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Lecture Note - Cost Concept
Lecture Note - Cost Concept
Cost Concepts
Chapter 2
Learning Objective 1
2
2-2
Manufacturing Costs
The Product
Direct Materials
Direct Labor
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2-3
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.
Nonmanufacturing Costs
Selling Administrative
Costs Costs
Learning Objective 2
Understand cost
classifications used to
prepare financial
statements: product costs
and period costs.
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2-4
Sale
Quick Check
10
Classifications of Costs
Prime Conversion
Cost Cost
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2-5
MegaLoMart
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Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Merchandise Inventory Inventories
• Raw Materials
• Work in Process
• Finished Goods
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Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Materials waiting to
Receivables Receivables
be processed.
Merchandise Inventory Inventories
Partially complete
products—some • Raw Materials
material, labor, or • Work in Process
overhead has been • Finished Goods
added.
Completed products
awaiting sale.
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2-6
Learning Objective 3
Prepare an income
statement including
calculation of the cost of
goods sold.
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16
Withdrawals
Beginning Additions Ending
balance + to inventory = balance + from
inventory
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2-7
Quick Check
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Learning Objective 4
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2-8
Manufacturing Work
Raw Materials Costs In Process
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Manufacturing Work
Raw Materials Costs In Process
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs are costs
+ Raw materials + Mfg. overhead incurred to
purchased = Total manufacturing convert the
= Raw materials costs
direct material
available for use
in production into a finished
– Ending raw materials product.
inventory
= Raw materials used
in production
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Manufacturing Work
Raw Materials Costs In Process
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2-9
Manufacturing Work
Raw Materials Costs In Process
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Work
In Process Finished Goods
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2-10
Quick Check
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Quick Check
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Quick Check
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2-11
Quick Check
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Learning Objective 5
Understand cost
classifications used to
predict cost behavior:
variable costs and fixed
costs.
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2-12
Number of autos
produced in a month
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Number of autos
produced in a month
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 34
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2-13
Number of autos
produced in a month
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 36
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Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
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Quick Check
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2-14
Learning Objective 6
Understand cost
classifications used for
assigning costs to cost
objects: direct and indirect
costs.
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40
Learning Objective 7
Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.
41
2-15
42
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Opportunity Cost
The potential benefit that is given
up when one alternative is selected
over another.
44
2-16
Sunk Costs
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Quick Check
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Quick Check
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2-17
Quick Check
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Appendix 2A
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2-18
Learning Objective 8
(Appendix 2A)
Properly account for labor
costs associated with idle
time, overtime, and fringe
benefits.
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Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
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Overtime
The overtime premiums for all factory workers are
usually considered to be part of manufacturing
overhead.
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2-19
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Cost of Quality
Appendix 2B
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Learning Objective 9
(Appendix 2B)
Identify the four types of
quality costs and explain
how they interact.
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2-20
Quality of Conformance
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Incurred to identify
defective products
Appraisal Costs before the products are
shipped to customers
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Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
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2-21
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Learning Objective 10
(Appendix 2B)
Prepare and interpret a
quality cost report.
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2-22
Appraisal costs:
Inspection 600,000 1.20% 560,000 1.12%
Quality cost
Reliability testing
Supervision of testing and inspection
580,000
120,000
1.16%
0.24%
420,000
80,000
0.84%
0.16%
reports provide
Depreciation of test equipment 200,000 0.40% 140,000 0.28% an estimate of
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
the financial
Internal failure costs:
Net cost of scrap 900,000 1.80% 750,000 1.50% consequences
Rework labor and overhead 1,430,000 2.86% 810,000 1.62%
Downtime due to defects in quality 170,000 0.34% 100,000 0.20% of the
Disposal of defective products
Total internal failure cost
500,000
3,000,000
1.00%
6.00%
340,000
2,000,000
0.68%
4.00% company’s
External failure costs:
current defect
Warranty repairs
Warranty replacements
400,000
870,000
0.80%
1.74%
900,000
2,300,000
1.80%
4.60%
rate.
Allowances 130,000 0.26% 630,000 1.26%
Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30%
Total quality cost $ 7,500,000 15.00% $ 9,000,000 18.00%
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9
Quality 18
Quality Cost as a Percentage of Sales
8
reports 16
Quality Cost (in millions)
7
External External
can also 14
External External
6 Failure Failure be 12 Failure Failure
5 prepared 10
4 Internal
Failure
in 8 Internal
Failure
3 Internal
Failure
graphic 6 Internal
Failure
2
Appraisal form. 4
Appraisal
Appraisal Appraisal
1 2
Prevention Prevention Prevention Prevention
0 0
1 2 1 2
Year Year
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2-23
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End of Chapter 2
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