Chapter 2Chapter 2Cost ConcepCost Concepts and

Cost Allocation

Fall 2007

Crosson

Learning Objectives:

How much does it cost?Types of Businesses Financial Reporting of Costs Cost ClassificationsProduct CostsManufacturing Inventory Accounts and

Cost FlowsOverhead Cost Allocation: Traditional

and ABC Approaches

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

What Do You Know?Exercise 12Exercise 12

Cost per bale?Cost per bale?

Revenue per bale?Revenue per bale?

Profit per bale?Profit per bale?

Price increase?Price increase?

What Do You Know?Exercise 12Exercise 12

Cost per bale?Cost per bale?

$150+$115+$600+($1,500/12)=$150+$115+$600+($1,500/12)=

$990/3,000= $990/3,000= $ .33/bale$ .33/bale

Revenue per bale?Revenue per bale?

$2,400/3,000= $2,400/3,000= $ .80/bale$ .80/bale

Profit? $ .80 - $ .33= Profit? $ .80 - $ .33= $ .47/bale$ .47/bale

Price increase? Price increase? It dependsIt depends

Use only with permission of Susan Crosson

Types of Businesses

ServiceMerchandising or

RetailManufacturing

Value Chain and Supply Chain

Use only with permission of Susan Crosson

Financial Reporting of CostsFigure 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-SAGNet Income

Retail Manufacturing Exhibit 1 in text

Good follow up exercise is E7 and SE2.

What Do You Know?

Exercise 6Exercise 61.1.

2.2.

3.3.

4.4.

5.5.

6.6.

7.7.

8.8.

9.9.

What Do You Know?

Exercise 6Exercise 61. MER1. MER

2. SER2. SER

3. MANF3. MANF

4. MER4. MER

5. MANF5. MANF

6. SER6. SER

7. SER7. SER

8. MANF8. MANF

9. MER9. MER

Use only with permission of Susan Crosson

Cost Classifications:

Cost traceability: direct and indirectCost behavior: fixed or variableMarketing value: value or nonvalue adding

Financial reporting: product or period

Use only with permission of Susan Crosson

Cost Classifications:

V a lu e A d d ingN on -V a lu e A d d ing

M arketing Value

Period CostsE xp en ses

S A GN on in ve n to r iab le

P r im e C o s ts

D irec t M ate ria ls

C o n ve rsio n C o s tsP r im e C o s ts

D ire c t L ab or

C o n ve rsio n C o s ts

O ve rhe adIn d ire c t C o s ts

Product CostsIn ven to riab le

Financial Reporting

V ariab leF ixed

Cost Behavior

Good follow up exercise is E2 and SE5.

Use only with permission of Susan Crosson

Product Costs and Inventory AccountsFigure 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.

The Materials AccountMaterial InventoryMaterial Inventory

Beginning Balance

+DM Purchased

+IDM Purchased

DM used (to WIP)

IDM used (to OH)

Ending Balance

The Finished Goods AccountFinished Goods InventoryFinished Goods Inventory

Beginning Balance(BB)

+Cost of Goods Manufactured

(COGM from WIP)

Cost of Goods Sold

(to COGS)

Ending Balance

BB+COGM=COGAS

The Work in Process AccountWIP InventoryWIP Inventory

Beginning Balance

+DM used

+DL used

+OH used

Cost of Goods Manufactured or Completed

(COGM to FG)

Ending Balance

Current ManufacturingCosts

Info. for the I/S’s COGM comes from this account!

What Do You Know?Exercise 5 Oak DivisionExercise 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

What Do You Know?Exercise 5 Loblolly DivisionExercise 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

What Do You Know?

Problem 2Problem 21.1. a.a.

b.b.

2. Gross margin2. Gross margin

Cost of goods soldCost of goods sold

Cost of goods available for saleCost of goods available for sale

Cost of goods manufacturedCost of goods manufactured

What Do You Know?Problem 2Problem 2

1.1. a. Materials, Work in Process, Finished a. Materials, Work in Process, Finished Goods, Production supplies, Small tools, Goods, Production supplies, Small tools, Patents, Factory building, Factory Patents, Factory building, Factory equipmentequipment

b. All the other accountsb. All the other accounts

2. Gross margin $191,8002. Gross margin $191,800

Cost of goods sold $308, 200Cost of goods sold $308, 200

Cost of goods available for sale $363,000Cost of goods available for sale $363,000

Cost of goods manufactured $312,000Cost 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

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….

