Accounting for leaders Problems Solving
Jdr
AccountCLass.ppt
Basic Cost
Management Concepts
Chapter 2
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Reviewer (R) - Slide 1 NN Deleted the words 'and Accounting for Mass Customization Operations' to match the LO as presented in the pages (Hilton 11e).
Reviewer (R) - CHAPTER 2 CORRECTIONS REQUIRED Note that pagination of the slides is inconsistent. Some slides have a slide number (bottom right), while other slides have no slide number.
Chapter 2: Basic Cost Management Concepts
Learning Objective 2-1 – Explain what is meant by the word cost.
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Learning Objective 2-1. Explain what is meant by the word cost.
Process of Management
Managers need cost information to
perform each of these functions.
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Decision
Making
Directing
Control
Planning
Strategy
Formulation
Reviewer (R) - Slide 3 NN First sentence: Added a comma after the word 'making.'
The process of management involves formulating strategy, planning, control, decision making, and directing operational activities. Management accounting information helps managers perform each of these functions more effectively. (LO 2-1)
What Do We Mean By a Cost?
A cost
is the measure of
resources given
up to achieve a
particular purpose.
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At the most basic level, a cost may be defined as the sacrifice made, usually measured by the resources expended, or given up, to achieve a particular purpose. The word cost can have different meanings depending on the context in which it is used. The important point is that different cost concepts and classifications are used for different purposes. The purpose of this chapter is to enable the users of this text to gain a firm grasp of the cost terminology used in companies, and which will be used throughout the text. (LO 2-1)
Learning Objective 2-2 – Distinguish among product costs, period costs, and expenses.
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Learning Objective 2-2. Distinguish among product costs, period costs, and expenses.
Product Costs, Period Costs, and Expenses
Product costs are costs assigned to inventory, to goods that are either purchased or manufactured for resale. Another term for product cost is inventoriable cost.
Period costs are costs that are expensed during the time period in which they are incurred.
Expenses are the consumption of assets for the purpose of generating revenue.
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Reviewer (R) - Slide 6 NN Added two spaces after each of the three bullets. Last paragraph: Added a space after the last word.
One important way of classifying costs is by the timing of their recognition as expenses for financial reporting.
An expense is defined as the cost incurred when a resource (asset) is used up or sold for the purpose of generating revenue. The resource used up can be:
- cash, expended directly;
- a promise to use up cash in the future, recognized as a liability (accounts payable); or
- the reduction in value of a recorded asset such as plant and equipment (via depreciation) or inventory (via cost of goods sold).
The term product cost and period cost are used to describe the timing with which various expenses are recognized.
A product cost is a cost assigned to goods that were either purchased or manufactured for resale. Another term for product cost is inventoriable cost, since a product cost is stored as the cost of inventory until the goods are sold. In the period of the sale, the product costs are recognized as an expense called cost of goods sold.
Period costs are all costs that are not product costs. They are expensed in the period they are incurred. All research and development, selling, and administrative costs are treated as period costs. This is true in manufacturing, retail, and service industry firms. (LO 2-2)
Learning Objective 2-3 – Describe the role of costs in published financial statements.
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Learning Objective 2-3. Describe the role of costs in published financial statements.
Cost Classifications on Financial Statements – Income Statement
Product Costs
Cost of goods sold
Period Costs
Operating expenses
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Product costs appear on the income statement as cost of goods sold in the period in which the products were sold. This is true for merchandising and manufacturing companies.
Period costs appear on the income statement in the period in which they were incurred. Selling and administrative expenses are an example of period costs. (LO 2-3)
Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Manufacturer
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
Raw Materials
Work in Process
Finished Goods
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Since retailers, wholesalers, and manufacturers sell inventoriable products, their balance sheets are also affected by product costs. Merchandisers, such as Wal-Mart, list the product cost as merchandise inventories on the balance sheet in the current assets section. (LO 2-3)
Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Manufacturer
Current Assets
- Cash
- Receivables
- Inventories
Raw Materials
Work in Process
Finished Goods
Those materials waiting to be processed.
