Professional Documents
Culture Documents
2-2
Learning Objective 1
2-3
Manufacturing Costs
Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor
The Product
Manufacturing
Manufacturing
Overhead
Overhead
2-4
Direct Materials
Raw materials that become an integral part of the
product and that can be conveniently traced
directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
2-5
Direct Labor
Those labor costs that can be easily traced to
individual units of product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
2-6
Manufacturing Overhead
Manufacturing costs that cannot be traced directly
to specific units produced.
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
2-7
Non-manufacturing Costs
Selling
Costs
Administrative
Costs
All executive,
organizational, and
clerical costs.
2-8
Learning Objective 2
Distinguish between
product costs and period
costs and give examples
of each.
2-9
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement
2-10
Quick Check
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
2-11
Quick Check
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
2-12
Classifications of Costs
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
2-13
Merchandisers . . .
Buy finished goods.
Sell finished goods.
MegaLoMart
Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.
2-14
Balance Sheet
Merchandiser
Current assets
Manufacturer
Current Assets
Cash
Cash
Receivables
Receivables
Prepaid Expenses
Merchandise
Inventory
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
2-15
Balance Sheet
Merchandiser
Current assets
Manufacturer
Current Assets
Cash
Cash
Receivables
Receivables
Materials
waiting to
Prepaid Expenses
Partially complete
products some
Inventory
material, labor, or
overhead has been
added.
Merchandise
be processed.
Prepaid
Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Completed products
awaiting sale.
2-16
Learning Objective 3
Prepare an income
statement including
calculation of the cost of
goods sold.
2-17
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
2-18
Beginning
Beginning
balance
balance
Additions
Additions
to
to inventory
inventory
Ending
Ending
balance
balance
Withdrawals
Withdrawals
from
from
inventory
inventory
2-19
Quick Check
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
2-20
Quick Check
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
$1,000 + $100 = $1,100
B. $ 800.
$1,100 - $300 = $800
C. $1,200.
D. $ 200.
2-21
Learning Objective 4
2-22
2-23
Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Work
In Process
Direct materials
As
Asitems
itemsare
areremoved
removed from
from raw
raw
materials
materialsinventory
inventoryand
and placed
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
called direct
direct materials.
materials.
2-24
Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Conversion
Conversion
costs
costsare
arecosts
costs
incurred
incurredto
to
convert
convert the
the
direct
directmaterial
material
into
into aafinished
finished
product.
product.
2-25
Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All
All manufacturing
manufacturing costs
costsincurred
incurred
during
during the
theperiod
period are
areadded
addedto
tothe
the
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
2-26
Raw Materials
Manufacturing
Costs
Beginning raw
Direct materials
materials inventory
+ Direct labor
+ Raw materials
+ Mfg. overhead
purchased
= Total manufacturing
= Raw materials
costs
available for use
in production
Ending raw materials
inventory
Costs
associated
with
associated
with the
thegoods
goodsthat
that
=Costs
Raw materials
used
are
areincompleted
completed
duringthe
the period
period are
are
production during
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
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
2-27
2-28
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
2-29
Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A.
B.
C.
D.
$276,000
$272,000
$280,000
$ 2,000
2-30
Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A.
B.
C.
D.
$276,000
$272,000
$280,000
$ 2,000
2-31
Quick Check
A.
B.
C.
D.
$555,000
$835,000
$655,000
Cannot be determined.
2-32
Quick Check
A.
B.
C.
D.
$555,000
$835,000
$655,000
Cannot be determined.
2-33
Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work
in process inventory at the end of the
month. What was the cost of goods
manufactured during the month?
A.
B.
C.
D.
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
2-34
Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work
in process inventory at the end of the
month. What was the cost of goods
manufactured during the month?
A.
B.
C.
D.
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
2-35
Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured
for the month was $760,000. And the ending
finished goods inventory was $150,000.
What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
2-36
Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured
for the month was $760,000. And the ending
finished goods inventory was $150,000.
What was the cost of goods sold for the
month?
A. $ 20,000. $130,000 + $760,000 = $890,000
B. $740,000. $890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.
2-37
Learning Objective 5
Understand the
differences between
variable costs and fixed
costs.
2-38
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
activity
activity within
within the
the
relevant
relevant range.
range.
