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ACC585ARes Chap 2
ACC585ARes Chap 2
Basic Cost
Management Concepts
and Accounting for Mass
Customization Operations
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning
Objective
1
2-2
Process of Management
Strategy Planning
Formulation
Control Directing
Decision
Making
2-3
What Do We Mean By a Cost?
A cost
is the measure of
resources given
up to achieve a
particular purpose.
2-4
Learning
Objective
2
2-5
Product Costs, Period Costs and Expenses
2-6
Learning
Objective
3
2-7
Cost Classifications on Financial
Statements – Income Statement
2-8
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
– Cash
Cash
– Receivables
Receivables
– Prepaid Expenses
Prepaid Expenses
– Merchandise
Inventories
Inventory Raw Materials
Work in Process
Finished Goods
2-9
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
– Cash
Those materials
Cash
waiting to be
Receivables
– Receivables processed.
– Prepaid Expenses
Prepaid Expenses
– Merchandise
Inventories
Inventory Raw Materials
Work in Process
Finished Goods
2-10
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Partially complete
Current Assets Current Assets
products – material to
– Cash which
Cash some labor
and/or overhead has
Receivables
– Receivables been added.
Prepaid Expenses
– Prepaid Expenses
Inventories
– Merchandise
Inventory Raw Materials
Work in Process
Finished Goods
2-11
Cost Classifications on Financial
Statements – Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
– Cash
Cash
Completed products
Receivables
– Receivables awaiting sale.
Prepaid Expenses
– Prepaid Expenses
Inventories
– Merchandise
Inventory Raw Materials
Work in Process
Finished Goods
2-12
Learning
Objective
4
2-13
Types of Production Processes
Type of Production Description of Example of
Process Process Manufacturer
2-15
Manufacturing Costs
The
Product
2-16
Direct Material
2-17
Direct Labor
Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.
2-18
Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs
2-19
Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs
Examples: depreciation
on plant and equipment,
property taxes,
insurance, utilities,
overtime premium, and
unavoidable idle time.
2-21
Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:
Prime Conversion
Cost Cost
2-22
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
2-23
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory
2-24
Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold
2-25
Learning
Objective
6
2-26
Schedule of Cost of Goods
Manufactured
2-27
Schedule of Cost of Goods
Computation of Cost of Raw Material Used
Manufactured
Raw-material inventory, January 1
Add: Purchases of raw materials
$ 6,000
134,000
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used $ 134,980
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
2-28
Schedule of Cost of Goods
Manufactured
Include all direct labor
costs incurred during the
Cometcurrent period.
Computer Corporation
Schedule of Cost of Goods Manufactured
2-29
Computation of Total Manufacturing Overhead
2-30
Schedule of Cost of Goods
Manufactured
Beginning work-in-
process inventory is
carried over from the
Comet Computer Corporation
prior period.
Schedule of Cost of Goods Manufactured
2-31
Income Statement for a
Manufacturer
2-32
Comet Computer Corporation
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1 $ 200
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Comet Computer Corporation
Deduct Finished-goods inventory, Dec. 31 190
Income Statement
Cost of goods sold $ 415,010
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
2-33
Learning
Objective
7
2-34
Activities that cause costs to be
incurred are called COST DRIVERS:
Cost Driver Examples
Activity Cost Driver
Machining operations Machine hours
Setup Setup hours
Production scheduling Manufacturing orders
Inspection Pieces inspected
Purchasing Purchase orders
Shop order handling Shop orders
Valve assembly support Customer requisitions
2-35
Learning
Objective
8
2-36
Cost Classifications
2-37
Total Variable Cost Example
Your total cable pay-per-view bill is based on
how many movies you watch.
Total Pay-Per-View
Bill
Pay-Per-View
Movies Watched 2-38
Variable Cost Per Unit Example
The cost per movie watched is constant. For
example, $4.00 per movie.
Movies Watched
2-39
Total Fixed Cost Example
Your monthly cable bill probably does not change
when you watch movies on channels that you have
elected to be paid on a monthly basis (HBO).
Monthly Charge for
HBO Bill
Number of HBO
Movies Watched 2-41
Cost Classifications
2-42
Learning
Objective
9
2-43
Direct and Indirect Costs
Direct costs Indirect costs
• Costs that can be • Costs that must be
easily and allocated in order to
conveniently traced to be assigned to a
a product or product or
department. department.
• Example: cost of • Example: cost of
paint in the paint national advertising
department of an for an airline is
automobile assembly indirect to a particular
plant. flight.
2-44
Controllable and
Uncontrollable Costs
A cost that can be significantly influenced
by a manager is a controllable cost.
2-46
Opportunity Cost
2-47
Sunk Costs
All costs incurred in the past that cannot be
changed by any decision made now or in the
future are sunk costs. Sunk costs should not be
considered in decisions.
– Example: You bought an automobile that cost
$12,000 two years ago. The $12,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $12,000
cost.
2-48
Differential Costs
Costs that differ between alternatives.
2-49
Marginal Costs and Average
Costs
Costs Benefits
2-51
End of Chapter 2
2-52