# Chapter 2 Cost Concepts and Cost Allocation

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```					    Chapter 2
Cost Concepts and
Cost Allocation

Fall 2007
Crosson
Learning Objectives:
How  much does it cost?
Financial Reporting of Costs
Cost Classifications
Product Costs
Manufacturing Inventory Accounts and
Cost Flows
and ABC Approaches
Key Question:
How much does it cost?

 What  should be included?
 Unit cost of a product or service:

_Total costs__
Units produced

Use only with permission of Susan Crosson
What Do You Know?
Exercise 12

Cost per bale?

Revenue per bale?

Profit per bale?

Price increase?
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

Service
Merchandising                   or
Retail
Manufacturing

Value Chain and Supply Chain
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

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.
Use only with permission of Susan Crosson
What Do You Know?
Exercise 6
1.
2.
3.
4.
5.
6.
7.
8.
9.
What Do You Know?
Exercise 6
1. MER
2. SER
3. MANF
4. MER
5. MANF
6. SER
7. SER
8. MANF
9. MER
Cost
Classifications:

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

Marketing Value                        Financial Reporting        Cost Behavior

Value Adding        Period Costs         Product Costs            Variable
SAG
Noninventoriable

Indirect Costs

Prime Costs         Conversion Costs       Conversion Costs
Prime Costs

Good follow up exercise is E2 and SE5.
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
Look and listen to
   Cost of Goods Sold                                    SE3.
Use only with permission of Susan Crosson
The Materials Account
Material Inventory
Beginning Balance
+DM Purchased     DM used (to WIP)
+IDM Purchased    IDM used (to OH)

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

BB+COGM=COGAS
Ending Balance
The Work in Process Account
WIP Inventory
Beginning Balance        Cost of Goods
+DM used                 Manufactured or
Current
+DL used Manufacturing   Completed
Costs

+OH used                 (COGM to FG)

Ending Balance

Info. for the I/S’s COGM comes from this account!
What Do You Know?
Exercise 5 Oak Division

Sales   ?      +Matl used           +\$3   +\$3
-COGS   C=\$8   +DL                  +A    +A=\$2
+OH                  +\$1   +\$1
GM      ?
=Current Mfg Costs   =\$6   =\$6
-SAG    ?      +Beg. WIP            \$2    \$2
NI      ?      -End. WIP            -B    -B=\$1
=COGM                =\$7   =\$7
+Beg. FG             +\$3   +\$3
=COGAS               =\$?   =\$?=\$10
-End. FG             -\$2   -\$2
COGS                 C     C=\$8
What Do You Know?
Exercise 5 Loblolly Division
Sales   ?    +Matl used           +\$7    +\$7
-COGS   18   +DL                  +\$6    +\$6
+OH                  +\$3    +\$3
GM      ?
=Current Mfg Costs   =d     =\$d=
-SAG    ?    +Beg. WIP            +\$e    +\$e=
NI      ?    -End. WIP            -\$3    -\$3
=COGM                =\$20   =\$20
+Beg. FG             +f     +\$f=
=COGAS               =\$?    =\$?
-End. FG             -\$6     -\$6
COGS                 18     18
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
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
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
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….
Use only with permission of Susan Crosson
How much does it cost?
cost of a product or service under
 Unit
Normal Costing:

Costs of Goods Manufactured*
Units produced

*Actual DM, Actual DL, Applied OH

Good follow up exercise is SE6.
Use only with permission of Susan Crosson
Figure 7
   PLAN:At beginning of period, find overhead rate
   APPLY: During the period apply overhead to WIP
as products are processed
   ACTUAL: During the period record actual overhead
   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.
Use only with permission of Susan Crosson
Actual OH:       Applied OH:
IDM              OH rate
IDL              times actual cost
Other OH costs   driver activity

Underapplied     Overapplied
COGS increases   COGS decreases

Dr. COGS xx          Dr. OH xx
Cr. OH      xx       Cr. COGS xx
What Do You Know?
Exercise 15
Actual:           Applied:
????              \$12.72 x _????_

????              ????
Underapplied      Overapplied

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

COGS will be decreased

   One plantwide rate                     Activities
   Many activity rates
   Budgeted Activity Cost
divided by Estimated
Pool divided by
Cost Driver i.e. DL\$,DLH
Estimated Cost Driver
Predetermined Rate:
Predetermined Rate:
Estimated Cost Pool
Estimated Cost Driver
Estimated Cost Driver
Good follow up exercises SE10 or E16.
Use only with permission of Susan Crosson
How much does it cost?
cost of a product or service under
 Unit

Costs of Goods Manufactured*
Units produced

*Actual DM, Actual DL, and
Applied Plantwide Predetermined OH

Use only with permission of Susan Crosson
What Do You Know?
\$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?
What Do You Know?
\$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
How much does it cost?
cost of a product or service under
 Unit
Normal Costing using ABC OH:

Costs of Goods Manufactured*
Units produced

*Actual DM, Actual DL, and
Applied Predetermined
Activity Cost Pool Rates
Use only with permission of Susan Crosson
What Do You Know?
Problem 8 ABC OH Rate:
Calculate the activity cost rate for
each cost pool.

applied using ABC to Rigger II and
BioScout.

What  is the product unit cost of a
Rigger II and a BioScout?
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
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
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
What Do You Know?
Rigger II?
ABC: \$10,000+\$1,450+\$215=\$11,665

BioScout?
ABC: \$12,000+\$1,600+ \$1,340 =\$14,940

How much does it really cost?
Now Try Case 5
\$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
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
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
C5 Notes
Rigger II?
ABC: \$10,000+\$1,160+\$205=\$11,365

BioScout?
ABC: \$12,000+\$1,280+ \$2,380 =\$15,660

How much does it really cost?
Homework:

Problem 5

Use only with permission of Susan Crosson

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