Total
Totalvariable
variablecosts
costs
change
changewhen
whenactivity
activity
changes.
changes.
Total
Totalfixed
fixedcosts
costsremain
remain
unchanged
unchangedwhen
whenactivity
activity
changes.
changes.
2-39
Variable Cost
Minutes Talked
2-40
Per Minute
Telephone Charge
Minutes Talked
2-41
Fixed Cost
Monthly Basic
Telephone Bill
2-42
2-43
In Total
Per Unit
Variable
Fixed
2-44
Quick Check
Which of the following costs would be variable with
respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-45
Quick Check
Which of the following costs would be variable with
respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-46
Learning Objective 6
Understand the
differences between direct
and indirect costs.
2-47
Indirect costs
Examples: direct
material and direct labor
Example: manufacturing
overhead
2-48
Learning Objective 7
2-49
2-50
2-51
Opportunity Cost
The potential benefit that is
given up when one
alternative is selected over
another.
2-52
Sunk Costs
Sunk costs have already been incurred and cannot be
changed now or in the future. They should be ignored
when making decisions.
2-53
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-54
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-55
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-56
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-57
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-58
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-59
Financial reporting
Predicting cost behavior
Assigning costs to cost objects
Decision making
2-60
2-61
Learning Objective 8
(Appendix 2A)
Properly account for labor
costs associated with idle
time, overtime, and fringe
benefits.
2-62
Idle Time
Machine
Breakdowns
Material
Shortages
Power Failures
2-63
Overtime
2-64
2-65
Cost of Quality
Appendix 2B
2-66
Learning Objective 9
(Appendix 2B)
Identify the four types of
quality costs and explain
how they interact.
2-67
Quality of Conformance
When the overwhelming majority of
products produced conform to design
specifications and are free from
defects.
2-68
Prevention
Costs
Appraisal Costs
Incurred to identify
defective products before
the products are shipped
2-69
Internal Failure
Costs
Incurred as a result of
identifying defects
before they are shipped
External Failure
Costs
Incurred as a result of
defective products being
delivered to customers
2-70
Prevention Costs
Quality training
Quality circles
Statistical process
control activities
Appraisal Costs
Testing & inspecting
incoming materials
Final product testing
Depreciation of testing
equipment
2-71
2-72
Learning Objective 10
(Appendix 2B)
Prepare and interpret a
quality cost report.
2-73
Prevention costs:
Systems development
Quality training
Supervision of prevention activities
Quality improvement
Total prevention cost
400,000
210,000
70,000
320,000
1,000,000
0.80% $
0.42%
0.14%
0.64%
2.00%
Appraisal costs:
Inspection
Reliability testing
Supervision of testing and inspection
Depreciation of test equipment
Total appraisal cost
600,000
580,000
120,000
200,000
1,500,000
900,000
1,430,000
170,000
500,000
3,000,000
400,000
870,000
130,000
600,000
2,000,000
7,500,000
Year 1
Amount
Percent*
270,000
130,000
40,000
210,000
650,000
0.54%
0.26%
0.08%
0.42%
1.30%
1.20%
1.16%
0.24%
0.40%
3.00%
560,000
420,000
80,000
140,000
1,200,000
1.12%
0.84%
0.16%
0.28%
2.40%
1.80%
2.86%
0.34%
1.00%
6.00%
750,000
810,000
100,000
340,000
2,000,000
1.50%
1.62%
0.20%
0.68%
4.00%
900,000
2,300,000
630,000
1,320,000
5,150,000
9,000,000
1.80%
4.60%
1.26%
2.64%
10.30%
18.00%
0.80%
1.74%
0.26%
1.20%
4.00%
15.00% $
Quality cost
reports provide
an estimate of
the financial
consequences
of the
companys
current defect
rate.
2-74
20
8
7
6
External
Failure
External
Failure
5
Internal
Failure
4
3
Internal
Failure
2
1
0
Appraisal
Appraisal
Quality
reports
can also
be
prepared
in
graphic
form.
18
Quality Cost as a Percentage of Sales
16
14
12
Prevention
2
Year
External
Failure
10
Internal
Failure
8
6
Internal
Failure
4
2
Prevention
External
Failure
Appraisal
Appraisal
Prevention
Prevention
2
Year
2-75
2-76
2-77
2-78
End of Chapter 2