1. Chapter 2 Cost Concep Chapter 2 Cost Concepts and Cost Allocation Fall 2007 Crosson

2. Learning Objectives:  How much does it cost?  Types of Businesses  Financial Reporting of Costs  Cost Classifications  Product Costs  Manufacturing Inventory Accounts and Cost Flows  Overhead Cost Allocation: Traditional and ABC Approaches

3. Use only with permission of Susan Crosson Key Question: How much does it cost?  What should be included?  Unit cost of a product or service: _Total costs__ Units produced

4. What Do You Know? Exercise 12 Cost per bale? Revenue per bale? Profit per bale? Price increase?

5. What Do You Know? Exercise 12 Cost per bale? $150+$115+$600+($1,500/12)= $990/3,000= $.33/bale Revenue per bale? $2,400/3,000= $.80/bale Profit? $.80 - $.33= $.47/bale Price increase? It depends

6. Use only with permission of Susan Crosson Types of Businesses  Service  Merchandising or Retail  Manufacturing Value Chain and Supply Chain

7. Use only with permission of Susan Crosson Financial Reporting of Costs Figure 3 Service Income Statement Sales -Cost of Sales (Supplies+DL+OH) Gross Margin -SAG Net Income  No Inventory Accounts  DM known as Supplies since immaterial  SAG=Selling, Administrative, and General Expenses

8. Use only with permission of Susan Crosson Financial Reporting of Costs Figure 3  Retail and Manufacturing Income statement Sales -Cost of Goods Sold (COGS) Gross Margin -SAG Net Income  Retail  Manufacturing Exhibit 1 in text Good follow up exercise is E7 and SE2.

9. What Do You Know? Exercise 6 1.2.3.4.5.6.7.8.9.

10. What Do You Know? Exercise 6 1. MER 2. SER 3. MANF 4. MER 5. MANF 6. SER 7. SER 8. MANF 9. MER

11. Use only with permission of Susan Crosson Cost Classifications:  Cost traceability: direct and indirect  Cost behavior: fixed or variable  Marketing value: value or nonvalue adding  Financial reporting: product or period

12. Use only with permission of Susan Crosson Cost Classifications: Good follow up exercise is E2 and SE5.

13. Use only with permission of Susan Crosson Product Costs and Inventory Accounts Figure 5  Materials Inventory  Materials Purchased  Materials Used in Production  Work in Process Inventory  Current Manufacturing Costs: DM, DL, OH used  Cost of Goods Manufactured  Finished Goods Inventory  Cost of Goods Manufactured/Completed  Cost of Goods Available for Sale  Cost of Goods Sold Look and listen to SE3.

14. The Materials Account Material Inventory Beginning Balance +DM Purchased +IDM Purchased DM used (to WIP) IDM used (to OH) Ending Balance

15. The Finished Goods Account Finished Goods Inventory Beginning Balance(BB) +Cost of Goods Manufactured (COGM from WIP) Cost of Goods Sold (to COGS) Ending Balance BB+COGM=COGAS

16. The Work in Process Account WIP Inventory Beginning Balance +DM used +DL used +OH used Cost of Goods Manufactured or Completed (COGM to FG) Ending Balance Current Manufacturing Costs Info. for the I/S’s COGM comes from this account!

17. What Do You Know? Exercise 5 Oak Division Sales -COGS GM -SAG NI ? C=$8 ? +Matl used +DL +OH =Current Mfg Costs +Beg. WIP -End. WIP =COGM +Beg. FG =COGAS -End. FG COGS +$3 +A +$1 =$6 $2 -B =$7 +$3 =$? -$2 C +$3 +A=$2 +$1 =$6 $2 -B=$1 =$7 +$3 =$?=$10 -$2 C=$8

18. What Do You Know? Exercise 5 Loblolly Division Sales -COGS GM -SAG NI ? 18 ? +Matl used +DL +OH =Current Mfg Costs +Beg. WIP -End. WIP =COGM +Beg. FG =COGAS -End. FG COGS +$7 +$6 +$3 =d +$e -$3 =$20 +f =$? -$6 18 +$7 +$6 +$3 =$d= +$e= -$3 =$20 +$f= =$? -$6 18