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Manufacturers have three types of inventory. Raw-material inventory includes all materials before they are placed into production. (LO 2-3)
Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Manufacturer
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
Raw Materials
Work in Process
Finished Goods
Partially completed products – material to which some labor and/or overhead has been added.
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Reviewer (R) - Slide 11 NN Changed the words 'Work-in-process' to non-bold font.
Work-in-process inventory refers to manufactured products that are only partially completed at the date when the balance sheet is prepared. (LO 2-3)
Cost Classifications on Financial Statements – Balance Sheet
Merchandiser
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Manufacturer
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories
Raw Materials
Work in Process
Finished Goods
Completed products awaiting sale.
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Finished-goods inventory refers to manufactured goods that are complete and ready for sale. The values of the work-in-process and finished-goods inventories are measured by their product costs. (LO 2-3)
Learning Objective 2-4 – List and describe four types of manufacturing processes.
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Learning Objective 2-4. List and describe four types of manufacturing processes.
Types of Production Processes
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Although there are tens of thousands of manufacturing firms, their basic production processes can be classified into four standard types. The nature of the product and the manufacturing process define the manufacturing costs incurred. The management team is in a better position to manage these costs if they understand the relationship of the production process and the types of costs incurred. This exhibit defines and describes the four standard categories of manufacturing processes. We will study of the role of managerial accounting and cost management in each of these manufacturing processes. (LO 2-4)
Learning Objective 2-5 – Give examples of three types of manufacturing costs.
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Learning Objective 2-5. Give examples of three types of manufacturing costs.
Manufacturing Costs
Direct
Material
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The
Product
Direct
Labor
Manufacturing Overhead
Managerial accountants classify costs by the functional area of the organization to which costs relate. Some examples of functional areas are manufacturing, marketing, administration, and research and development. Manufacturing costs are further classified into the following three categories: direct material, direct labor, and manufacturing overhead. (LO 2-5)
Direct Material
Cost of raw material that is used to
make, and can be conveniently
traced, to the finished product.
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Example:
Steel used to
manufacture
the automobile.
Reviewer (R) - Slide 17 NN Changed the words 'direct material' to non-bold font.
Material that is consumed in the manufacturing process, is physically incorporated in the finished product, and can be traced to products conveniently is called direct material. Examples include the sheet metal in an automobile and a microprocessor chip in a computer. (LO 2-5)
Cost of salaries, wages, and fringe
benefits for personnel who work
directly on manufactured products.
Direct Labor
Example:
Wages paid to an
automobile assembly
worker.
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Reviewer (R) - Slide 18 NN Changed the words 'direct-labor' to non-italic font.
The cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products is classified as direct-labor cost. (LO 2-5)
Manufacturing Overhead
All other manufacturing costs
Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.
Indirect
Labor
Indirect
Material
Other
Costs
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All other costs of manufacturing are classified as manufacturing overhead, which includes three types of costs: indirect material, indirect labor, and other manufacturing costs. The cost of materials that are required for the production process but do not become an integral part of the finished product are classified as indirect material costs. Materials that do become an integral part of the finished product but are insignificant in cost are also often classified as indirect material. (LO 2-5)
Manufacturing Overhead
All other manufacturing costs
Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors, and security guards.
Indirect
Labor
Indirect
Material
Other
Costs
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Reviewer (R) - Slide 20 NN Changed the words 'indirect labor' to bold italic font.
The costs of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process, are classified as indirect labor. (LO 2-5)
Manufacturing Overhead
All other manufacturing costs
Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.
Indirect
Labor
Indirect
Material
Other
Costs
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All other manufacturing costs that are neither material nor labor costs are classified as manufacturing overhead. (LO 2-5)
Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:
Prime
Cost
Conversion
Cost
Direct
Material
Direct
Labor
Manufacturing
Overhead
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Direct material and direct labor are often referred to as prime costs. Direct labor and overhead are often called conversion costs, since they are the costs of “converting” raw material into finished products. (LO 2-5)
Manufacturing Cost Flows
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As direct material is consumed in production, its cost is added to work-in-process inventory. Similarly, the costs of direct labor and manufacturing overhead are accumulated in work in process.