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.

Use only with permission of Susan Crosson

Actual and Applied OverheadFigure 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.

The Overhead AccountOverheadOverhead

Actual OH:

IDM

IDL

Other OH costs

Applied OH:

OH rate

times actual cost driver activity

Underapplied

COGS increases

Overapplied

COGS decreases

Dr. COGS xxCr. OH xx

Dr. OH xxCr. COGS xx

What Do You Know?Exercise 15Exercise 15

OverheadOverheadActual:

????

Applied:

$12.72 x _????_

????

Underapplied

????

Overapplied

COGS will be _______________

What Do You Know?Exercise 15Exercise 15

OverheadOverheadActual:

$1,143,400

Applied:

($12.72 x 89,920=)

$1,143,782.40

Underapplied

$382.40

Overapplied

COGS will be decreased

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 PoolEstimated Cost Driver

Good follow up exercises SE10 or E16.

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

What Do You Know?

Problem 8 Traditional OH Rate: Problem 8 Traditional OH Rate: $13.75$13.75/DLH/DLH how computed? how computed?

What is the OH rate for Rigger II What is the OH rate for Rigger II and for BioScout?and for BioScout?

What is the product unit cost of What is the product unit cost of Rigger II and BioScout?Rigger II and BioScout?

What Do You Know?Problem 8 Traditional OH Rate: Problem 8 Traditional OH Rate: $13.75DLH how computed?$13.75DLH how computed?

$220,000/(12,000 + 4,000) = $13.75$220,000/(12,000 + 4,000) = $13.75What is the OH rate: What is the OH rate: Rigger II? Rigger II? $13.75 x 30DLH = $412.50 $13.75 x 30DLH = $412.50 BioScout? BioScout? $13.75 x 40DLH = $550.00$13.75 x 40DLH = $550.00

What is the product unit cost:What is the product unit cost:DM+DL+OH=DM+DL+OH=

Rigger II?Rigger II?

$$10,000.00+$1,450.00+$412.5010,000.00+$1,450.00+$412.50=$11,862.50=$11,862.50

BioScout? BioScout? $12,000+$1,600+$550$12,000+$1,600+$550=$14,150=$14,150

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

What Do You Know?

Problem 8 ABC OH Rate: Problem 8 ABC OH Rate: Calculate the activity cost rate for Calculate the activity cost rate for each cost pool.each cost pool.

Compute the total overhead costs Compute the total overhead costs applied using ABC to Rigger II and applied using ABC to Rigger II and BioScout.BioScout.

What is the product unit cost of a What is the product unit cost of a Rigger II and a BioScout?Rigger II and a BioScout?

What Do You Know?

Problem 8 ABC OH Rate: Problem 8 ABC OH Rate: Calculate the activity cost rate:Calculate the activity cost rate:

Setup: $70,000/700= $100Setup: $70,000/700= $100/setup/setup

Inspection: $20,000/500= $40Inspection: $20,000/500= $40/inspection/inspection

Engineering: $50,000/2,000=$25Engineering: $50,000/2,000=$25/Hour/Hour

Assembly: $80,000/10,000=$8Assembly: $80,000/10,000=$8/MH/MH

Problem 8 ABC OH Rate Compute the overhead costs applied: Problem 8 ABC OH Rate Compute the overhead costs applied:

Rigger II:Rigger II:Setup: $100Setup: $100/setup x 250= $25,000/setup x 250= $25,000

Inspection: $40Inspection: $40/inspection x 150= $6,000/inspection x 150= $6,000

Engineering:$25Engineering:$25/Hour x 600= $15,000/Hour x 600= $15,000

Assembly:$8Assembly:$8/MH x 5,000= $40,000/MH x 5,000= $40,000

Total: $86,000/400 units = $215Total: $86,000/400 units = $215BioScout:BioScout:

Setup: $100Setup: $100/setup 450= $45,000/setup 450= $45,000

Inspection: $40Inspection: $40/inspection x 350= $14,000/inspection x 350= $14,000

Engineering:$25Engineering:$25/Hour x 1,400= $35,000/Hour x 1,400= $35,000

Assembly:$8Assembly:$8/MH x 5,000= $40,000/MH x 5,000= $40,000

Total: $134,000/100 = $1,340Total: $134,000/100 = $1,340

What Do You Know?