19. What Do You Know? Problem 2 1. a. b. 2. Gross margin Cost of goods sold Cost of goods available for sale Cost of goods manufactured

20. What Do You Know? Problem 2 1. a. Materials, Work in Process, Finished Goods, Production supplies, Small tools, Patents, Factory building, Factory equipment b. All the other accounts 2. Gross margin $191,800 Cost of goods sold $308, 200 Cost of goods available for sale $363,000 Cost of goods manufactured $312,000

21. P2 Computations: Sales $ 500,000. COGS $ 308,200b Gross Margin $ 191,800a Operating Expenses $ 53,670. Net Income $ 138,130. COGS: COGM $ 312,100d Beg. FG $ 50,900. COGAS $ 363,000c End. FG $ 54,800. COGS $ 308,200b

22. Use only with permission of Susan Crosson Manufacturing Inventory Accounts and Cost Flows  Figure 4 Activities and Documents Good follow up exercise is SE4.  Cost Flow Assumptions  Actual Costing:  Actual DM,DL, OH  *Normal Costing:  Actual DM, DL  Applied OH  Standard Costing:  Predetermined or standard DM, DL, OH (like applied OH) * What we will assume….

23. Use only with permission of Susan Crosson How much does it cost?  Unit cost of a product or service under Normal Costing: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, Applied OH Good follow up exercise is SE6.

24. Use only with permission of Susan Crosson Actual and Applied Overhead Figure 7  PLAN: At beginning of period, find overhead rate using either traditional or ABC  APPLY: During the period apply overhead to WIP as products are processed  ACTUAL: During the period record actual overhead in the Overhead account  RECONCILE: At end of period reconcile Actual and Applied Overhead by closing the balance in the Overhead account to COGS (if immaterial) Good follow up exercises are SE7, SE9, E14, or E15. Look and listen to SE 8.

25. The Overhead Account Overhead Actual OH: IDM IDL Other OH costs Applied OH: OH rate times actual cost driver activity Underapplied COGS increases Overapplied COGS decreases Dr. COGS xx Cr. OH xx Dr. OH xx Cr. COGS xx

26. What Do You Know? Exercise 15 Overhead Actual: ???? Applied: $12.72 x _????_ ???? Underapplied ???? Overapplied COGS will be _______________

27. What Do You Know? Exercise 15 Overhead Actual: $1,143,400 Applied: ($12.72 x 89,920=) $1,143,782.40 Underapplied $382.40 Overapplied COGS will be decreased

28. Use only with permission of Susan Crosson Overhead Cost Allocation: Traditional and ABC Approaches to Applying Overhead  Traditional  One overhead account  One plantwide rate  All Budgeted Overhead divided by Estimated Cost Driver i.e. DL$,DLH Predetermined Rate: Estimated Overhead Estimated Cost Driver  ABC  Overhead divided into Activities  Many activity rates  Budgeted Activity Cost Pool divided by Estimated Cost Driver Predetermined Rate: Estimated Cost Pool Estimated Cost Driver Good follow up exercises SE10 or E16.

29. Use only with permission of Susan Crosson How much does it cost?  Unit cost of a product or service under Normal Costing using Traditional OH: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, and Applied Plantwide Predetermined OH

30. What Do You Know? Problem 8 Traditional OH Rate:  $13.75 /DLH how computed?  What is the OH rate for Rigger II and for BioScout?  What is the product unit cost of Rigger II and BioScout?

