ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu

Transcript of ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Page 1: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

ACCT 2302

Fundamentals of Accounting II

Spring 2011

Lecture 2

Professor Jeff Yu

Page 2: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

DecisionMaking

Formulating long-and short-term plans

(Planning)

Formulating long-and short-term plans

(Planning)

Measuring performance (Controlling)

Measuring performance (Controlling)

Implementing plans (Directing and

Motivating)

Implementing plans (Directing and

Motivating)

Comparing actual to planned performance

(Controlling)

Comparing actual to planned performance

(Controlling)

Begin

Review: what do managers do and how MA can help

MA provides information that help managers make decisions throughout the planning and control cycle.

Page 3: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Review: Managerial vs. Financial Accounting

Financial Accounting

Managerial Accounting

Users

Time Focus

Emphasis Verifiability and Precision

Subject The whole Organization

Requirement Follow GAAP

Page 4: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Chapter 2: Today’s Agenda

Introduce cost terms, concepts and classifications

I organize our discussions according to the three major course themes:

How costs behave?

How accounting system reports costs?

Economic costs vs. Accounting costs

Page 5: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

How costs behave?

Cost is a sacrifice; In accounting, a measurable cost is typically the relinquishment of a measurable asset or the creation of a measurable liability.

Cost Behavior: how a cost will react to a change in activity level.

Cost Driver: The activity causing a cost to change. e.g., units produced, units sold, hours worked, etc.

Page 6: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Consider the Rollerblade manufacturer: Each rollerblade produced requires one set of wheels. If rollerblade production increases 10%, how will that affect the total cost of wheels required for production?

Rollerblades produced

Tota

l co

st o

f

wh

eels

Total Variable Cost

Page 7: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Suppose the Rollerblade manufacturer rents a factory in which to produce the rollerblades. How will the monthly factory rental cost change as the number of rollerblades produced increases?

Rollerblades produced

Tota

l co

st o

f

fact

ory

ren

tal

Total Fixed Cost

Page 8: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Rollerblades produced

Per

un

it w

heel co

st

Consider again the Rollerblade manufacturer: If rollerblade production increases 10%, how much will the cost per unit cost of wheels change?

Pairs of Rollerblades

producedPer unit

wheel costTotal wheel

cost1 $5 $5

10 $5 $50400 $5 $2,000500 $5 $2,500

Variable Cost Per Unit

Page 9: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Rollerblades produced

How does the factory rental cost per unit of rollerblade change as the number of rollerblades produced increases?

Pairs of Rollerblades

producedMonthly

rental costPer unit

rental cost1 $1,000 $1,000

10 $1,000 $100400 $1,000 $3500 $1,000 $2

Per

Un

it R

en

tal C

ost

Fixed Cost Per Unit

Page 10: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Quick Check

Fixed costs are usually characterized by:

a. Unit costs that remain constant.

b. Total costs that increase as activity decreases.

c. Total costs that increase as activity increases.

d. Total costs that remain constant.

Variable costs are usually characterized by:

a. Unit costs that decrease as activity increases.

b. Total costs that increase as activity decreases.

c. Total costs that increase as activity increases.

d. Total costs that remain constant.

Page 11: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Relevant Range

The range of activity within which the assumptions about cost behavior are valid.

Activity Volume

Total cost

Total cost curve

Relevant range

Page 12: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Summary: Cost Behavior

In Total Per Unit

Variable Cost

Fixed Cost

Within the Relevant Range, how will each of the following

cost change as activity level increases (decreases)?

Page 13: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Practice Problem

Luxor Company’s relevant range is 500 to 4000 units. The cost information for producing 1500 units is as follows:

Total Fixed Cost $120,000

Total Variable Cost $360,000

Total production cost $480,000

Calculate:

1) per unit variable cost if 3,000 units are produced;

2) per unit fixed cost if 2,500 units are produced;

3) Per unit production cost if 1,000 units are produced;

4) The total cost if 4,000 units are produced.

What if 5,000 units are produced?

Page 14: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Nale company’s relevant range is from 200 to 2000 units. In the past it produced 400 units with a total cost of $2200, and 500 units with a total cost of $2700. Now if it want to produce 800 units, what will be the expected total cost?

Practice Problem

Page 15: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

How accounting system reports costs?

Costing: In accounting, costing is largely a matter of assigning

costs to products or services.

Absorption Costing: The costing method used to value inventories and cost of goods sold for financial reporting purposes.

Under absorption costing, all manufacturing costs are treated as product costs, all non-manufacturing costs are treated as period costs, regardless of whether they are fixed or variable.

Page 16: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Product vs. Period Costs

Absorption costing differentiates product and period costs based on the timing with which various costs are recognized as expenses on the income statement (according to GAAP).

Product Costs (Manufacturing Costs): Recognized as expense (cost of good sold) when

the product is sold

Period Costs (Non-Manufacturing Costs): Recognized as expense in the period incurred, no

matter the product is sold or not.