When products are finished, their costs are transferred from work-in-process inventory to finished-goods inventory. The total cost of direct material, direct labor, and manufacturing overhead transferred from work-in-process inventory to finished-goods inventory is called the cost of goods manufactured.
The costs then are stored in finished goods until the time period when the products are sold. At that time, the product costs are transferred from finished goods to cost of goods sold, which is an expense of the period when the sale is made. (LO 2-5)
Learning Objective 2-6 – Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and an income statement for a manufacturer.
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Learning Objective 2-6. Prepare a schedule of cost goods manufactured, a schedule of cost of goods sold, and an income statement for a manufacturer.
Schedule of Cost of Goods Manufactured
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Manufacturers generally prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold to summarize the flow of manufacturing costs during an accounting period. Let’s take a look at the schedule of cost of goods manufactured for Comet Computer Corporation. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Schedule of Cost of Goods Manufactured | |||
| Raw material used | $ 134,980 | ||
| Direct labor | 50,000 | ||
| Total manufacturing overhead | 230,000 | ||
| Total manufacturing costs | $ 414,980 | ||
| Add: Work-in-process inventory, January 1 | 120 | ||
| Subtotal | $ 415,100 | ||
| Deduct: Work-in-process inventory, December 31 | 100 | ||
| Cost of goods manufactured | $ 415,000 |
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Raw materials used in production is calculated by adding raw materials purchases for the period to the beginning raw materials inventory. This is the value of the raw materials that were available for use during the period. The raw materials at the end of the period is subtracted from raw materials available to arrive at the raw materials used in production during the period. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Schedule of Cost of Goods Manufactured | |||
| Raw material used | $ 134,980 | ||
| Direct labor | 50,000 | ||
| Total manufacturing overhead | 230,000 | ||
| Total manufacturing costs | $ 414,980 | ||
| Add: Work-in-process inventory, January 1 | 120 | ||
| Subtotal | $ 415,100 | ||
| Deduct: Work-in-process inventory, December 31 | 100 | ||
| Cost of goods manufactured | $ 415,000 |
3 Column
| Computation of Cost of Raw Material Used | |||
| Raw-material inventory, January 1 | $ 6,000 | ||
| Add: Purchases of raw materials | 134,000 | ||
| Raw material available for use | 140,000 | ||
| Deduct: Raw material inventory, December 31 | 5,020 | ||
| Raw material used | $ 134,980 |
Schedule of Cost of Goods Manufactured
Include all direct labor costs incurred during the current period.
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All direct labor costs incurred during the period is added to raw materials used. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Schedule of Cost of Goods Manufactured | |||
| Raw material used | $ 134,980 | ||
| Direct labor | 50,000 | ||
| Total manufacturing overhead | 230,000 | ||
| Total manufacturing costs | $ 414,980 | ||
| Add: Work-in-process inventory, January 1 | 120 | ||
| Subtotal | $ 415,100 | ||
| Deduct: Work-in-process inventory, December 31 | 100 | ||
| Cost of goods manufactured | $ 415,000 |
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Costs incurred during the period that fall into the category of manufacturing overhead are totaled and then added to raw materials used and direct labor to arrive at total manufacturing costs. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Schedule of Cost of Goods Manufactured | |||
| Raw material used | $ 134,980 | ||
| Direct labor | 50,000 | ||
| Total manufacturing overhead | 230,000 | ||
| Total manufacturing costs | $ 414,980 | ||
| Add: Work-in-process inventory, January 1 | 120 | ||
| Subtotal | $ 415,100 | ||
| Deduct: Work-in-process inventory, December 31 | 100 | ||
| Cost of goods manufactured | $ 415,000 |
3 Column
| Computation of Total Manufacturing Overhead | ||
| Indirect material | $ 10,000 | |
| Indirect labor | 40,000 | |
| Depreciation on factory | 90,000 | |
| Depreciation on equipment | 70,000 | |
| Utilities | 15,000 | |
| Insurance | 5,000 | |
| Total manufacturing overhead | $ 230,000 |
Schedule of Cost of Goods Manufactured
Beginning work-in-process inventory is carried over from the prior period.
Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.
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The value of the work-in-process inventory at the beginning of the period is added to the total manufacturing costs.
The value of the ending work-in-process inventory is subtracted from the subtotal to arrive at cost of goods manufactured for the period. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Schedule of Cost of Goods Manufactured | |||
| Raw material used | $ 134,980 | ||
| Direct labor | 50,000 | ||
| Total manufacturing overhead | 230,000 | ||
| Total manufacturing costs | $ 414,980 | ||
| Add: Work-in-process inventory, January 1 | 120 | ||
| Subtotal | $ 415,100 | ||
| Deduct: Work-in-process inventory, December 31 | 100 | ||
| Cost of goods manufactured | $ 415,000 |
Income Statement for a Manufacturer
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Now let’s look at the income statement for Comet. Remember, cost of goods sold is the expense measured by the cost of the finished goods sold during a period of time. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Income Statement | |||
| 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 |
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The cost of goods sold amount can be obtained from the cost of goods sold schedule. This schedule starts with the finished goods inventory value at the beginning of the period. Cost of goods manufactured from the cost of goods manufactured schedule is added to arrive at cost of goods available for sale. The value of the finished goods inventory at the end of the period is deducted to determine the cost of goods sold amount for the period. (LO 2-6)
3 Column
| Comet Computer Corporation | |||
| Income Statement | |||
| 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 |
3 Column
| 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 | ||
| Deduct Finished-goods inventory, Dec. 31 | 190 | ||
| Cost of goods sold | $ 415,010 |
Learning Objective 2-7 – Understand the importance of identifying an organization's cost drivers.
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Reviewer (R) - Slide 32 Changed the LO to match the learning objective as presented in the pages (Hilton 11e).
Learning Objective 2-7. Understand the importance of identifying an organization’s cost drivers.
Activities that cause costs to be incurred are called COST DRIVERS:
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The phrase different costs for different purposes is often used to convey the notion that different characteristics of costs can be important to understand in a variety of managerial situations. One of the most important cost classifications involves the way a cost changes in relation to changes in the activity of the organization. Activity refers to a measure of the organization’s output of products or services. The activities that cause costs to be incurred are also called cost drivers. (LO 2-7)
Sheet1
| 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 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
Learning Objective 2-8 – Describe the behavior of variable and fixed costs, in total and on a per-unit basis.
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Learning Objective 2-8. Describe the behavior of variable and fixed costs, in total and on a per-unit basis.
Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.
- Total variable costs change when activity changes.
- Total fixed costs remain unchanged when activity changes.
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After identifying costs and cost drivers, management should examine the relationship of various costs to the activities performed. Such a relationship is referred to as cost behavior.
Two types of cost behavior are variable costs and fixed costs. A variable cost changes in total in direct proportion to a change in the level of activity (or cost driver). A fixed cost remains unchanged in total even if the level of activity (or cost driver) varies. (LO 2-8)
Total Variable Cost Example
Your total cable pay-per-view bill is based on how many movies you watch.
Pay-Per-View Movies Watched
Total Pay-Per-View Bill
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For example, assume your pay-per-view movie costs are classified as variable costs. If you watch zero movies, your pay-per-view movie cost will be zero. (LO 2-8)
Variable Cost Per Unit Example
The cost per movie watched is constant. For example, $4.00 per movie.
Movies Watched
Per Movie Charge
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The cost per movie is constant, regardless of the number of movies watched. In our example, the cost is $4.00 per movie no matter if you watch one move, four movies, or ten movies. (LO 2-8)
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.
Number of HBO Movies Watched
Monthly Charge for HBO Bill
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Reviewer (R) - Slide 38 Moved the words 'on a' to the third line of text.
Reviewer (R) - Slide 38 NN First sentence: Changed the word 'drive' to read 'driver.'
A fixed cost remains unchanged in total as the level of activity (or cost driver) changes. For example your monthly cable bill (in which you have elected to include an HBO channel) is the same every month, regardless of the number of HBO movies that you watch. This is classified as a fixed cost. It does not change when activity changes. (LO 2-8)
Graph of Unit Fixed Cost
The average cost per HBO movie decreases as more HBO movies are watched.
