ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 5 Professor Jeff Yu

1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 5 Professor Jeff Yu

2. Review: Job-order costing vs. Process costing A firm making built-to-order products typically use ___________ costing. A firm mass-producing a single product typically use _________ costing. Under job-order costing, product costs are accumulated by _______ to get the average product cost for each unit. Under process costing, product costs are accumulated by _______ to get the average product cost for each unit. Service companies typically use ______________ costing. Both job-order costing and process costing are _______ costing systems.

3. Review: MOH Application in job-order costing Manufacturing overhead is applied (allocated) to individual jobs (work-in-process) based on a ___________ rate (POHR). At the ________ of the period, calculate: POHR = Estimated total MOH cost / __________ total activity level ________ the period, calculate: Applied MOH = POHR * ________ activity level At the _______of the period, calculate: _______ MOH - Applied MOH to determine whether MOH was underapplied or overapplied.

4. Review: Job-Order Costing 1. If Applied MOH>Actual MOH, then MOH is ________ for the period. If Applied MOH<Actual MOH, then MOH is __________ for the period. 2. What is the journal entry to apply MOH to jobs during the period? 3. What is the adjusting journal entry to close the overapplied (underapplied) MOH to CGS at the end of the period?

5. Review: Product Cost Flow in Job-order Costing Direct Materials Work-in-Process (JOB) FinishedGoods Direct Labor Applied MOH Cost of GoodsSold

6. Thought Questions 1. What effect will the year-end adjustment of overapplied MOH have on a firm’s Cost of Goods Sold? Gross Margin? Net operating income? (choices: increase, decrease or unaffected) 2. What effect will the year-end adjustment of underapplied MOH have on a firm’s Cost of Goods Sold? Gross Margin? Net operating income?

7. Chapter 5: Cost Behavior Objectives: Introduce further classification of Variable costs and Fixed costs Analyze Mixed Costs Discuss High-Low Method and Cost Function Discuss the contribution format income statement (Contribution Approach)

8. Unitsproduced Machine hours Miles driven Labor hours Review: The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost

9. A straight line closely approximates a curvilinear variable cost line within the relevant range. RelevantRange Accountant’s Straight-Line Approximation (constant unit variable cost) Review: Relevant Range Economist’sCurvilinear Cost Function Total Cost Activity

10. Review: Cost Behavior Within the Relevant Range, how will each of the following cost change as activity level increases (decreases)?

11. True Variable Cost For example, Direct Material is typically a true variable cost because the amount used during a period will vary in direct proportion to the level of production activity. DM Cost Units Produced

12. Cost Volume Step-Variable Cost Costs increase or decrease only in response to fairly wide changes in activity.

13. Step-Variable Cost Total cost increases to a new higher cost for the next higher range of activity Total cost remainsconstant within anarrow range ofactivity Cost Activity

14. Fixed Cost: Two types Committed Fixed Cost Long-term, cannot be significantly reduced in the short term. Discretionary Fixed Cost May be altered in the short-term by current managerial decisions Examples Depreciation on Equipment; Real Estate Taxes Examples Advertising; R&D; Management Development program

15. Y X Mixed Cost A mixed cost has both fixed and variablecomponents. Consider the example of utility cost. Total mixed cost Total Utility Cost Variable Cost based on the usage Fixed MonthlyUtility Charge Activity (Kilowatt Hours)

16. Y X Mixed Cost Total mixed cost Total Utility Cost Activity (Kilowatt Hours)

17. Mixed Cost Example TXU charges a fixed monthly fee of $20 plus $0.1 per kilowatt hour. In March you used 2,000 kilowatt hours. Q: 1) What is the amount of your electricity bill for March? 2) What is the average cost per kilowatt hours for March? 3) What will be the average cost per kilowatt hours for April if you only use 1,000 kilowatt hours?

18. Practice…Hospital Costs • True variable, step variable, mixed, discretionary fixed or committed fixed? • Spending on medical student internship • Nursing supervisor salaries – supervisor needed for every 10 nursing personnel • Operating costs of x-ray equipment ($95,000 per year plus $3 per film) • Insurance for all full time employees

19. Cost Function Y = a +bX Activity Level (Cost Driver) Total Cost Total Fixed Costs Variable Cost per Unit • Q: what can we say about a and b for each of the costs below • True variable cost; 2) Fixed Cost; 3) Mixed Cost

20. Example For each of the costs below, please specify whether it is a Fixed Cost, True Variable Cost, Mixed Cost, or Step Variable Cost?

21. Estimate Cost Function: the High-low Method • Choose the two data points with the highest- and the lowest- activity level: (XH, YH), (XL,YL) • Set up the equations: YH = a + b XH • YL = a + b XL • (3) Solve the equation for “a” (total fixed cost) and “b” (VC per unit): • b = (YH-YL)/(XH-XL) • = change in cost / change in activity • a = YL – b*XL

22. Example Sebolt recorded the following activity and costs for 4 quarters: • Using the high-low method, estimate a cost function in the form of Y=a+bX • What is total fixed cost and per unit variable cost? • What will be the total cost if we increase the production level to 150 units?

23. For Next Class • Complete assigned readings • We will finish Chapter 5 with the contribution format income statement, and start Chapter 6: CVP analysis • Attempt the assigned HW problems • We will work on a lot of problems next class!

24. Homework Problem 1 Neptune Rental operates a boat rental service and its relevant range is 5,000 to 8,000 hours of operating time. When the boats were operated for 6,000 hours, Neptune’s total costs were $192,000, among which $168,000 was total fixed cost. Q: If it is estimated that on Saturday the boats will be operated for 8,000 hours, what will be the estimated average cost per hour?

25. Homework Problem 2 Comparative income statements for Boggs Co. for the last two months are presented below. Q: Identify each of the expenses above as either fixed, true variable or mixed (assume there is no step variable cost).

26. Homework Problem 3 Bakeman Corporation has provided the following production and average cost data for two levels (highest and lowest) of monthly production volume. The company produces a single product. Q: 1) Identify the cost behavior of DM, DL and MOH as fixed, true variable or mixed. 2) What is the best estimate of Variable MOH cost per unit? 3) What is the cost function for total manufacturing cost?

27. Homework Problem 4 Golden Co’s MOH costs consists of utilities (true variable), supervisory salaries (fixed) and maintenance (mixed). At 40,000 machine hours, the breakdown of overhead costs are $52,000 for utilities, $60,000 for supervisory salaries and $58,200 for maintenance. • How much of the $241,600 MOH cost in June was maintenance cost? • Use high-low method to estimate cost function of maintenance cost. • Use high-low method to estimate cost function of total MOH cost.