February 2, 2006
PROFESSOR: Yes, we are going to turn in the homework. Since there are so
many people in here it gets really confused. Put your last name first and then your first
name and so it can be read easily. 150 does not make it easy.
So do that and then pass your homework over to the edge that is due today.
Everybody is coming up here and saying they forgot where they signed the
seating chart. I am very smart and Suki is very smart but we are not responsible for
where you signed the sheeting chart. So you need to remember where you signed the
seating chart so you can sit there each day.
Adds, everybody is coming up here wondering about adds. Here is what we did:
figured out how many people did not show the other day. This is my cut: I will allow
people to add that have a 3.0 or better with a C or better in 220. These people can see
Suki and you need to show verification.
(Naming off people that can do this).
The names that I just read off of people that want to add can go see Suki. There
are 150 people here. It will not work if you all come up during class and ask me
The names I read you have your verification, go see Suki to add.
You need to go find another class where you can get in. Don’t hang around here
for three weeks and then say you have to add me. That will not work.
Now, these other people that are enrolled in the class I need you to show Suki
verification of your grade in 220. You need to show her written verification.
The people that I am reading off need to show written verification of their grade
to SUKI in 220.
He needs verification for these people for some reason. You have it don’t you?
2 20 with a grade of C or better.
Who was on the add list that I did not read their name?
Funny thing. Nobody here that was on the add list that I did not read your name?
Okay. One last chance. Anybody want to sign up for the wall street journal
before I submit it?
FEMALE STUDENT: When do you need our grade verification by? I won’t
have it for a week.
PROFESSOR: You need it before the last day to add your verification for 220.
If I read your name to show verification and you don’t show it, I will drop you.
MALE STUDENT: Does it have to be on official transcript or unofficial?
PROFESSOR: It is something from the university. Not a piece of paper where
you write C on it.
I want to see if some people are here and I don’t want to read this whole list.
Here are some people that were absent on Tuesday that I want to know if they are here
(Reading list of people that were absent Tuesday).
Did you have a hot date on Tuesday?
MALE STUDENT: I could not find a parking place so I sat in back.
PROFESSOR: She is really a good student. She just forgot we were going to
meet on Tuesday (LAUGHING).
He is saying something about Suki, the assistant.
Any enrollment questions?
Everybody got to sign the sheeting chart?
If you did not get do sign the seating chart, at some point you need to see SUKI,
Everybody able to get the syllabus? You get the book?
PROFESSOR: The book store has books?
MALE STUDENT: Yeah.
PROFESSOR: Okay. If you are in the class, you need to get a book. Questions
Questions about anything we talked about on Tuesday?
What is the question you are not supposed to ask? What did we do on Tuesday.
MALE STUDENT: Post pone the first homework--.
PROFESSOR: No. You can borrow a book from your friend if you need to and
Xerox the pages. We can’t wait.
Other questions on any of the substance we talked about the other day? Cost?
Chapter 1? A lot of material in chapter 1.
Who has our joke? Who was supposed to have it? Who was sitting next to the
person that was supposed to have it?
Who is the back up?
This is not good. (CLASS LAUGHS).
This is not the way it is supposed to be.
I will tell one from my other class.
MALE STUDENT: I have one. If couples have Valentines Day what do single
PROFESSOR: I don’t know.
MALE STUDENT: Palm Sunday.
PROFESSOR: You back her up next time. Okay?
Palm Sunday, I get it. (CLASS LAUGHS).
Guys have palm Sunday instead of valentines.
This whole thing about calculating your cost of goods and you don’t count them
because they are what? They are gone. The only ones that you can count are your
We will do the same thing with raw materials. We will start out with what you
had the beginning and then add in the purchases. How much did you put into production.
You subtract the ending amount of raw materials and you end up with work in process.
For a manufacturing company it is more complex. You will have different kinds
of inventory. How many kinds?
PROFESSOR: Raw materials, work in process, finished goods.