Number of HBO Movies Watched
Monthly HBO Bill per Movie Watched
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The cost of your HBO cable bill can be divided by the number of HBO movies watched to arrive at the average cost per HBO movie. The more HBO movies that you watch, the average cost per HBO movie decreases. (LO 2-8)
Cost Classifications - Summary
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In summary, the total variable cost changes as activity changes. But the cost per unit of variable costs stays the same, regardless of the level of activity. On the other hand, total fixed costs stay the same, regardless of the level of activity. However, the fixed cost per unit changes (in the opposite direction) as the level of activity changes. (LO 2-8)
Learning Objective 2-9 – Distinguish among direct, indirect, controllable, and uncontrollable costs.
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Learning Objective 2-9. Distinguish among direct, indirect, controllable, and uncontrollable costs.
Direct and Indirect Costs
Direct costs
- Costs that can be
easily and conveniently traced to a product or department. - Example: cost of paint in the paint department of an automobile assembly plant.
Indirect costs
- Costs that must be allocated in order to be assigned to a product or department.
- Example: cost of national advertising for an airline is indirect to a particular flight.
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An entity, such as a particular product, service, or department, to which a cost is assigned is called a cost object. A cost that can be traced to a particular cost object is called a direct cost of that cost object. A cost that is not directly traceable to a particular cost object is called an indirect cost of that cost object.
Whether a cost is a direct cost or an indirect cost of a department often depends on which department is under consideration. A cost can be a direct cost of one department or subunit in the organization but an indirect cost of other departments. While the salary of a General Electric Company plant manager is an indirect cost of the plant’s departments, the manager’s salary is a direct cost of the plant. An important objective of a cost management system is to trace as many costs as possible directly to the activities that cause them to be incurred. Sometimes called activity accounting, this process is vital to management’s objective of eliminating non-value-added costs. These are costs of activities that can be eliminated without deterioration of product quality, performance, or perceived value. (LO 2-9)
Controllable and
Uncontrollable Costs
A cost that can be significantly influenced
by a manager is a controllable cost.
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Another cost classification that can be helpful in cost control indicates the controllability of a cost item by a particular manager. If a manager can control or heavily influence the level of a cost, then that cost is classified as a controllable cost of that manager. Costs that a manager cannot influence significantly are classified as uncontrollable costs of that manager. Many costs are not completely under the control of any individual. In classifying costs as controllable or uncontrollable, managerial accountants generally focus on a manager’s ability to influence costs. The question is not, Who controls the cost? but, Who is in the best position to influence the level of a cost item? This exhibit lists several cost items, along with their typical classification as controllable or uncontrollable. (LO 2-9)
Learning Objective 2-10 – Define and give examples of an opportunity cost, an out-of-pocket cost, a sunk cost, a differential cost, a marginal cost, and an average cost.
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Reviewer (R) - Slide 44 Changed the word 'and' to read 'an.'
Learning Objective 2-10. Define and give examples of an opportunity cost, an out-of-pocket cost, a sunk cost, a differential cost, a marginal cost, and an average cost.
Opportunity Costs
The potential benefit that is sacrificed when one alternative is selected over another.
- Example: If you were
not attending college,
you could be earning
$30,000 per year. - Your opportunity cost
of attending college for one year is $30,000.
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An opportunity cost is defined as the benefit that is sacrificed when the choice of one action precludes taking an alternative course of action. Opportunity costs arise in many business decisions. (LO 2-10)
Out-of-Pocket Costs
- Those costs that require the payment of cash or other assets as a result of its incurrence.
- These costs should be considered when making decisions.
Reviewer (R) - Slide 46 First bullet: Changed the word 'a' to read 'as.' Changed the word 'there' to read 'its.'
Reviewer (R) - Slide 46 NN Second sentence: Changed the word 'their' to read 'its.
