1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 3 Professor Jeff Yu

2. Review: cost behavior  __________ per unit does NOT change when activity level changes.  Total ____________ does NOT change when activity level changes.  ________________ increases when activity level increases.  ________________ decreases when activity level increases.  ________________ is the range of activity within which the assumptions about cost behavior are valid.

3. Review: cost classification for decision making  ______________ are costs that differ between two (or more) alternatives.  ______________ is the value of the next best alternative foregone as the result of making a decision.  ______________ is a cost that has already been incurred and cannot be changed by any decision made now or in the future.  ______________ is not a differential cost and should be ignored when making decisions.

4. Direct Material Direct Labor Manufacturing Overhead Manufacturing Costs = ________ Costs Marketing/ Selling Costs Administrative Costs Nonmanufacturing Costs = _______ Costs Review: cost terms under Absorption Costing

5. Merchandising vs. Manufacturing Firms Merchandisers... Buy finished goods. Sell finished goods. Manufacturers... Buy raw materials. Produce and sell finished goods. MegaLoMart

6. Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets  Cash  Receivables  Prepaid Expenses  Inventories Raw Materials Work in Process Finished Goods

7. Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

8. Basic Inventory Flows Beginning balance $$ Beginning balance $$ Additions $$$ + Available $$$$$ = Withdrawals $$$ _ Available $$$$$ Ending balance $$ Ending balance $$ = How to illustrate inventory flows using T-accounts?

9. 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? Quick Check

10. Manufacturing Cost Flows Selling and Administrative costs Raw Material Work in Process Finished Goods Cost of Goods Sold Raw Material Purchases Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Manufacturing Overhead Selling and Administrative Direct Material Cost of Goods Manufactured Goods Sold

11. Which of the following transactions would immediately result in an expense? (There could be more than one correct answer.) A. Work in process is completed. B. Finished goods are sold. C. Raw materials are placed into production. D. Administrative salaries are accrued and paid. Quick Check

12. Manufacturing Cost Flows How to calculate Direct Material cost? Beginning Balance of Raw Materials Inventory + Raw Materials Purchased Raw Materials Available for Use - Indirect Material used - Ending Balance of Raw Materials Inventory Direct Material Q: How to do it using the T-account?

13. 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. Assume the firm doesn’t use any indirect material, what is the cost of direct material? Example

14. Manufacturing Cost Flows How to calculate Manufacturing Costs? Direct Material + Direct Labor + Manufacturing Overhead * Manufacturing Costs * Note: use actual MOH only if we have the actual number at the time of the decision. However, in most real world situations, we don’t and hence have to use an estimated number (applied MOH) to provide timely info for the decision.

15. In May 2010, DFW Inc. used $280,000 of Direct material. Direct labor cost was $375,000 and applied manufacturing overhead was $180,000. What were total manufacturing costs incurred for the month? Example

16. How to calculate Cost of Goods Manufactured? Beginning Balance of Work in Process Inventory + Manufacturing Costs Total Costs to Account For - Ending Balance of Work in Process Inventory Cost of Goods Manufactured Manufacturing Cost Flows Q: How to do it using the T-account?

17. Beginning work in process inventory 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? Example

18. Manufacturing Cost Flows How to calculate Cost of Goods Sold: Beginning Balance of Finished Goods Inventory + Cost of Goods Manufactured Cost of Goods Available for Sale - Ending Balance of Finished Goods Inventory Cost of Goods Sold Q: How to do it using the T-account?

19. 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? Example

20. Summary of Manufacturing Cost Flows: T-Accounts

21. Office Oasis, an office furniture manufacturer, provides you with the following accounting information for the month of May: Direct Material: $20,000 Raw Materials purchased: $30,000 Direct Labor: $15,000 Applied MOH: $35,000 Ending Raw materials inventory: $20,000 Ending Work-in-process inventory: $10,000 Cost of Goods Manufactured: $90,000 Based on the above cost data, calculate: 1)The beginning Raw material inventory for the month of May. 2)The beginning Work-in-process inventory for the month of May. Practice Problem

22. Jan 1 Dec 31 Raw materials inventory $ 90 65 Work-in-process inventory 180 175 Finished good inventory 150 165 Sales 800 Raw materials purchases 75 Selling expenses 140 Direct Labor expenses 180 Applied Manufacturing Overhead 35 Administrative expenses 110 Based on the above data (in thousands), calculate: 1)Direct Material cost during the year; 2)Cost of Goods Manufactured for the year; 3)Cost of Goods Sold for the year; 4)Net operating income for the year. Practice Problem

23. For Next Class  Read chapter 3  Attempt the assigned HW problems

24. Administrative salaries $160 Raw materials purchases 290 Sales commissions 140 Depreciation of office equipments in headquarter 30 Applied Manufacturing overhead 270 Jan 1 Dec 31 Raw materials inventory $ 40 10 Work-in-process inventory 42 __ Finished good inventory 50 __ Total manufacturing cost is $683, CGM is $690, CGS is $660. Q: based on the above data (in thousands): 1)What is the Direct Labor cost? 2)What is the balance of Work-in-process inventory on Dec 31? 3)What is the balance of Finished good inventory on Dec 31? Homework Q1

25. Q: based on the above data (in thousands): 1)What is the Cost of Goods Manufactured for the year? 2)What is the Net Operating Income for the year? Homework Q2 Jan 1Dec 31 Raw Materials Inventory 9060 Work in Process Inventory 150100 Finished Goods Inventory 80180 Raw materials purchases 720 Selling and Administrative expenses 300 Direct Labor cost 150 Applied MOH 350 Sales 2,500