Agenda

1. Agenda • Review: Some vocabulary, cost behavior, simple (traditional) product costing, the flow of costs through a manufacturer’s accounts • Overview of Tuesday’s class. • Quiz: Learning with Cases • Group exercise: product costing, cost flow, cost behavior

2. Cost Concepts • Important vocabulary • resources • costs • cost object • direct costs • indirect costs • fixed costs • variable costs • product costs • overhead

3. Costing inventory and sales • Resources = assets • Costs = use or sacrifice of resources • Product costs = manufacturing costs (GAAP) • direct (e.g., DM and DL) • variable or fixed • traceable • indirect (overhead - O/H) • variable • fixed

4. Components of Product Costs • Direct material • Direct labor • Indirect manufacturing costs (O/H) • Cost pool/s • Factory costs • May vary, but not always with units of production

5. Direct vs. Indirect Costs • Cost object: The item we are trying to determine a cost for (product, factory, headquarters, CEO) • A cost can be categorized as direct or indirect only after the cost object has been defined. • A cost that is a direct factory cost may be an indirect product cost.

6. Direct vs. Indirect Costs • Direct costs can be either fixed or variable. • Indirect costs can be either fixed or variable

7. Example: Variable cost/unit = $1 • Fixed costs are budgeted at $100,000 • Production volume = 1 • Production volume = 100,000 Fixed cost behavior Total Cost Fixed mfg.costs = $100,000 Production Volume

8. Fixed manufacturing cost behavior • Example: Fixed manufacturing • costs = $100,000 • Production volume = 1, or • Production volume = 100,000 Unit costs Unit fixed manufacturing costs vary with productionvolume Production Volume

9. Example: Variable cost/unit = $1 • Production volume = 1 • Production volume = 100,000 Variable costs Total cost Total variable costs increase withproduction volume Production volume

10. Example: Variable cost/unit = $1 • Production volume = 1 • Production volume = 100,000 Variable costs Unit cost Unit variable costs do notchange with productionvolume. $1 Production volume

11. Retainer paid to video distributor Electricity costs of the HEC store Cost of videos purchased Subscription to Video Trends Computer leased for HEC store Cost of free popcorn for customers Earthquake insurance for store Freight-in costs of videos D or I V or F D F I F D V D F I F I V I F D V Home Entertainment Center operates a large store in SanFrancisco. The store has both a video section and a musicalsection. HEC reports revenues for the video section separatelyfrom the musical section. Classify direct and indirect and variable and fixed costs with respect to the video section.

12. Other cost concepts • Outlay costs • Opportunity costs • Differential costs • Sunk costs

13. Traditional Overhead Allocation • Budgeted, actual and applied overhead • Budgeted overhead costs = $500,000 • Denominator volume of the cost driver = 500,000 direct labor hours • Predetermined overhead rate = $1 per hour • Actual overhead costs were $495,000

14. Traditional Product Costing • DL = $3 per unit, DM = $2 per unit • Labor costs $3 per hour, 500,000 units are manufactured; 505,000 DL hours are used. • What is a unit of product expected to cost? • How much did the company spend building 500,000 units? • How much would would we expect them to spend building 400,000 units?

15. Traditional Product Costing • How much overhead was applied? • Over- or underapplied overhead = Actual overhead spending - Overhead applied. • By how much was overhead over- or underapplied? • Efficiency variance = 5,000 DL hours x $1 per hour = $5,000 • Budget variance = $500,000 - $495,000

16. Flow of costs through a manufacturer’s accounts: Work in process Materials inv. Finished goods BI Purchases EI BI DMDL O/H EI BI From WIP EI To COGS COGM to FG to WIP Mfg. Overhead Wages Payable Cost of Goods Sold Actual Appliedto WIP BBto WIP EB From FG Paydays

17. Other important concepts • Contribution margin • Gross margin • What is the difference between the two? • Which one would you look at to decide what product to manufacture? • Which one would you expect to see on an income statement?

18. Who uses cost accounting information? • Cost of goods sold, inventories  financial statements. • Bids, product pricing managers • Budgeting, production scheduling managers • Can the same cost system serve both masters? Should it?

19. Tuesday • Cost-Volume-Profit analysis - a simple decision model. • Lecture and demonstration problems • Group exercise that is a little tough. • Cost-Volume-Profit analysis is required for the Prestige Telephone Company case next Thursday.

20. Learning with cases: How do instructors’ and students’ roles differbetween case/experiential and traditional approaches to learning? Name one advantage and one disadvantage to case learning.