Chapter 2

1. Chapter 2 Basic Cost Management Concepts and Accounting for Mass Customization Operations

2. Define & Explain “Cost” • Sacrifice made or resources given up to produce a product or service • Meaning depends on the context • Purpose dictates Classification & Recording • Different concepts & classifications are used for different purposes

3. Definitions Match Expense Recognizing product costs as an expense Product Cost All costs that are not product costs Cost of Goods Sold Cost incurred when an asset is used up or sold to generate revenue Period Cost Cost assigned to goods made or bought to resell, Inventoriable costs

4. List & Explain the Four Management Processes • Decision Making • Planning • Directing Operational Activities • Controlling

5. Year 1 Year 2 Time Describe Interaction of Product Costs to Cost of Goods Sold for a Retailer Goods on hand at end of the year are an asset, value = product cost Buy goods to resell, Product Cost=purchase price + transportation Sell goods an expense COGS is equal to the product expense of goods sold

6. Year 1 Year 2 Time Do the Same Thing for a Manufacturer Goods are made, product cost = direct material + direct labor + manu. overhead Sell goods an expense COGS is equal to the product expense of goods sold Goods on hand at end of the year are an asset, value = product cost

7. Year 1 Year 2 Time Do Same Thing for Period Costs Period costs incurred in Year 1 are expensed in Year 1 Period costs incurred in Year 2 are recognized as expenses in Year 2 Period costs treated the same in all types of businesses

8. Review General Format of an Income Statement Sales $1,000,000 Cost of goods sold 600,000 Gross profit $400,000 Less: S & A expenses 200,000 Operating expenses $200,000 Less: interest expense 50,000 Income before income tax $150,000 Income tax expense 60,000 Net income $90,000

9. Definitions Match Raw Materials Materials, Direct Labor & Overhead of units started but uncompleted All materials before they’re entered into production Work-in-Process Goods that are completed & ready for sale to customers Finished Goods

10. Fill in the Arrows A few major high volume products Standardized commodities produced in high volumes Unique low volume products Multiple low volume products Customized assembly of standardized components in high volume Assembly Line Continuous Job Shop Batch Mass Customization

11. Define & Discuss Mass-Customization Manufacturing • Many standardized components are chosen to produce customized products to customer specifications • High Production Volume • Use Direct Sales Approach • Consumer Orders Often Taken Via the Internet

12. Definitions Match Direct Material Salary, wages & benefits of employees directly making the product Direct Labor All manufacturing costs not in Direct Materials or Direct Labor Manufacturing Overhead Raw materials directly incorporated in the product

13. Definitions Match Indirect Material Personnel costs of production workers not directly making the product Indirect Labor Do not do direct work on making the products Materials needed for production but not an integral part of the product Service Departments

14. How Should the Following Costs be Treated? • Overtime Premium • Idle Time

15. Prime Costs Conversion Costs Illustrate Prime & Conversions Costs Foreman

16. Direct Materials Direct Labor Work-in-Process Finished Goods Cost of Goods Sold Manufacturing Overhead Describe & Illustrate Manufacturing Cost Flows

17. Define Schedules of Cost of Goods Manufactured & Cost of Goods Sold • A detailed schedule showing all the costs put into manufacturing during the period. It shows the change in Work-in-Process Inventory & transfer to Finished Goods Inventory • Shows the expense Cost of Goods Sold & the change in Finished Goods Inventory

18. How are Changes in Inventory Accounts Shown? All Inventories work basically the same. Beginning balance: What’s on hand at the beginning of the time period + What’s acquired or put into the process = What’s available for use, to complete or to sell - Ending Inventory or what’s not used or completed or sold =What’s Used, Completed or Sold

19. Describe the Schedule of Cost of Goods Manufactured Raw Materials Inventory Analysis Produces Raw Materials Used Plus Direct Labor Plus Factory Overhead These Three Equal Total Manufacturing Cost the Input to Work-in-Process Inventory Work-in-Process Inventory Analysis Produces Cost of Goods Manufactured

20. Define & Describe the Use of Cost Drivers • Activities are measures of product or service outputs • Cost drivers are activities that cause costs to be incurred • A cost driver is a characteristic of the activity • Desire high correlation

21. Match Cost Definitions Direct Costs a manager cannot significantly influence Do direct work on making the products Indirect Cannot trace a cost directly to a department Controllable Costs a manager can significantly influence Uncontrollable

22. Cost Definitions Match Opportunity Costs incurred in the past The benefit sacrificed when choosing another choice Sunk The additional cost of another product or service Differential Total costs divided by total units produced Marginal Costs that differ between two alternatives Average

23. This Completes Chapter 2