Professional Documents
Culture Documents
Chapter 2
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Overview
Costs can be classified in a number of ways
depending on the purpose of the classification.
It is important to note that the classifications of
costs are not mutually exclusive.
That is, a particular cost may be classified in many
different waysdepending on the purpose of the
classification.
The four main purposes emphasized in this chapter
include preparing external financial reports,
predicting cost behavior, assigning costs to
cost objects, and making business decisions.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Manufacturing Costs
Manufacturing VS Merchandising businesses
Manufacturing costs These costs are incurred
to make a product.
Manufacturing costs are usually grouped into three
main categories:
1. Direct Materials
2. Direct Labor
3. Manufacturing Overhead
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Copyright2006,TheMcGrawHillCompanies,Inc.
Manufacturing Costs
Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
The Product
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Copyright2006,TheMcGrawHillCompanies,Inc.
Direct Materials
Raw materials that become an integral part of the
product and that can be conveniently traced
directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
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Copyright2006,TheMcGrawHillCompanies,Inc.
Direct Labor
Those labor costs that can be easily traced to
individual units of product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
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Copyright2006,TheMcGrawHillCompanies,Inc.
Manufacturing Overhead
Manufacturing costs that cannot be traced directly
to specific units produced.
Indirect
Indirect Labor
Labor
Wages paid to employees who
are not directly involved in
production work.
Examples: maintenance
workers, janitors and security
guards.
Other
Other
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Indirect
Indirect Materials
Materials
Materials used to support the
production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.
Other costs related to the
manufacturing facility.
Examples: Heating, property tax
and insurance
Copyright2006,TheMcGrawHillCompanies,Inc.
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Direct
Material
Material
Direct
Direct
Labor
Labor
Prime
Cost
McGrawHill/Irwin
Manufacturing
Manufacturing
Overhead
Overhead
Conversion
Cost
Copyright2006,TheMcGrawHillCompanies,Inc.
Non-manufacturing Costs
Marketing or
Selling Cost
Administrative
Cost
All executive,
organizational, and
clerical costs.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Sale
Balance
Sheet
McGrawHill/Irwin
Income
Statement
Income
Statement
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Which of the following costs would be considered a
period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.
MegaLoMart
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Balance Sheet
Merchandiser
Current assets
Manufacturer
Current Assets
Cash
Cash
Receivables
Receivables
Prepaid Expenses
Merchandise
Inventory
McGrawHill/Irwin
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Copyright2006,TheMcGrawHillCompanies,Inc.
Balance Sheet
Merchandiser
Current assets
Manufacturer
Current Assets
Cash
Cash
Receivables
Receivables
Materials
waiting to
be processed.
Prepaid
Expenses
Prepaid Expenses
Partially complete
products some
Inventory
material, labor, or
overhead has been
added.
Merchandise
Inventories
Raw Materials
Work in Process
Finished Goods
Completed products
awaiting sale.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Inventory Flows
Beginning
Beginning
balance
balance
$$
$$
Available
Available
$$$$$
$$$$$
McGrawHill/Irwin
Additions
Additions
$$$
$$$
_ Withdrawals
Withdrawals
$$$
$$$
Available
Available
$$$$$
$$$$$
Ending
Ending
balance
balance
$$
$$
Copyright2006,TheMcGrawHillCompanies,Inc.
McGrawHill/Irwin
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
$1,000 + $100 = $1,100
B. $ 800.
$1,100 - $300 = $800
C. $1,200.
D. $ 200.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
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Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
McGrawHill/Irwin
Manufacturing
Costs
Work
In Process
Direct materials
As
Asitems
itemsare
areremoved
removed from
from raw
raw
materials
materialsinventory
inventoryand
and placed
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
called direct
direct materials.
materials.
Copyright2006,TheMcGrawHillCompanies,Inc.
Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
McGrawHill/Irwin
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Conversion
Conversion
costs
costsare
arecosts
costs
incurred
incurredto
to
convert
convert the
the
direct
directmaterial
material
into
into aafinished
finished
product.
product.
Copyright2006,TheMcGrawHillCompanies,Inc.
Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
McGrawHill/Irwin
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All
All manufacturing
manufacturing costs
costsincurred
incurred
during
during the
theperiod
period are
areadded
addedto
tothe
the
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
Copyright2006,TheMcGrawHillCompanies,Inc.
Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured
+
=
Costs
Costsassociated
associated with
with the
thegoods
goodsthat
that
are
arecompleted
completedduring
duringthe
the period
period are
are
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
McGrawHill/Irwin
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A.
B.
C.
D.
McGrawHill/Irwin
$276,000
$272,000
$280,000
$ 2,000
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A.
B.
C.
D.
McGrawHill/Irwin
$276,000
$272,000
$280,000
$ 2,000
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
B.
C.
D.
McGrawHill/Irwin
$555,000
$835,000
$655,000
Cannot be determined.
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
B.
C.
D.
McGrawHill/Irwin
$555,000
$835,000
$655,000
Cannot be determined.
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work
in process inventory at the end of the
month. What was the cost of goods
manufactured during the month?
A.
B.
C.
D.
McGrawHill/Irwin
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work
in process inventory at the end of the
month. What was the cost of goods
manufactured during the month?
A.
B.
C.
D.
McGrawHill/Irwin
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured
for the month was $760,000. And the ending
finished goods inventory was $150,000.
What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured
for the month was $760,000. And the ending
finished goods inventory was $150,000.
What was the cost of goods sold for the
month?
A. $ 20,000. $130,000 + $760,000 = $890,000
B. $740,000. $890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.
McGrawHill/Irwin
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McGrawHill/Irwin
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Number of Kilometers
(Car Driven)
McGrawHill/Irwin
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Number of Kilometers
(Car Driven)
McGrawHill/Irwin
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Number of Kilometers
(Car Driven)
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Number of Kilometers
(Car Driven)
McGrawHill/Irwin
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In Total
Per Unit
Variable
Fixed
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Which of the following costs would be variable with
respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Which of the following costs would be variable with
respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Indirect costs
Example: manufacturing
overhead
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Opportunity Costs
The potential benefit that is
given up when one alternative is
selected over another.
Example: If a shipwrecked
sailor on a desert island is
capable of catching 10 fish
or harvesting 5 coconut a
day. Going for either of the
option, will make benefit
lost from the other option
the opportunity cost.
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Sunk Costs
Sunk costs have already been incurred and cannot be
changed now or in the future. They should be ignored when
making decisions.
Example: How long would you watch a bad movie?
Lets say you rent a movie and after half an hour decide it is
unbearable to watch; its not even good enough that you can
make fun of it. Most of us would watch the rest of the movie since we
paid for it, but the truth is, the price of rental is a sunk cost.
What we really face is the choice of watching the rest of a bad
movie, or using the time to do something more fun like visiting a
friend or make yourself healthy by going to the gym.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the cost of the train
ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose you are trying to decide whether to drive
or take the train to Portland to attend a concert. You
have ample cash to do either, but you dont want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Financial reporting
Predicting cost behavior
Assigning costs to cost objects
Decision making
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
End of Chapter 2
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.