From an economic perspective, a dollar of opportunity costs associated with an action should be treated as equivalent to a dollar of out-of-pocket cost. Out-of-pocket costs are those that require the payment of cash or other assets as a result of its incurrence. For example, the out-of-pocket costs associated with a softball order consists of the manufacturing costs required to produce the softballs. In making the decision to accept or reject a softball order, the firm’s management should consider both the out-of-pocket costs and the opportunity cost of the order (LO 2-10)
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 $22,000 two years ago. The $22,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $22,000 cost.
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Sunk costs are costs that have been incurred in the past. Consequently, they do not affect future costs and cannot be changed by any current or future action. Hence, these costs should NOT be considered and are irrelevant to all future decisions. (LO 2-10)
Differential Costs
Costs that differ between alternatives.
Example: You can earn $1,500 per month in your
hometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in your
hometown and $300 per month to the city.
What is your differential cost?
$300 - $50 = $250
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A differential cost is the amount by which the cost differs under two alternative actions. Another word for differential costs are incremental costs. Differential or incremental costs are found in a variety of business decisions. (LO 2-10)
Marginal Costs and Average Costs
The extra cost
incurred to produce
one additional unit.
The total cost to
produce a quantity
divided by the
quantity produced.
Marginal and average costs are
largely a function of cost behavior
-- variable and fixed costs.
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A special case of the differential-cost concept is the marginal cost, which is the extra cost incurred when one additional unit is produced. Marginal costs typically differ across different ranges of production quantities because the efficiency of the production process changes. The average cost per unit is the total cost, for whatever quantity is manufactured. Marginal costs and average costs arise in a variety of economic situations. (LO 2-10)
Costs and Benefits of Information
More information does not mean more
benefits if information overload results.
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Costs
Benefits
Many different cost concepts have been explored in this chapter. An important task for managers is to weigh the benefits of providing information against the costs of generating, communicating, and using that information. When managers receive more data than they can utilize effectively, information overload occurs. In deciding how much and what type of information to provide, managerial accountants should consider these human limitations. (LO 2-10)
End of Chapter 2
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Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used134,980$
Direct labor50,000
Total manufacturing overhead230,000
Total manufacturing costs414,980$
Add: Work-in-process inventory, January 1120
Subtotal415,100$
Deduct: Work-in-process inventory, December 31100
Cost of goods manufactured415,000$
Computation of Cost of Raw Material Used
Raw-material inventory, January 1 6,000$
Add: Purchases of raw materials134,000
Raw material available for use140,000
Deduct: Raw material inventory, December 315,020
Raw material used134,980$
Computation of Total Manufacturing Overhead
Indirect material10,000$
Indirect labor40,000
Depreciation on factory90,000
Depreciation on equipment70,000
Utilities15,000
Insurance5,000
Total manufacturing overhead230,000$
Comet Computer Corporation
Schedule of Cost of Goods Manufactured
Raw material used134,980$
Direct labor50,000
Total manufacturing overhead230,000
Total manufacturing costs414,980$
Add: Work-in-process inventory, January 1120
Subtotal415,100$
Deduct: Work-in-process inventory, December 31100
Cost of goods manufactured415,000$
Comet Computer Corporation
Income Statement
For the Year Ended December 31, 20X2
Sales revenue700,000$
Less: Cost of goods sold415,010
Gross margin284,990$
Selling and administrative expenses174,490
Income before taxes110,500$
Income tax expense30,000
Net income80,500$
Comet Computer Corporation
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2
Finished-goods inventory, Jan. 1200$
Add: Cost of goods manufactured415,000
Cost of goods available for sale415,200
Deduct Finished-goods inventory, Dec. 31190
Cost of goods sold415,010$
Cost Driver Examples
ActivityCost Driver
Machining operationsMachine hours
SetupSetup hours
Production schedulingManufacturing orders
InspectionPieces inspected
PurchasingPurchase orders
Shop order handlingShop orders
Valve assembly supportCustomer requisitions
Summary of Variable and Fixed Cost Behavior
Cost
In Total
Per Unit
Total variable cost changes
Variable cost per unit
Variable
as activity level changes.
remains the same over
wide ranges of activity.
Total fixed cost remains
Fixed cost per unit
Fixed
the same even when the
goes down as activity
activity level changes.
level goes up.
