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Chapter 2 Cost Concep ts and Cost Allocation

Chapter 2 Cost Concep ts and Cost Allocation. Fall 2007 Crosson. Learning Objectives:. How much does it cost? Types of Businesses Financial Reporting of Costs Cost Classifications Product Costs Manufacturing Inventory Accounts and Cost Flows

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Chapter 2 Cost Concep ts and Cost Allocation

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  1. Chapter 2Cost Concepts and Cost Allocation Fall 2007 Crosson

  2. Learning Objectives: How much does it cost? Types of Businesses Financial Reporting of Costs Cost Classifications Product Costs Manufacturing Inventory Accounts and Cost Flows Overhead Cost Allocation: Traditional and ABC Approaches

  3. Key Question:How much does it cost? • What should be included? • Unit cost of a product or service: _Total costs__ Units produced Use only with permission of Susan Crosson

  4. What Do You Know? Exercise 12 Cost per bale? Revenue per bale? Profit per bale? Price increase?

  5. What Do You Know? Exercise 12 Cost per bale? $150+$115+$600+($1,500/12)= $990/3,000= $ .33/bale Revenue per bale? $2,400/3,000= $ .80/bale Profit? $ .80 - $ .33= $ .47/bale Price increase? It depends

  6. Types of Businesses • Service • Merchandising or Retail • Manufacturing Value Chain and Supply Chain Use only with permission of Susan Crosson

  7. Financial Reporting of CostsFigure 3 Service Income Statement Sales -Cost of Sales (Supplies+DL+OH) Gross Margin -SAG Net Income • No Inventory Accounts • DM known as Supplies since immaterial • SAG=Selling, Administrative, and General Expenses Use only with permission of Susan Crosson

  8. Financial Reporting of Costs Figure 3 • Retail and Manufacturing Income statement Sales -Cost of Goods Sold (COGS) Gross Margin -SAG Net Income • Retail • Manufacturing Exhibit 1 in text Good follow up exercise is E7 and SE2. Use only with permission of Susan Crosson

  9. What Do You Know? Exercise 6 1. 2. 3. 4. 5. 6. 7. 8. 9.

  10. What Do You Know? Exercise 6 1. MER 2. SER 3. MANF 4. MER 5. MANF 6. SER 7. SER 8. MANF 9. MER

  11. Cost Classifications: • Cost traceability: direct and indirect • Cost behavior: fixed or variable • Marketing value: value or nonvalue adding • Financial reporting: product or period Use only with permission of Susan Crosson

  12. Cost Classifications: Good follow up exercise is E2 and SE5. Use only with permission of Susan Crosson

  13. Product Costs and Inventory AccountsFigure 5 • Materials Inventory • Materials Purchased • Materials Used in Production • Work in Process Inventory • Current Manufacturing Costs: DM, DL, OH used • Cost of Goods Manufactured • Finished Goods Inventory • Cost of Goods Manufactured/Completed • Cost of Goods Available for Sale • Cost of Goods Sold Look and listen to SE3. Use only with permission of Susan Crosson

  14. The Materials Account Material Inventory

  15. The Finished Goods Account BB+COGM=COGAS Finished Goods Inventory

  16. The Work in Process Account Current Manufacturing Costs WIP Inventory Info. for the I/S’s COGM comes from this account!

  17. What Do You Know? Exercise 5 Oak Division

  18. What Do You Know? Exercise 5 Loblolly Division

  19. What Do You Know? Problem 2 a. b. 2. Gross margin Cost of goods sold Cost of goods available for sale Cost of goods manufactured

  20. What Do You Know? Problem 2 a. Materials, Work in Process, Finished Goods, Production supplies, Small tools, Patents, Factory building, Factory equipment b. All the other accounts 2. Gross margin $191,800 Cost of goods sold $308, 200 Cost of goods available for sale $363,000 Cost of goods manufactured $312,000

  21. P2 Computations: Sales $ 500,000. COGS$ 308,200b Gross Margin$ 191,800a Operating Expenses $ 53,670. Net Income $ 138,130. COGS: COGM$ 312,100d Beg. FG $ 50,900 . COGAS$ 363,000c End. FG $ 54,800. COGS$ 308,200b

  22. Manufacturing Inventory Accounts and Cost Flows • Figure 4 Activities and Documents Good follow up exercise is SE4. • Cost Flow Assumptions • Actual Costing: • Actual DM,DL, OH • *Normal Costing: • Actual DM, DL • Applied OH • Standard Costing: • Predetermined or standard DM, DL, OH (like applied OH) * What we will assume…. Use only with permission of Susan Crosson

  23. How much does it cost? • Unit cost of a product or service under Normal Costing: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, Applied OH Good follow up exercise is SE6. Use only with permission of Susan Crosson

  24. Actual and Applied OverheadFigure 7 • PLAN:At beginning of period, find overhead rate using either traditional or ABC • APPLY:During the period apply overhead to WIP as products are processed • ACTUAL:During the period record actual overhead in the Overhead account • RECONCILE:At end of period reconcile Actual and Applied Overhead by closing the balance in the Overhead account to COGS (if immaterial) Good follow up exercises are SE7, SE9, E14, or E15. Look and listen to SE 8. Use only with permission of Susan Crosson