How come you don’t have beginning inventory or direct labor? You cannot store
those things up. If you have labor in January, if you don’t use it, can you store it up for
February? No. The same with manufacturing overhead. You incur some overhead in
January. If you didn’t do any production or assign it to anything, you can’t get it back.
With extra raw materials you have them to start the next period with for February. So
you don’t store up direct labor or manufacturing overhead.
They go directly into work in process.
So you have your raw materials inventory, work in process. What three things
are in work in process?
MALE STUDENT: Labor, raw materials and overhead.
What is one reason why we are screwing around with all of this stuff? Why do
we care? You are probably asking yourself about the class in general, why do we care.
MALE STUDENT: So we know what the cost of manufacturing is.
PROFESSOR: Why is it important for us to know how much it costs? So we sell
it for a certain price. We have to make sure we sell it for a high enough price to cover
our costs. You don’t want to sell your stuff too cheap.
What happens if you think it is costing you more than it is costing you? What
will you do with your sales prices? They will be high. If you think it is costing you 1
hundred when it is only costing you 80 to make the goods, you are setting your price high
and you will not sell as much because your competitors will sell it cheaper. So you will
not have customers. So it is important to know how much it is costing us.
Let me go back a minute. Currently companies don’t like to store inventory.
What are some reasons why companies wouldn’t want too much inventory?
MALE STUDENT: Because it cost the money to store it.
PROFESSOR: Costs money to store it.
MALE STUDENT: Sometimes the worth of the goods goes down especially
PROFESSOR: If you have computers and they come out with a new chip, what
happens to the value? They go down. So if something is on the shelf for 3 months,
conceivably you could buy it for cheaper.
Dell seems to be able to eat people’s lunch like Gateway they use just in time.
They want to buy the components for the computers just in time to make them. They
have to have suppliers that can ship them those components quickly so they are there
when they need it. They want that stuff to be purchased just in time to make the
Because the price is cheaper this week than 3 weeks ago. Plus they don’t want to
invest the money to hold the inventory. They would like to build your computer and ship
it to you before they have to pay for those components.
Supposedly Dell has very little in components like less than a week’s worth of
stuff. They don’t order that stuff until they get your order. They get those components in
to make your computer and ship it to you in a couple of days. They do that better than
just about anybody else.
It is very important in an industry like that.
Cost co. Maybe you guys are impulse buyers. I am going around Costco and I
see something I want and decide I will think about it and go home. You go back and it is
gone. They turn over their inventory quickly so it will not necessarily be there next week
when you go back.
I do that to my wife. I say think about and I kind of hope (CLASS LAUGHS)
unless it is one of the staples like a diet doctor pepper and we have to buy it.
Raw materials going into work in process.
Everybody clear on this that we talked about yesterday? You can move things
from one side of the equation to the other to figure stuff out. You might work top down,
bottom up, right to left, et cetera.
Raw materials: everybody clear on what we did here the other day? Beginning
raw materials plus your purchases is your available. Then you end up with the raw
materials used. The raw materials used went into manufacturing costs.
What would happen if somebody stole some of your raw materials? Where does
that show up here?
Will it be in your ending inventory? No. It is not there because it is stolen. If it
was there, it wouldn’t be stolen. So because something was stolen your ending inventory
is lower. So you subtract it and end up with raw materials used in production. So it is
higher. We think we put more into production than we really did. So there are more
dollars in there that went into production but we really didn’t get anything for that. It
increases your cost of manufacturing because that cost is gone.
We did these.
You put the raw materials that you used into the work in process. You add your
label to it and overhead and you have your total manufacturing costs. Where do those
total manufacturing costs go to?
At the end of the period, where are they? This one here, you have materials and
labor and overhead.
What happens to it? It does not go to expense.
MALE STUDENT: Operating expenses.
PROFESSOR: Part of it goes to finished goods. One of two things happened to it
during the month. Either we finished it or didn’t finish it. It stays in work in process
until it is finished. So if it is finished it goes into finished goods.
Has it been sold yet? No. It is in finished goods. It is an asset account.
It is finished and sitting on the shelves. We want to sell it now. Once it is sold,
then what? It goes into cost of goods sold as an expense.