Problem 8 ABC OH Rate: Problem 8 ABC OH Rate: What is the product unit cost:What is the product unit cost:

Rigger II?Rigger II?

$$10,000+$1,450+$215 10,000+$1,450+$215 =$11,665=$11,665

BioScout? BioScout?

$12,000+$1,600+ $1,340 $12,000+$1,600+ $1,340 =$14,940=$14,940

What Do You Know?Problem 8 Traditional v. ABC: Problem 8 Traditional v. ABC:

Rigger II?Rigger II?

Traditional: Traditional: $$10,000.00+$1,450.00+$412.5010,000.00+$1,450.00+$412.50=$11,862.50=$11,862.50

ABC: $ABC: $10,000+$1,450+$21510,000+$1,450+$215=$11,665=$11,665

BioScout? BioScout?

Traditional: $12,000+$1,600+$550Traditional: $12,000+$1,600+$550=$14,150=$14,150

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

How much does it really cost?How much does it really cost?

Now Try Case 5C5 Traditional OH Rate: C5 Traditional OH Rate: $25/DLH how computed?$25/DLH how computed?

$320,000/(80% of (12,000 + 4,000) = $320,000/(80% of (12,000 + 4,000) = $320,000/12,800)= $25$320,000/12,800)= $25

What is the OH rate: What is the OH rate: Rigger II?Rigger II?$25x$25x(80%of 30/DLH)(80%of 30/DLH)=$25x24=$600 =$25x24=$600 BioScout?BioScout?$25x$25x(80%of40/DLH)(80%of40/DLH)=$25x32=$800=$25x32=$800

What is the product unit cost:What is the product unit cost:DM+DL+OH=DM+DL+OH=

Rigger II?Rigger II?$$10,000+$1,160+$60010,000+$1,160+$600=$11,760=$11,760 BioScout? BioScout? $12,000+$1,280+$800$12,000+$1,280+$800=$14,080=$14,080

C5 Notes

C5 ABC OH Rate: C5 ABC OH Rate: Calculate the activity cost rate:Calculate the activity cost rate:

Setup: $70,000/700= $100Setup: $70,000/700= $100/setup/setup

Inspection: $20,000/500= $40Inspection: $20,000/500= $40/inspection/inspection

Engineering: $50,000/2,000=$25Engineering: $50,000/2,000=$25/Hour/Hour

Assembly: $180,000/10,000=$18Assembly: $180,000/10,000=$18/MH/MH

C5 ABC OH Rate Compute the overhead costs applied: C5 ABC OH Rate Compute the overhead costs applied:

Rigger II:Rigger II:Setup: $100Setup: $100/setup x 250= $25,000/setup x 250= $25,000

Inspection: $40Inspection: $40/inspection x 150= $6,000/inspection x 150= $6,000

Engineering:$25Engineering:$25/Hour x 600= $15,000/Hour x 600= $15,000

Assembly:$18Assembly:$18/MH x 2,000= $36,000/MH x 2,000= $36,000

Total: $82,000/400 units = $205Total: $82,000/400 units = $205BioScout:BioScout:

Setup: $100Setup: $100/setup x 450= $45,000/setup x 450= $45,000

Inspection: $40Inspection: $40/inspection x 350= $14,000/inspection x 350= $14,000

Engineering:$25Engineering:$25/Hour x 1,400= $35,000/Hour x 1,400= $35,000

Assembly:$18Assembly:$18/MH x 8,000= $144,000/MH x 8,000= $144,000

Total: $238,000/100 = $2,380Total: $238,000/100 = $2,380

C5 NotesC5 Traditional v. ABC: C5 Traditional v. ABC:

Rigger II?Rigger II?

Traditional: Traditional: $$10,000+$1,160+$60010,000+$1,160+$600=$11,760=$11,760

ABC: $ABC: $10,000+$1,160+$20510,000+$1,160+$205=$11,365=$11,365

BioScout? BioScout?

Traditional: Traditional: $12,000+$1,280+$800$12,000+$1,280+$800=$14,080=$14,080

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

How much does it really cost?How much does it really cost?

Use only with permission of Susan Crosson

Homework:

Problem 5