through a manufacturers accounts Overview of Tuesdays class. Quiz: Learning with Cases Group exercise: product costing, cost flow, cost behavior

Cost Concepts
Important vocabulary
resources costs cost object direct costs indirect costs fixed costs variable costs product costs overhead

Costing inventory and sales

Resources = assets Costs = use or sacrifice of resources Product costs = manufacturing costs (GAAP) direct (e.g., DM and DL) variable or fixed traceable indirect (overhead - O/H) variable fixed

Components of Product Costs

Direct material Direct labor Indirect manufacturing costs (O/H)
Cost pool/s Factory costs May vary, but not always with units of production

Direct vs. Indirect Costs

Cost object: The item we are trying to determine a cost for (product, factory, headquarters, CEO) A cost can be categorized as direct or indirect only after the cost object has been defined. A cost that is a direct factory cost may be an indirect product cost.

Direct vs. Indirect Costs

Direct costs can be either fixed or variable.

Indirect costs can be either fixed or variable

Fixed cost behavior

Example: Variable cost/unit = $1

Total Cost

Fixed costs are budgeted at $100,000 Production volume = 1 Production volume = 100,000

Fixed mfg. costs = $100,000

Production Volume

Fixed manufacturing cost behavior

Unit costs
Example: Fixed manufacturing costs = $100,000 Production volume = 1, or Production volume = 100,000 Unit fixed manufacturing costs vary with production volume

Production Volume

 Example: Variable cost/unit = $1 Production volume = 1 Production volume = 100,000 Total cost

Variable costs

Total variable costs increase with production volume

Production volume

 Example: Variable cost/unit = $1 Production volume = 1 Production volume = 100,000 Unit cost

Variable costs

Unit variable costs do not change with production volume. $1

Production volume

Home Entertainment Center operates a large store in San Francisco. The store has both a video section and a musical section. HEC reports revenues for the video section separately from the musical section. Classify direct and indirect and variable and fixed costs with respect to the video section.

D or I
Retainer paid to video distributor Electricity costs of the HEC store Cost of videos purchased Subscription to Video Trends Computer leased for HEC store Cost of free popcorn for customers Earthquake insurance for store Freight-in costs of videos D I D D I I I D

V or F
F F V F F V F V

Other cost concepts

Outlay costs Opportunity costs Differential costs Sunk costs

Traditional Overhead Allocation

Budgeted, actual and applied overhead Budgeted overhead costs = $500,000 Denominator volume of the cost driver = 500,000 direct labor hours Predetermined overhead rate = $1 per hour Actual overhead costs were $495,000

Traditional Product Costing

DL = $3 per unit, DM = $2 per unit Labor costs $3 per hour, 500,000 units are manufactured; 505,000 DL hours are used. What is a unit of product expected to cost? How much did the company spend building 500,000 units? How much would would we expect them to spend building 400,000 units?

Traditional Product Costing

How much overhead was applied? Over- or underapplied overhead = Actual overhead spending - Overhead applied. By how much was overhead over- or underapplied? Efficiency variance = 5,000 DL hours x $1 per hour = $5,000 Budget variance = $500,000 - $495,000

Flow of costs through a manufacturers accounts:

Materials inv. BI Purchases EI

Work in process BI COGM DM to FG DL O/H EI Wages Payable Paydays BB to WIP EB

Finished goods
BI From WIP EI To COGS

to WIP

Mfg. Overhead Actual Applied to WIP

Cost of Goods Sold From FG

Other important concepts

Contribution margin Gross margin What is the difference between the two? Which one would you look at to decide what product to manufacture? Which one would you expect to see on an income statement?

Who uses cost accounting information?

Cost of goods sold, inventories financial statements. Bids, product pricing managers Budgeting, production scheduling managers Can the same cost system serve both masters? Should it?

Tuesday
Cost-Volume-Profit analysis - a simple decision model. Lecture and demonstration problems Group exercise that is a little tough. Cost-Volume-Profit analysis is required for the Prestige Telephone Company case next Thursday.

Learning with cases:

How do instructors and students roles differ between case/experiential and traditional approaches to learning?

Name one advantage and one disadvantage to case learning.