These total manufacturing costs go into work in process.
Look at this over here on the right side.
One of the things that we will be getting into the homework and a quiz; it will be
on cost of goods manufactured. What is another way of saying cost of goods
MALE STUDENT: Goods sold.
PROFESSOR: No. Do you ever—I won’t say never, but it sounds kind of bazaar
do you ever sell work in process? No. Because it is not done.
You don’t call up general motors and say can I have a half done car. You don’t
buy half of a computer from Dell. You don’t buy work in process. You buy finished
We had some work in process at the beginning of the month. We have this. We
back out what is still in work in process. And we have cost of goods manufactured.
Give me some other words for that?
MALE STUDENT: Finished goods.
PROFESSOR: In other words, it is during this period, call it a month, these are
the things that we have finished.
Cost of goods manufactured, could be cost of goods completed this month. Cost
of goods that we are done making. Okay?
So now that we are done making them they don’t belong in work in process
anymore so we will move them on.
Here we go.
Goods manufactured will go up there into finished goods. We had some finished
goods at the beginning of the period. We completed some more during this period. That
is the most finished goods we can sell. What we had the beginning plus what we
completed this period.
At the end of the period those are one of two places?
MALE STUDENT: Sold or stored.
PROFESSOR: They are sold or still here in inventory. Which ones do we count?
MALE STUDENT: The ones in inventory.
PROFESSOR: Is it easier to count things that are here or aren’t here? That are
here. So we count the finished goods ending inventory and we assume everything else
was sold. When it is sold it goes into cost of goods sold. What kind of account?
MALE STUDENT: Expense.
Now, what happens if some of our finished goods were stolen? First of all, when
people steal stuff do they like leave a note so you can update your inventory? Usually
not. (CLASS LAUGHS).
Please update your records. They don’t do that. They just steal it and leave.
Where does it end up here? It ends up in cost of goods sold. Because you count what is
still there. If they sole it, it is not there anymore.
So that means that your ending inventory is lower that means your expense is
higher. Your profit goes down.
Okay. Here we go.
I will shift gears employ we will talk about costs in a different way. We will talk
about how costs behave. We will talk about when you increase your volume and you buy
more unit and sell more and make more, whatever it is, how do certain costs behave as
your volume goes up.
We talk about those costs as being variable costs and fixed costs.
If we are talking super bowl, Sunday they sell a lot of what? Beer and pizza.
Let’s take pizza.
The dough and the pepperoni and all of that stuff variable or fixed? Variable.
The more pizzas you sell, the more dough and pepperoni you will use. So that is a
variable cost. When activity changes, when we sell more pizzas, the cost of pepperoni
will go up.
How about our rent? It is fixed. So on Sunday if we sell 1 hundred pizzas or a
thousand our rent will be the same. We will say for the size of our business, our rent is a
fixed cost. That means in total our rent is one number.
What happens if I sell more pizzas? What if I say how much is my rent per
MALE STUDENT: It goes down as you sell more.
PROFESSOR: It goes down. If my rent is a thousand dollars and I sell only one
pizza that day, then it was a thousand dollars a pizza. The more pizzas I sell my rent per
pizza goes down. Rent is a what?
MALE STUDENT: Fixed cost.
PROFESSOR: The more pizzas I divide the rent by. How about my cost of the
pepperoni or the cost of the boxes that I put the pizza in, what are those? Variable costs.
If I say 10 types more pizzas, the cost of my boxes is what?
MALE STUDENT: The same. It is fixed.
PROFESSOR: 10 times as much. Okay.
What about my cost per box? It stays the same. We say that the cost of the box
is a variable cost. It varies in total. What are variable costs per unit? Fixed. They are
the same, constant. The same amount per box.
Everybody understand that? When I say variable or fixed am I talking per unit or
in total? In total.
When I talk about it per unit, which makes it a little more complicated is that it is
My variable costs are variable in total but per unit they are fixed or constant.
My fixed costs are fixed per total but in unit they vary.
Let me jump ahead a little bit. I have this store and I can sell so much pizza.
