Managers Responsibilities

Improve

Learn

Copyright 2015 Pearson Education,

Inc.

Inventory out-flow
Calculation
Beg Inv + InvIncr = Total Inv = InvOut + End
Inv

Beg Inv + InvIncr = InvOut + End Inv

subtract Ending Inventory from both sides
BegInv + InvIncr EndInv = InvOut + EndInv
EndInv
since .
+EndInv EndInv
= zero
BegInv + InvIncr EndInv = InvOut + - 0
BegInv + InvIncr EndInv = InvOut

Cost of Goods Sold

Schedule & Formula

Pg 67

+ Beginning finished goods inventory

+
BegFG
+ Cost of goods manufactured
+ CofGM
= Cost of goods available for sale
Ending finished goods inventory
- EndFG
= Cost of goods sold
= CofGS
BegFG + CofGM EndFG = CofGS

Copyright 2015 Pearson Education, Inc.

Cost of Goods Manufactured

Schedule & Formula Pg 67
+

Beginning work in process inventory

+ BegWIP
+ Direct materials used
+ DMused
+ Direct labor
+ DL
+ Manufacturing overhead
+ MOH
Indirect materials
Indirect labor
Other indirect manufacturing costs

= Total manufacturing costs to account for

Ending work in process inventory
- EndWIP
= Cost of goods manufactured
= CofGM
BegWIP + (DMused + DL + MOH) EndWIP = CofGM

Copyright 2015 Pearson Education, Inc.

Direct Materials Used

Schedule & Formula

Pg 66

+ Beginning raw materials inventory

BegRM
+ Purchases of raw materials
+ RMincr
+ Freight in + other purch costs +
RMincr
= Materials available for use
Ending raw materials inventory
+ EndRM
= Direct materials used
=
Copyright 2015 Pearson Education, Inc.

Direct Materials used

Cost of Goods Mfg

Cost of Goods Sold

Income Statement

DM Used
BegInv + InvIncr EndInv = CofGMfg
CofGS

Copyright 2015 Pearson

Education, Inc.

Cost Flows Visualized (Exhibit 2-7)

2015 Fall(c-1)

Pg 86

E2-25A

Which formula do we need to use?

Direct Materials used

BegInv + InvIncr EndInv

Cost of Goods Mfg

BegWIP + (DMused + DL + MOH) EndWIP = CofGM

Cost of Goods Sold
Income Statement

Direct Materials Used

E2-25(a)

Computation of Direct Materials Used

Direct materials used:
Beginning raw materials inventory
Purchases of direct materials
Import duties
Freight-in
Direct materials available for use
Ending raw materials inventory
Direct materials used

Beg + Incr Ending .. of ??

http://www.wavsource.com/snds_2015-08-23_2824562050165472/movies/wizard/melting2.wav

Pg 86

E2-25(A), Cost of Goods Manufactured

Raw materials used

$75,000

Beg + Incr Ending .. of ??

Beginning WIP Inventory

+ Mfg costs incurred:
DM Used (..see DM used sched)
DL
MOH
Total mfg costs to account for
- Ending WIP Inventory
Cost of Goods Mfg
Total MOH:
Indirect Labor
Insurance
Depreciation
Repairs & Maint
Total MOH

(Other MOH)
(Other MOH)
(Other MOH)

Pg 86

E2-25(b), Cost of Goods Sold

Pg 86

Raw materials used

$ 75,000

Cost of Goods Mfg

$ 243,800

Beg + Incr Ending .. of ??

Beginning FG Inventory
+ Cost of Goods Mfg (see CofGM schedule)
Total Goods available for Sale
- Ending FG Inventory
Cost of Goods Sold

Direct Materials used

Cost of Goods Mfg

Cost of Goods Sold

Income Statement

Copyright 2015 Pearson

Education, Inc.

13

Direct Material Used (DM Used)

BegRM + RMincr = RMavail EndRM = DMused
BegRM + RMincr EndRM = DMused
Cost of Goods Manufactured (CofGM)
BegWIP + WIPincr = TotMfg EndWIP = CofGM
WIPincr = DMused + DL + MOH

BegWIP + (DMused + DL + MOH) EndWIP = CofGM

MOH = IM + IL + OthrMOH
BegWIP + (Dmused + DL + IM + IL + OthrMOH) EndWIP = CofGM

Cost of Goods Sold (CofGS)

BegFG + CofGM = FGAvail EndFG = CofGS
BegFG + CofGM EndFG = CofGS
Operating Income (OpI)
Rev CofGS = GP Per = OpI
Rev CofGS Per = OpI

Using the formulas to solve a problem

BegRM + RMincr EndRM = DMused
BegWIP + (DMused + DL + IM + IL + OthrMOH) EndWIP = CofGMfg
BegFG + CofGMfg EndFG = CofGS
Sales CofGS Per = OpI

Use DMused formula to solve for Ending Raw Material inventory(EndRM)

