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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?
Types of Businesses
Financial Reporting of Costs
Cost Classifications
Product Costs
Manufacturing Inventory Accounts and
    Cost Flows
Overhead Cost Allocation: Traditional
    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
         Types of Businesses

                           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:




       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?
           a product or service under
 Unit cost of
  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
     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.
                 Use only with permission of Susan Crosson
The Overhead Account
            Overhead
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
           Overhead
Actual:           Applied:
????              $12.72 x _????_

????              ????
Underapplied      Overapplied



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



    COGS will be decreased
Overhead Cost Allocation:
Traditional and ABC Approaches to Applying Overhead

     Traditional                         ABC
   One overhead account                  Overhead divided into
   One plantwide rate
                                           Activities
                                          Many activity rates
   All Budgeted Overhead
                                          Budgeted Activity Cost
    divided by Estimated
                                           Pool divided by
    Cost Driver i.e. DL$,DLH               Estimated Cost Driver
  Predetermined Rate:
                                         Predetermined Rate:
  Estimated Overhead
                                         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?
           a product or service under
 Unit cost of
  Normal Costing using Traditional OH:

     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?
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?
      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
How much does it cost?
           a product or service under
 Unit cost of
  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.

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?
     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?
     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?
            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
             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
             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?
           Homework:

           Problem 5




Use only with permission of Susan Crosson
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
             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?
           Homework:

           Problem 5




Use only with permission of Susan Crosson