What if my business gets bigger and bigger and I get more orders, what do I have to do?
MALE STUDENT: Hire more people.
PROFESSOR: What else?
MALE STUDENT: Expand size.
PROFESSOR: My rent was fixed because I was selling so many pizzas. If every
day I am selling 3 times as many pizzas, I need a big facility. I need to raise my fixed
This is called the relevant range. I can only get so many pizzas produced out of
that facility. If my volume goes way up I have to rent a new building and therefore my
fixed cost jumps. It stays fixed again within that range. But it is a bigger number of
pizzas. Everybody understand that?
The same thing if I am producing in a factory and my volume goes up and I put
on a second shift. What do I have to do with supervisors? Hire more. They are fixed.
They get salary.
10 can handle the day shift but my volume goes up and I have switched into a
different relevant range.
We will start drawing pictures here. This is not talking about your cell phone.
This is talking about your home phone. It says your total long distance telephone bill is
based on the minutes you talk. If you talk 0, it is the cost of 0. If you talk more, it goes
In is a variable cost. As the volume goes up, you go across the bottom; your cost
of long distance goes up. It is a variable cost. Variable costs usually start at 0. If I talked
0 long distance, I incurred 0 long distance costs.
If I sell 0 pizzas, how much does it cost me for boxes? 0.
Everybody got that?
The cost per long distance minute: it says here 10 cents a minute. If I talk one
minute I pay 10 cents. If I talk more minutes I still may the same per minute. What are
we talking about here? Fixed or variable?
MALE STUDENT: Fixed per unit.
PROFESSOR: It is variable but instead of saying what is your total cost per long
distance we are doing your cost per unit. What is your cost per unit? It stays the same.
Maybe we want to stay constant instead of fixed.
Here we are talking about your basic telephone bill. You know at home you have
a phone bill even if you don’t use it costs 10-20 dollars a month. You pay whether you
use the phone or not. What is that? Fixed cost.
You look here. Your number of local calls. That dollar amount of that bill will
stay 20 dollars no matter whether you make 0 local calls or 1 hundred. You are not
charged per unit so that is a fixed cost.
Now we are taking that fixed cost, the 20 dollars per month for that phone bill,
but now we will say how much does that cost per local call? What if you only make one
call a month? 20 dollars a call.
If I make 20 calls? It is one dollar a call. The more calls that I make, local calls
that I make, what happens to that fixed cost?
MALE STUDENT: It goes down.
PROFESSOR: It goes down, down, per unit.
So the graph will change whether we are talking in total or per unit.
For example, in my business I need one telephone line. 20 dollars a month, fixed
cost. What will happen if my business grows?
MALE STUDENT: You might need more.
PROFESSOR: What will happen to my fixed costs? They will go up. Within a
certain range one line is enough. As I sell more I need more lines. That means that the
relevant range is changing.
But within that the variable cost will change. A fixed cost in total will stay the
same. When you switch over to per unit the variable costs do what per unit? They stay
the same. The fixed costs per unit as volume changes they go down.
Which of these would be variable?
Cost of lighting? Fixed.
Wages for manager? Fixed.
Cost of ice cream? Clearly variable.
Cost of renting the film? Fixed.
Now we will take questions on variable versus fixed? We will spend a whole
chapter or two on them later on.
It is a lot of fun. I use that in quotes.
It does not compare to Valentines Day or anything like that.
FEMALE STUDENT: Why is the cost fixed? Utilities?
PROFESSOR: Because the movie theater is going to have to heat or cool the
theater no matter if there are 10 people or 1 hundred people. They still have to keep the
theater at a certain temperature or people will complain.
FEMALE STUDENT: But don’t utilities change? If there is nobody there they
don’t have to turn it on.
PROFESSOR: Utility costs could change based on the weather. But we are
defining these costs as changing based upon what? Level of activity. The level of
activity in a movie theater is tickets, bodies. It says we need to heat or cool this room and
basically it will cost pretty much the same to heat or cool this room whether there are 20
people here or 120 people here. It does not mean it will necessarily be the same every
month but it doesn’t change based on the level of activity.
