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1. 2 Product Costing Systems: Concepts and Design Issues

2. 2-2 Learning Objective 1

3. 2-3 The Meaning of Cost

4. 2-4 Learning Objective 3

5. 2-5 Retailers . . . ? Buy finished goods. ? Sell finished goods. Manufacturers . . . ? Buy raw materials. ? Produce and sell finished goods. Comparing Service, Retail and Manufacturing Companies

6. 2-6 Manufacturing Companies

7. 2-7 Manufacturing Companies

8. 2-8 Manufacturing Companies ..

9. 2-9 Stages of Production and the Flow of Costs

10. 2-10 Stages of Production and the Flow of Costs - Example

11. 2-11 Stages of Production and the Flow of Costs - Example

12. 2-12 Stages of Production and the Flow of Costs - Example

13. 2-13 Stages of Production and the Flow of Costs - Example

14. 2-14 Stages of Production and the Flow of Costs - Example

15. 2-15 Stages of Production and the Flow of Costs - Example

16. 2-16 Learning Objective 2

17. 2-17 Schedule of Cost of Goods Manufactured

18. 2-18 Schedule of Cost of Goods Manufactured

19. 2-19 Schedule of Cost of Goods Manufactured

20. 2-20 Schedule of Cost of Goods Manufactured

21. 2-21 Schedule of Cost of Goods Manufactured

22. 2-22 Schedule of Cost of Goods Manufactured

23. 2-23 Income Statement for a Manufacturer

24. 2-24 Income Statement for a Manufacturer

25. 2-25 Income Statement for a Manufacturer

26. 2-26 Production Costs in the Service Sector A service provider cannot “inventory” its services. The costs of providing the service can be identified and measured, just as occurs in manufacturing industries. Managing and tracking the costs associated with value-chain activities can point to opportunities for improvement.

27. 2-27 Cost Drivers

28. 2-28 Learning Objective 4

29. 2-29 Cost behavior means how a cost will react to changes in the level of business activity. Total variable costs change when activity level changes. Total fixed costs remain unchanged when activity level changes. Cost Behavior

30. 2-30 Your total long distance telephone billis based on how many minutes you talk. Total Variable Cost Example

31. 2-31 The cost per long distance minute talked is constant. For example, 5 cents per minute. Variable Cost Per Unit Example

32. 2-32 Your monthly basic telephone bill probably does not change when you make more local calls. Total Fixed Cost Example

33. 2-33 The average cost per local calldecreases as more local calls are made. Fixed Cost Per Unit Example

34. 2-34 Cost Behavior Summary

35. 2-35 Cost Hierarchy

36. 2-36 Cost Hierarchy

37. 2-37 Cost Hierarchy

38. 2-38 Cost Hierarchy

39. 2-39 Learning Objective 5

40. 2-40 Committed and Discretionary Costs

41. 2-41 Opportunity Costs

42. 2-42 Sunk Costs

43. 2-43 Direct Costs Costs that can betraced easily and conveniently to a product or department. Example: Cost of paint in the paint department of an automobile assembly plant. Indirect Costs Costs that need to be allocated, before they can be assigned to a product or department. Example: Cost of national advertising for an airline is indirect to a given flight or route. Traceability of Resources

44. 2-44 Learning Objective 6

45. 2-45 A system of accounting for costs in which both fixed and variable production costs are included in product costs. Absorption (Full) Costing

46. 2-46 A system of cost accounting that assigns only the variable cost of production to products. Variable Costing

47. 2-47 Learning Objective 7

48. 2-48 Absorption Costing vs. Variable Costing

49. 2-49 Absorption and Variable Costing

50. 2-50 Absorption Costing vs. Variable Costing - Example Howell, Inc. produces a single product with a sales price of $40 and the following cost information:

51. 2-51 Unit product cost is determined as follows: Absorption Costing vs. Variable Costing - Example

52. 2-52 Absorption Costing vs. Variable Costing - Example

53. 2-53 Absorption Costing vs. Variable Costing - Example

54. 2-54 Comparing Absorption andVariable Costing Let’s compare the methods.

55. 2-55 We can reconcile the difference between absorption and variable net income as follows: Reconciling Income

56. 2-56 Extending the Example

57. 2-57 In its second year of operations, Howell started with an inventory of 2,000 units, produced 30,000 units and sold 32,000 units at $40 each. Howell Inc., Year 2

58. 2-58 Unit product cost is determined as follows: Howell Inc., Year 2

59. 2-59 Howell Inc., Year 2

60. 2-60 Howell Inc., Year 2

61. 2-61 Summary

62. 2-62 Summary

63. 2-63 Learning Objective 8

64. 2-64 Variable versus Absorption Costing

65. 2-65 Variable versus Absorption Costing

66. 2-66 Variable versus Absorption Costing

67. 2-67 Variable versus Absorption Costing

68. 2-68 Variable versus Absorption Costing

69. 2-69 Throughput Costing

70. 2-70 Throughput Costing

71. 2-71 Learning Objective 9

72. 2-72 Intentional Overproduction of Inventory Absorption costing: Excess inventory would include more fixed production costs, so that gross income for the period would be artificially higher. An unethical manager would have an incentive to “produce for inventory” at the end of a period, in order to obtain a better looking bottom line. Throughput costing: No such incentive would exist, since fixed production costs would be charged against operating income for the period.

73. 2-73 End of Chapter 2