BegRM + RMincr EndRM = DMused
since EndRM = EndRM add EndRM to both sides

BegRM + RMincr EndRM + EndRM = Dmused + EndRM

since -EndRM + EndRM = 0 so substitute zero in the formula

BegRM + RMincr + 0 = DMused + EndRM

BegRM + RMincr = DMused + EndRM

since DMused = DMused .. subtract DMused from both sides

BegRM + RMincr DMused = DMused DMused + EndRM

+DMused DMused = 0 so substitute -0- in the formula

BegRM + RMincr DMused = 0 + EndRM

BegRM + RMincr DMused = EndRM

Pg 87

E2-27
Pg 87

(a) Cost of Goods Sold

Direct Materials used

= BegRM + (RMPurch+FrtIn+Duties)-EndRM
Cost of Goods Mfg = BegWIP+DMused+DL+(IM+IL+OMOH)-EndWIP
Cost of Goods Sold = BegFG + CofGMfg - EndFG
Income Statement
Rev CofGS = GP Per = OpI

E2-27
Pg 87

(b) Beginning Raw Materials

Cost of Goods Sold

$ 15,600

Direct Materials used

= BegRM + (RMPurch+FrtIn+Duties)-EndRM
Cost of Goods Mfg = BegWIP+DMused+DL+(IM+IL+OMOH)-EndWIP
Cost of Goods Sold = BegFG + CofGMfg - EndFG
Income Statement
OpI = Rev CofGS = GP - Per

E2-27
Pg 87

(c) Ending Finished Goods Inventory

Cost of Goods Sold

$ 15,600

Direct Materials used

= BegRM + (RMPurch+FrtIn+Duties)-EndRM
Cost of Goods Mfg = BegWIP+DMused+DL+(IM+IL+OMOH)-EndWIP
Cost of Goods Sold = BegFG + CofGMfg - EndFG
Income Statement
OpI = Rev CofGS = GP - Per

Cost Behavior
Cost behaviorhow costs change as volume changes.

Variable
costs
Fixed
costs

Change in total cost in

direct proportion to
changes in volume
Stay constant in total cost
over a wide range of
activity levels

What are some examples of Variable costs?

What are some examples of Fixed costs?
Copyright 2015 Pearson Education, Inc.

20

Total Cost
Total cost = Fixed costs + Total
Variable cost (Variable cost per unit x
number of units)
Example:
Fixed costs = $20,000
Variable cost per unit = $50 per unit
Number of units = 100
Total cost = $20,000 + ($50 x 100)
= $25,000
Copyright 2015 Pearson Education, Inc.

21

Cost Behavior
Summarized

Total
Total Dollars
Dollars

Variable Costs
Variable
Costs
Fixed
Costs
Fixed
Costs

Cost Per
per Unit
Cost

Change
in
Change in
Unchanged in
proportion
with
proportion with
relation to
output
output
More output = More
output
More output = More cost
cost

Unchanged in
relation toin
Unchanged
relation
to output
output
2-

Change
Change
inversely with
inversely
with
output
output
More output
output == lower
More
lower
cost
cost per unit
per
unit
22

S2-16

Cost incurred
a. Cost of coffee used at a Starbucks store

b. Hourly wages paid to sales clerks at Best Buy

c. Monthly flower costs for a florist
d. Cost of fuel used for a trucking company
e. Shipping costs for Amazon.com

f. Monthly rent for a nail salon

g. Sales commissions at a car dealership

h. Monthly insurance costs for the home office of Google
i. Monthly depreciation of equipment for a customer service office

Pg 82

Variable or Fixed

S2-16 (continued)

Cost incurred
j. Cost of fabric used at a clothing manufacturer

k. Cost of fruit sold at a grocery store

l. Monthly office lease costs for a CPA firm
m. Monthly cost of French fries at a McDonalds restaurant
n. Property taxes for a restaurant

o. Depreciation of exercise equipment at the YMCA

Pg 82

Variable or Fixed

Multiple Classifications of Costs

Costs may be classified as:
Direct/Indirect, and
Variable/Fixed

These multiple classifications give rise

to important cost combinations:
Direct and variable
Direct and fixed
Indirect and variable
Indirect and fixed
2-

25

Controllable vs Uncontrollable
Relevant vs Irrelevant Costs
Controllabl
e
Uncontroll
able

Management can influence or

change cost
Management cannot change or
influence cost in the short run

Releva
nt

Differential costs, which are costs that

differ between alternatives

Irreleva
nt

Costs that do not differ between

alternatives
or
Sunk costs costs incurred in the past
Copyright 2015 Pearson Education, Inc.
26
that cannot
be changed

E2-28 pg 87

Cost incurred
a. The interest rate paid on invested funds, when deciding how
much inventory to keep on-hand
b. Cost of computers purchased 6 months ago, when deciding
whether to upgrade to computers with faster processing speed
c. The property tax rates in different locales, when deciding where
to locate the companys headquarters
d. The type of fuel (gas or diesel) used by delivery vans, when
deciding which make and model of van to purchase for the
companys delivery van fleet.
e. Cost of operating automated production machinery versus the
cost of direct labor, when deciding whether to automate
production.
f. The fair market value of old manufacturing equipment when
deciding whether or not to replace it with newer equipment.
g. Cost of purchasing packaging materials from an outside vendor,
when deciding whether to continue manufacturing the packaging
materials in-house.
h. Depreciation expense on old manufacturing equipment when
deciding whether or not to replace it with newer equipment.
i. The cost of land purchased 3 years ago, when deciding whether
to build on the land now or wait two more years before building.

relevant/irrelevant