Page 17: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Accounting for manufacturing firm

The production process:

Purchase materials

Use Materials, Labor,Overhead to

make a product

Ready to sell to customer

Accounting:

Raw MaterialsInventory

Work-in-ProcessInventory

Finished goodsInventory

Cost of Goods Sold

Page 18: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Manufacturing Costs

Manufacturing Overhead

DirectLabor

DirectMaterial

Product Cost

Page 19: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Direct Material

Example:Steel used tomanufacture

the automobile.

Example:Steel used tomanufacture

the automobile.

Materials that become an integral part of the product and that can be conveniently traced

directly to the product

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Cost of wages for people who work directly on products.

In other words, those labor costs that can be easily traced toindividual units of product.

Example:Wages paid to an

automobile assemblyworker.

Example:Wages paid to an

automobile assemblyworker.

Direct Labor

Page 21: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

All other manufacturing costs that cannot be traced directly to specific units produced. It includes any other costs that is related to the manufacturing process or production facility (factory).

Manufacturing Overhead

IndirectLabor

IndirectMaterial

Othermanufacturing Costs

Examples of other manufacturing costs:

Depreciation, maintenance and repairs of production equipment;

Utilities, insurance, property tax of the production facility (factory)

Page 22: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Examples of Manufacturing Overhead

IndirectMaterial

IndirectLabor

Wages paid to employees who are not directly involved in

production work but is associated with operating the

factory.

Examples: wages for production supervisors,

maintenance workers, janitors and security guards for the

factory

Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Page 23: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Cost Classification - Manufacturing Firms

PrimeCost

ConversionCost

Manufacturing costs are often combined as follows:

DirectMaterial

DirectLabor

ManufacturingOverhead

Page 24: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Nonmanufacturing Costs

Marketing and Selling Costs

Costs necessary to get the order and deliver the product. e.g. advertising,

shipping, sales commissions.

Administrative Costs

All executive, organizational, and clerical

costs.

Page 25: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

DirectMaterial

DirectLabor

ManufacturingOverhead

Manufacturing Costs = Product Costs

Marketing/ Selling Costs

Administrative Costs

NonManufacturing Costs = Period Costs

Summary: Costs under Absorption Costing

Page 26: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Quick Check

For each of the following costs, answer whether it is:

DM, DL, MOH or Nonmanufacturing cost?

Prime and/or Conversion cost? Product or Period cost?

1). Manufacturing equipment depreciation.

2). Property taxes on corporate headquarters.

3). Wages paid to the production supervisor.

4). Electrical costs to light the production facility.

5). Wages paid to the factory machine operators.

6). The cost of a hard drive installed in a computer.

7). Sales commissions.

Page 27: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Cost Behavior: Accounting Costs

For each of the following costs, please specify whether it is a fixed cost or variable cost within the relevant range?

Assume the cost driver is units of product produced:

1). Direct Material

2). Direct Labor

3). Property tax of the factory building

4). Electricity consumed to make the product

Assume the cost driver is units of product sold:

1). Sales Commission

2). Cost of one advertising campaign.

Page 28: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Economic Costs vs. Accounting Costs

Differential Cost/Differential Revenue – Costs and revenues that differ between two (or more) alternatives

Opportunity Cost – the potential benefit given up when one alternative is selected over the next best alternative.

Sunk Cost – a cost that has already been incurred and cannot be changed by any decision now or later.

Cost classification for decision making:

Page 29: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Relevant costs for decision making

Every decision involves a choice between at least two alternatives.

Only differential costs and benefits are relevant in a decision. All other costs and benefits can and should be ignored.

Is Opportunity Cost a differential cost?

Is Sunk Cost a differential cost?

Page 30: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Practice Problem: Equipment Replacement Decision

A manager at White Co. is deciding whether to replace an old machine with a new machine. White’s sales are estimated to be $200,000 per year for the next 5 years. Fixed expenses, other than depreciation, are estimated to be $70,000 per year. Purchasing the new machine costs $90,000 and will save variable expenses of $20,000 per year during its 5-year useful life. The old machine was purchased at $72,000 and carry a remaining book value of $60,000 on the balance sheet. The disposal value of the old machine is $15,000. The old machine, if not used, could also be leased to another company for $4,000 per year for the next 5 years.

Question: for this equipment replacement decision

(1)what are differential costs and revenues over the next 5 years?

(2)What is the opportunity cost for keep using the old machine?

(3) Is there any sunk cost?

Page 31: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

For Next Class

Read Chapter 2, focus on product cost flows

Complete the assigned HW problems

Page 32: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Home Work: Q1

Answer Yes or No to each of the following question:

Wage paid to factory machine operators at $10 per unit of product would be a:

(1) Period Cost?

(2) Conversion Cost?

(3) Fixed Cost?

(4) Prime Cost?

Page 33: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Home Work: Q2

Karvel Co.’s relevant range is 100 to 5000 units.

Last year 2,000 units were produced with

total production cost of $240,000, among which total fixed cost is $60,000 and total variable cost is $180,000.

Q: What will be the per unit production cost if 1,000 units are produced this year?

Page 34: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 2 Professor Jeff Yu.

Home Work: Q3

Mastang Co.’s relevant range is 0 to 1000 units. In April it produced 400 units with a total production cost of $3,000. In May it produced 900 units with a total production cost of $5,500.

Q: What will be the total production cost for June if 800 units are expected to be produced?