  25. The Overhead Account Overhead Dr. COGS xx Cr. OH xx Dr. OH xx Cr. COGS xx

  26. What Do You Know? Exercise 15 Overhead COGS will be _______________

  27. What Do You Know? Exercise 15 Overhead COGS will be decreased

  28. Traditional One overhead account One plantwide rate All Budgeted Overhead divided by Estimated Cost Driver i.e. DL$,DLH Predetermined Rate: Estimated Overhead Estimated Cost Driver ABC Overhead divided into Activities Many activity rates Budgeted Activity Cost Pool divided by Estimated Cost Driver Predetermined Rate: Estimated Cost Pool Estimated Cost Driver Overhead Cost Allocation: Traditional and ABC Approaches to Applying Overhead Good follow up exercises SE10 or E16. Use only with permission of Susan Crosson

  29. How much does it cost? • Unit cost of a product or service under Normal Costing using Traditional OH: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, and Applied Plantwide Predetermined OH Use only with permission of Susan Crosson

  30. What Do You Know? Problem 8 Traditional OH Rate: $13.75/DLH how computed? What is the OH rate for Rigger II and for BioScout? What is the product unit cost of Rigger II and BioScout?

  31. What Do You Know? Problem 8 Traditional OH Rate: $13.75DLH how computed? $220,000/(12,000 + 4,000) = $13.75 What is the OH rate: Rigger II? $13.75 x 30DLH = $412.50 BioScout? $13.75 x 40DLH = $550.00 What is the product unit cost:DM+DL+OH= Rigger II? $10,000.00+$1,450.00+$412.50=$11,862.50 BioScout? $12,000+$1,600+$550=$14,150

  32. How much does it cost? • Unit cost of a product or service under Normal Costing using ABC OH: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, and Applied Predetermined Activity Cost Pool Rates Use only with permission of Susan Crosson

  33. What Do You Know? Problem 8 ABC OH Rate: Calculate the activity cost rate for each cost pool. Compute the total overhead costs applied using ABC to Rigger II and BioScout. What is the product unit cost of a Rigger II and a BioScout?

  34. What Do You Know? Problem 8 ABC OH Rate: Calculate the activity cost rate: Setup: $70,000/700= $100/setup Inspection: $20,000/500= $40/inspection Engineering: $50,000/2,000=$25/Hour Assembly: $80,000/10,000=$8/MH

  35. Problem 8 ABC OH Rate Compute the overhead costs applied: Rigger II: Setup: $100/setup x 250= $25,000 Inspection: $40/inspection x 150= $6,000 Engineering:$25/Hour x 600= $15,000 Assembly:$8/MH x 5,000= $40,000 Total: $86,000/400 units = $215 BioScout: Setup: $100/setup 450= $45,000 Inspection: $40/inspection x 350= $14,000 Engineering:$25/Hour x 1,400= $35,000 Assembly:$8/MH x 5,000= $40,000 Total: $134,000/100 = $1,340

  36. What Do You Know? Problem 8 ABC OH Rate: What is the product unit cost: Rigger II? $10,000+$1,450+$215 =$11,665 BioScout? $12,000+$1,600+ $1,340 =$14,940

  37. What Do You Know? Problem 8 Traditional v. ABC: Rigger II? Traditional: $10,000.00+$1,450.00+$412.50=$11,862.50 ABC: $10,000+$1,450+$215=$11,665 BioScout? Traditional: $12,000+$1,600+$550=$14,150 ABC: $12,000+$1,600+ $1,340 =$14,940 How much does it really cost?

  38. Now Try Case 5 C5 Traditional OH Rate: $25/DLH how computed? $320,000/(80% of (12,000 + 4,000) = $320,000/12,800)= $25 What is the OH rate: Rigger II?$25x(80%of 30/DLH)=$25x24=$600 BioScout?$25x(80%of40/DLH)=$25x32=$800 What is the product unit cost:DM+DL+OH= Rigger II?$10,000+$1,160+$600=$11,760 BioScout? $12,000+$1,280+$800=$14,080

  39. C5 Notes C5 ABC OH Rate: Calculate the activity cost rate: Setup: $70,000/700= $100/setup Inspection: $20,000/500= $40/inspection Engineering: $50,000/2,000=$25/Hour Assembly: $180,000/10,000=$18/MH

  40. C5 ABC OH Rate Compute the overhead costs applied: Rigger II: Setup: $100/setup x 250= $25,000 Inspection: $40/inspection x 150= $6,000 Engineering:$25/Hour x 600= $15,000 Assembly:$18/MH x 2,000= $36,000 Total: $82,000/400 units = $205 BioScout: Setup: $100/setup x 450= $45,000 Inspection: $40/inspection x 350= $14,000 Engineering:$25/Hour x 1,400= $35,000 Assembly:$18/MH x 8,000= $144,000 Total: $238,000/100 = $2,380

  41. C5 Notes C5 Traditional v. ABC: Rigger II? Traditional: $10,000+$1,160+$600=$11,760 ABC: $10,000+$1,160+$205=$11,365 BioScout? Traditional: $12,000+$1,280+$800=$14,080 ABC: $12,000+$1,280+ $2,380 =$15,660 How much does it really cost?

  42. Homework:Problem 5 Use only with permission of Susan Crosson

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