What would we do if there are 10 of us in the theater and they turn off the air?
We will complain. What if they say we will not cool the theater because there are only
10 of you? It will not make us happy.
Now we will talk about direct versus indirect costs. We are saying direct costs
can be traced the units of what you are making. You can directly trace that cost into the
product. We are saying examples here (Power Point) direct material and direct labor.
Indirect costs are costs that cannot be easily traced to a unit of product or other
We allocate to the product. For example, when you are making the car, is it easy
to tell can we directly trace the rent of the factory to the car? No. Is the rent part of the
cost of making the car?
MALE STUDENT: Yes.
PROFESSOR: Yes, but it is not directly traceable to the car. How do we charge it
to the car? We allocate it to the car based on some method. It is very different than what
we did with labor and material.
The material went right into the car.
How do these differ? We talked the other day about product costs and period
costs. How are those different than direct and indirect?
How about administration and marketing? What were they the other day? Period
costs. Now they are indirect.
How about material? They were a product cost. And now they are direct.
The difference here is what? What is the difference?
MALE STUDENT: Of these and--.
PROFESSOR: Product versus period?
MALE STUDENT: These are traced to a cost objective as opposed to a period,
time or product.
PROFESSOR: Direct cost we are talking about easily traceable to a product. The
difference is the overhead. What was the overhead before? Product costs.
I give you a key. If it says the word “factory” what does that tell you? It is a
product cost. What do we do in the factory? We make products. So the utilities are a
product cost. The rent of the factory is a product cost.
Here manufacturing overhead. The rent is manufacturing overhead. Is the
represent easily traceable to the car? No. So it is indirect.
If you talk about product versus period, what is the rent? A product cost. So the
manufacturing overhead is the difference between those.
Differential costs and revenues. If you are trying to make a decision on
something, you want to focus what affect is the decision going to have on revenues and
Somebody comes into our factory and we have some excess capacity and they
want to buy some more units from us at a lower price. We have the capacity. We have to
decide do we accept this special order or not. We have to look at our costs and still figure
out if we can make some money.
Does our rent matter? According to this the rent would not matter. Because if
you accept the order, your rent stays the same and if you don’t accept it, it stays the same.
Therefore, does your rent—should your rent enter your decision to accept the order or
How about your direct materials? Yes. It will change. It will use up more raw
Differential revenue: you will make 5 hundred more. The extra costs of your
transportation is the three hundred.
Everybody understand that?
Here we go.
You will decide whether to take the train to port land to go to a concert. You had
pizza for dinner last night. Is that relevant? No. Because the cost of the pizza is gone
now. So therefore the pizza is not relevant.
How about the cost of the train ticket? Yes, it is relevant. If you drive you don’t
pay for the train and if you take the train you pay for it. Every decision involves choice
among these alternatives.
You want to find what revenues will be different between A and B and what
costs will be different.
So let’s take taking the train or driving. Tell me about your car insurance?
MALE STUDENT: It will be the same.
PROFESSOR: You pay your car insurance for six month and whether you drive it
or leave it parked it will be the same. So your car insurance does not enter into the
Annual cost of licensing your car? No.
Depreciation on your car?
MALE STUDENT: It depends.
PROFESSOR: The answer is it depends. You did it straight line over years? It
will not be. So the answer is a definite maybe.
We are taking cost and splitting it up 17 different ways. We are talking about
opportunity cost. An opportunity says if I do one thing I give up something else.
If I take accounting 230, Tuesday/Thursday at 11 I cannot take communications
at that time. The opportunity cost of taking accounting is that you have to give up the
communications class. That is something you give up.
This one if you go to school versus going out to work.
You give up that money by going to school.
Do you do debits and credits with opportunity costs? No.
It is something that you didn’t get. We don’t record things that we don’t get.
Now it talks about sunk cost. Sunk costs mean I already did this purchase. I
can’t undo my purchase. Therefore, that cost is sunk and doesn’t matter with regard to
(Power Point) reading.
