Professional Documents
Culture Documents
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accessible website, in whole or in part.
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?
How is cost of goods manufactured calculated and used in
preparing an income statement?
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accessible website, in whole or in part.
Cost
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accessible website, in whole or in part.
Association with a Cost Object
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accessible website, in whole or in part.
Reaction to Changes in Activity
Variable
Fixed
Mixed
Step
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accessible website, in whole or in part.
Cost Reaction to Changes in Activity
Variable
Fixed Cost
cost
$
$
# of Units # of Units
Within the
relevant range
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accessible website, in whole or in part.
Cost Reaction to Changes in Activity
Variable
Fixed Cost
cost
$ $
Total Total
# of Units # of Units
Unit $ Unit $
Within the
# of Units relevant range # of Units
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accessible website, in whole or in part.
Total and Unit Cost Behavior
Total Cost Unit Cost
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accessible website, in whole or in part.
Cost Reaction to Changes in Activity
Step Cost
Mixed Cost(fixed)
variable
$ $
fixed
# of Units # of Units
Within the
relevant range
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accessible website, in whole or in part.
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
Predicts but may not Directly causes the
cause the cost to cost to change
change
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accessible website, in whole or in part.
Classification on the Financial
Statements
Unexpired—balance sheet assets
Expired—income statement expenses
Product—inventoriable costs
Prime—direct material and direct labor
Conversion—direct labor and overhead
Product costs are unexpired before sale
Product costs are expired when sold
Period—expensed in period incurred
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accessible website, in whole or in part.
Product Costs
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 is sold
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accessible website, in whole or in part.
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 when incurred
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accessible website, in whole or in part.
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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accessible website, in whole or in part.
Degrees of Conversion
Low Moderate High
Moderate
Low High
Department stores Manufacturing
Gas stations Construction
Jewelry stores Agriculture
Travel agencies Architecture
Moderate
Auditing
Mining
Florists
Printing
Meat markets
Restaurants
Oil-change businesses
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accessible website, in whole or in part.
Service Company
Input
Purchase
supplies
Significant amount of labor
Tangible or intangible output
Use supplies,
labor, overhead Output
to provide service
Sell to
customer
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accessible website, in whole or in part.
Retail Company
Input
Output
Purchase
Warehouse
products
and/or display
for resale
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accessible website, in whole or in part.
Manufacturer
Significant amount of labor and machinery
Input
Tangible output Output
Purchase Finished
raw materials product
and supplies
Production
Center Sell to
add labor and
overhead
customer
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accessible website, in whole or in part.
Cost Accumulation in a
Manufacturing Company
Materials
Inventory
Work in Process
Inventory
Finished Goods Cost of
Inventory Goods Sold
Income
Balance Sheet Statement
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accessible website, in whole or in part.
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,
production bonuses, payroll taxes
May include holiday and vacation pay, insurance,
retirement benefits
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accessible website, in whole or in part.
Product Cost—Indirect
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accessible website, in whole or in part.
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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accessible website, in whole or in part.
Allocating Overhead
Actual Cost System
Product Cost Cost Used
Overhead Actual
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accessible website, in whole or in part.
Allocating Overhead:
Actual Cost System
The Actual Cost System is not timely
All costs must be known before calculating
product cost
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accessible website, in whole or in part.
Allocating Overhead:
Actual vs. Normal
Product Cost Actual Cost Normal Cost
System System
Direct Materials Actual Actual
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accessible website, in whole or in part.
Predetermined Overhead Rate
Allows overhead to be assigned during the
period
Compensates for fluctuations
that are not related to activity level
in activity level that do not affect fixed overhead
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accessible website, in whole or in part.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Flow of Product Costs
Raw Materials Inventory XXX
Accounts Payable XXX
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accessible website, in whole or in part.
Flow of Product Costs
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accessible website, in whole or in part.
Flow of Product Costs
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accessible website, in whole or in part.
Flow of Product Costs
Accounts Receivable XXX Matches
Sales XXX revenues
and
Cost of Goods Sold XXX expenses
Finished Goods Inventory XXX on the
income
statement
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accessible website, in whole or in part.
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
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accessible website, in whole or in part.
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> Cost
of goods manufactured $1,058,200
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accessible website, in whole or in part.
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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accessible website, in whole or in part.
Income Statement
Revenue XXXX
Cost of Goods Sold <1,054,000>
Gross Profit XXXX
Operating Expenses <XXXX>
Operating Income XXXX
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accessible website, in whole or in part.
Questions
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accessible website, in whole or in part.
Ethical Issues
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