31. What Do You Know? Problem 8 Traditional OH Rate:  $13.75DLH how computed? $220,000/(12,000 + 4,000) = $13.75  What is the OH rate:  Rigger II? $13.75 x 30DLH = $412.50  BioScout? $13.75 x 40DLH = $550.00 What is the product unit cost: DM+DL+OH= Rigger II? $ 10,000.00+$1,450.00+$412.50 =$11,862.50 BioScout? $12,000+$1,600+$550 =$14,150

32. Use only with permission of Susan Crosson How much does it cost?  Unit cost of a product or service under Normal Costing using ABC OH: Costs of Goods Manufactured* Units produced *Actual DM, Actual DL, and Applied Predetermined Activity Cost Pool Rates

33. What Do You Know? Problem 8 ABC OH Rate:  Calculate the activity cost rate for each cost pool.  Compute the total overhead costs applied using ABC to Rigger II and BioScout.  What is the product unit cost of a Rigger II and a BioScout?

34. What Do You Know? Problem 8 ABC OH Rate:  Calculate the activity cost rate:  Setup: $70,000/700= $100 /setup  Inspection: $20,000/500= $40 /inspection  Engineering: $50,000/2,000=$25 /Hour  Assembly: $80,000/10,000=$8 /MH

35. Problem 8 ABC OH Rate Compute the overhead costs applied:  Rigger II:  Setup: $100 /setup x 250= $25,000  Inspection: $40 /inspection x 150= $6,000  Engineering:$25 /Hour x 600= $15,000  Assembly:$8 /MH x 5,000= $40,000  Total: $86,000/400 units = $215  BioScout:  Setup: $100 /setup 450= $45,000  Inspection: $40 /inspection x 350= $14,000  Engineering:$25 /Hour x 1,400= $35,000  Assembly:$8 /MH x 5,000= $40,000  Total: $134,000/100 = $1,340

36. What Do You Know? Problem 8 ABC OH Rate:  What is the product unit cost: Rigger II? $ 10,000+$1,450+$215 =$11,665 BioScout? $12,000+$1,600+ $1,340 =$14,940

37. What Do You Know? Problem 8 Traditional v. ABC: Rigger II? Traditional: $ 10,000.00+$1,450.00+$412.50 =$11,862.50 ABC: $ 10,000+$1,450+$215 =$11,665 BioScout? Traditional: $12,000+$1,600+$550 =$14,150 ABC: $12,000+$1,600+ $1,340 =$14,940 How much does it really cost?

38. Now Try Case 5 C5 Traditional OH Rate:  $25/DLH how computed? $320,000/(80% of (12,000 + 4,000) = $320,000/12,800)= $25 What is the OH rate:  Rigger II?$25x (80%of 30/DLH) =$25x24=$600  BioScout?$25x (80%of40/DLH) =$25x32=$800 What is the product unit cost: DM+DL+OH=  Rigger II? $ 10,000+$1,160+$600 =$11,760  BioScout? $12,000+$1,280+$800 =$14,080

39. C5 Notes C5 ABC OH Rate:  Calculate the activity cost rate:  Setup: $70,000/700= $100 /setup  Inspection: $20,000/500= $40 /inspection  Engineering: $50,000/2,000=$25 /Hour  Assembly: $180,000/10,000=$18 /MH

40. C5 ABC OH Rate Compute the overhead costs applied:  Rigger II:  Setup: $100 /setup x 250= $25,000  Inspection: $40 /inspection x 150= $6,000  Engineering:$25 /Hour x 600= $15,000  Assembly:$18 /MH x 2,000= $36,000  Total: $82,000/400 units = $205  BioScout:  Setup: $100 /setup x 450= $45,000  Inspection: $40 /inspection x 350= $14,000  Engineering:$25 /Hour x 1,400= $35,000  Assembly:$18 /MH x 8,000= $144,000  Total: $238,000/100 = $2,380

41. C5 Notes C5 Traditional v. ABC: Rigger II? Traditional: $ 10,000+$1,160+$600 =$11,760 ABC: $ 10,000+$1,160+$205 =$11,365 BioScout? Traditional: $12,000+$1,280+$800 =$14,080 ABC: $12,000+$1,280+ $2,380 =$15,660 How much does it really cost?

42. Use only with permission of Susan Crosson Homework: Problem 5