Professional Documents
Culture Documents
Chapter 2
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Costs Terms, Concepts and
Classifications
Chapter Two
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Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
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Direct Materials
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
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Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
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Manufacturing Overhead
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
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Classifications of Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead
Prime Conversion
Cost Cost
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Non-manufacturing Costs
Marketing or Administrative
Selling Cost Cost
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Product Costs Versus Period Costs
Sale
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Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
MegaLoMart
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Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses
Prepaid Expenses
Inventories
Merchandise
Inventory Raw Materials
Work in Process
Finished Goods
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Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Materials waiting to
be processed.
Prepaid Expenses
Prepaid Expenses
Partially complete Inventories
Merchandise
products some Raw Materials
Inventory
material, labor, or Work in Process
overhead has been
Finished Goods
added.
Completed products
awaiting sale.
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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
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Inventory Flows
Beginning
Beginning Additions
Additions Available
Available
balance
balance + $$$
$$$
= $$$$$
$$$$$
$$
$$
Available
Available _ Withdrawals
Withdrawals
Ending
Ending
$$$$$
$$$$$ $$$
$$$
= balance
balance
$$
$$
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Schedule of Cost of Goods
Manufactured
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs
costsarearecosts
costs
+ Raw materials + Mfg. overhead incurred
incurredto to
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
direct
directmaterial
material
available for use
in production into
into aafinished
finished
Ending raw materials product.
product.
inventory
= Raw materials used
in production
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Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
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Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
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Product Cost Flows
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Manufacturing Cost Flows
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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.
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Total Variable Cost
Minutes Talked
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Variable Cost Per Unit
Telephone Charge
Per Minute
Minutes Talked
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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.
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Assigning Costs to Cost Objects
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Cost Classifications for Decision
Making
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Differential Costs and Revenues
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Summary of the Types of Cost
Classifications
Financial reporting
Predicting cost behavior
Assigning costs to cost objects
Decision making
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Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
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Labor Fringe Benefits
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Prevention and Appraisal Costs
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
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Internal and External Failure Costs
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
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Examples of Quality Costs
Appraisal Costs
Prevention Costs Testing & inspecting
Quality training
incoming materials
Quality circles
Final product testing
Statistical process
Depreciation of testing
control activities
equipment
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Distribution of Quality Costs
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End of Chapter 2
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