Professional Documents
Culture Documents
Chapter 2
Chapter Two
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead
Prime Conversion
Cost Cost
Marketing or Administrative
Selling Cost Cost
Sale
MegaLoMart
Merchandiser Manufacturer
Current assets Current Assets
Cash ◆ Cash
Receivables ◆ Receivables
Merchandiser Manufacturer
Current assets Current Assets
Cash ◆ Cash
Receivables ◆ Receivables
Materials waiting to
Prepaid Expenses be processed.
◆ Prepaid Expenses
Partially complete ◆ Inventories
Merchandise
products – some
Inventory Raw Materials
material, labor, or Work in Process
overhead has been Finished Goods
added.
Completed products
awaiting sale.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
The Income Statement
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory $ 14,200
+ Purchases 234,150
Goods available
for sale $ 248,350
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold $ 236,250
Beginning
Beginning Additions
Additions Available
Available
balance
balance + $$$
$$$
= $$$$$
$$$$$
$$
$$
Available
Available _ Withdrawals
Withdrawals
Ending
Ending
$$$$$
$$$$$ $$$
$$$
= balance
balance
$$
$$
Manufacturing Work
Raw Materials Costs In Process
Manufacturing W
Raw Materials Costs In P
Conversion
Conversion
Beginning raw Direct materialscosts
costsarearecosts
costs
materials inventory + Direct labor incurred
incurredto to
+ Raw materials + Mfg. overhead convert
convert the
the
purchased direct
directmaterial
= Total manufacturing material
= Raw materials costs into
into aafinished
finished
available for use product.
product.
in production
– Ending raw materials
inventory
= Raw materials used
in production
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
How
How aa cost
cost will
will react
react to
to
changes
changes in in the
the level
level of
of
activity
activity within
within thethe
relevant
relevant range.
range.
Total
Totalvariable
variablecosts
costs
change
changewhen
whenactivity
activity
changes.
changes.
Total
Totalfixed
fixedcosts
costsremain
remain
unchanged
unchangedwhen
whenactivity
activity
changes.
changes.
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Variable Cost Per Unit
Telephone Charge
Per Minute
Minutes Talked
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Total Fixed Cost
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
• Financial reporting
• Predicting cost behavior
• Assigning costs to cost objects
• Decision making
Machine Material
Breakdowns Shortages
Power
Failures
Support activities
Prevention whose purpose is to
Costs reduce the number of
defects
Incurred to identify
defective products
Appraisal Costs before the products are
shipped
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
Appraisal Costs
Prevention Costs • Testing & inspecting
• Quality training
incoming materials
• Quality circles
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment
Appraisal costs:
Inspection
Reliability testing
600,000
580,000
1.20%
1.16%
560,000
420,000
1.12%
0.84% Quality cost
Supervision of testing and inspection 120,000 0.24% 80,000 0.16%
Depreciation of test equipment 200,000 0.40% 140,000 0.28% reports provide
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
$10 20
9 18
Quality
7 14
6
External
Failure
External
Failure
can also 12
External
Failure
External
Failure
5 be 10