The cost is sunk because that 10 thousand dollars is gone no matter if I drive it or
How about you are talking about going to buy something today. Does it matter
that you spent 10 bucks on pizza last night? No. It is gone.
(Power Point) this is no. That five thousand is not sunk.
Questions? A lot of stuff in this chapter.
Okay. Let’s do the homework. Pass over one copy of the homework. You are
supposed to bring two copies.
Next time we have a request. That you park yourself in the right place for the
chairs for the seating chart.
You are not supposed to switch. If your name is on the chart, you need to sit
Did we pass up the homework? One copy.
Suki will collect it.
Question 1: what is the basic difference between the two types of accounting?
MALE STUDENT: Financial accounting is based on passed revenues.
PROFESSOR: One is made for decision making in house and the other is for
reporting to outside.
MALE STUDENT: Financial accounting is more of dealing with the past.
Managerial accounting is trying to predict the future.
PROFESSOR: That is correct. We do an income statement and balance sheet.
Today we would be doing for January, what is past. Managerial accounting looks at the
past to predict what is going to happen in the future.
Financial accounting is mandatory for whom?
MALE STUDENT: Anybody who incorporated.
PROFESSOR: It is mandatory for publicly held companies. If you are privately
held, you know Gary’s pizza, then doing financial statements is not mandatory but you
need records for your taxes. We have a set of rules for financial accounting. If you are
going to do financial statements you have to follow those rules so users can compare one
company with the next.
MALE STUDENT: Managerial accounting helps the inside users.
PROFESSOR: We are still talking external versus internal. Managerial
accounting will try to help budgets. We will see how we did and measure it against that
plan so we can adjust and move forward.
Number 6: what are the 3 major elements of costs?
Direct materials, direct labor and manufacturing overhead.
8: explain the difference between a product cost and a period cost.
Who else? How about somebody in the middle? The guy with the cool hat on.
MALE STUDENT: How are you?
PROFESSOR: Fine. I have a hat like that. My daughter and my wife won’t let
me wear it (CLASS LAUGHS).
One time we do a lot of boating. I had these sunglasses on the boat. I said it is
cool. These only cost me six buck and my little daughter said you got ripped off.
MALE STUDENT: All of the costs that are not included in product costs.
PROFESSOR: Okay. What is a product cost without saying it is everything but
MALE STUDENT: Involved in acquiring or making the product.
PROFESSOR: Would all of those costs be easily traceable to the product? No.
What would be the difference between product cost and period cost in terms of
when that cost hits the income statement?
FEMALE STUDENT: Product cost is treated as an expense in the period in which
the related products of sold.
PROFESSOR: Period costs will be expensed off when occurred that period. They
never go on the balance sheet. The product cost will follow the product. They will stay
on the balance sheet as long as we own them. When we sell them it is an expense.
So there is a difference in the timing.
If product costs did not stay on the balance sheet, okay, until you sold them, then
companies—then that would also mean that we—we recognize revenue when? When
If you got to earn revenue by just producing what would you do? Just produce
like hell and don’t worry about selling it but that is not how it works.
MALE STUDENT: Merchandising companies,--manufacturing companies use
goods of cost sold.
PROFESSOR: True or false both manufacturers and merchandisers have an
account called cost of good sold. The balance sheets look different. I think the income
statement differs mostly in how you calculate cost of goods sold.
It is more complicated on the manufacturing. You have to go through the raw
materials and work in process and on down. So it is more complicated.
It talks about instead of just saying purchases, you will have cost of goods
15: variable cost varies per unit of product, true or false?
Let’s go back. When we define fixed versus variable are we talking about per
unit costs or total? Total.
So we say this, we said that variable costs varies in total. That is our definition.
What about variable costs per unit? They stay the same. They are constant.
It says a variable cost is a cost that varies per unit. The answer is false.
A fixed cost is constant per unit? That is false. A fixed cost is not constant per
(Use the phone call example).
Everybody knows what we are doing for next Tuesday?
If you want to add and I called your name, you need to show her the verification.