ACCT CHAPTER 2

Period costs EXAMPLES:

- Property taxes—30% of building is used for sales, marketing, and administrative offices - Lease payment on administrative headquarters - Telecommunications costs for the customer service call center

Product costs EXAMPLES:

- Property taxes—70% of building is used for manufacturing (Moh) - Depreciation on automated production equipment (moh) - Salaries paid to quality control inspectors in the plant (moh) - Standard packaging materials used to package individual units of product for sale (for example, cereal boxes in which cereal is packaged) (dm)

The Cost of Goods Manufactured (CGM) is calculated as ________.

Beginning Work in Process Inventory + Manufacturing Costs Incurred - Ending Work in Process Inventory

prime costs =

DM + DL

total product costs =

DM + DL + MOH

________ include costs that can be traced to the cost object.

Direct costs

Accounting Treatment Pr vs Period

Expense Immediately

Merchandising firms consider which of the following cost elements as a product cost?

Freight-in Operating expenses, employee salary, and other administrative expenses are example of merchandising firm period costs.

conversion costs =

MOH + DL

The Value Chain

The activities that add value to the company's products and services

Which of the following describes the way in which total fixed costs behave?

They will remain the same throughout production levels within the relevant range.

Average cost =

Total cost ÷ Number of units •Example •Total cost = $70,000,000 (from prev. slide) •Number of units = 10,000 vehicles $70,000,000/ = $7,000 per vehicle 10,000

Total cost =

Total fixed cost + (Variable cost per unit x Number of units) •Example •Fixed costs = $20,000,000 •Variable cost per unit = $5,000 per vehicle •Number of units = 10,000 vehicles $20,000,000 + ($5,000 x 10,000) = $70,000,000

Which is an example of an indirect cost if the cost object is one unit?

Utilities Cost

For a manufacturer, beginning work in process would be equal to

cost of goods manufactured + ending work in process inventory - manufacturing costs incurred in the period.

An example of a relevant cost to a decision would include a ________.

differential cost

Other indirect manufacturing costs include each of the following EXCEPT ________.

direct labor

Conversion costs consist of

direct labor and manufacturing overhead.

•Expense -

expired cost, because once the benefit has been used up, it is said to have expired and must be reported in the Income Statement as an expense.

A factory janitor's wages would be classified as ________ when determining the cost of a manufactured product.

indirect cost

Costs that remain the same among alternatives are

irrelevant costs

A cost is relevant to a decision if ________.

it is a future cash flow and differs between alternatives

report three types of inventory on the balance sheet.

manufacturing

Period costs are also known as ________.

operating costs

________ are always expensed in the period in which they are incurred and NEVER become part of an inventory account.

period

A salesperson's salary would be classified as ________ when determining the cost of a manufactured product.

period cost

Selling, marketing, and administrative costs are examples of ________.

period costs

________ are the costs incurred by manufacturers to produce their products or incurred by merchandisers to purchase their products.

product costs

Operating income ________.

refers to the company's earnings before interest and income taxes

All of the following activities are included in the value chain except

safety

Tom's Televisions is a multi-location retailer of televisions. In a recent meeting, an insightful intern expressed concern that there were a number of older model televisions in the warehouse. As new models are released, Tom's wants to have sold their older inventory. Which one of the following Excel strategies will most helpful in this effort?

sorting

•Price -

the Retail Selling Price of the Product or Service charged to a customer and used to calculate Revenue

A relevant cost in determining whether to take the train to Phoenix or fly to Phoenix would be

the cost of a plane ticket

The method of assigning costs that results in a very precise cost figure, The specific term for attaching a direct cost with a cost object

trace

Examples of Cost

•Assets are a "cost" that have a future benefit - inventory, building, equipment •Labor is a "cost" - direct labor wages, supervisor's salaries, etc. •Advertising is a "cost" that was used up in the current period

•Example: Toyota's cost objects may include:

•Individual units •Different models •Alternative marketing strategies •Geographic business segments •Departments •Sustainability initiatives

Relevant and Irrelevant Costs

•Relevant costs: differential costs, differ between alternatives •Irrelevant costs: do not differ among alternatives •Sunk costs: costs that have already been incurred and cannot be changed

Elements of the Value Chain

•Research and Development (R&D): researching and developing new or improved products services and the processes for producing them •Design: detailed engineering of products and services and the processes for producing them •Production or Purchases: resources used by manufacturers to produce a product or merchandising companies purchasing finished merchandise for resale •Marketing: promotion and advertising of products or services •Distribution: delivery of products or services to customers •Customer Service: support provided for customers after sale

Merchandising Companies

•Resell tangible products bought from manufacturers and suppliers •Ex: Walmart, Amazon, Gap, Best Buy •Retailer - merchandiser that sells to consumer (end users, individuals) •Wholesaler - merchandiser that sells to retailers •Carry substantial amount of inventory

Comparing Balance Sheets

•Service companies have no inventory. •Merchandising companies show Inventory or Merchandise Inventory. •Manufacturing companies show Raw Materials, Work in Process, and Finished Goods Inventory.

Marginal Cost

•The cost of making one more unit. •Fixed costs will not change if one more unit is made, unless the plant is already operating at 100% capacity.

Manufacturing Companies

•Use labor, plant, and equipment to convert raw materials into finished products •Ex: Toyota •Three types of inventory •Raw materials inventory •Work in process inventory •Finished goods inventory

Cost

•a monetary measure of the resources given up to acquire a good or service. A cost represents a current or future benefit (resource or asset) to the firm. •Cost is the amount paid to acquire the resource (asset) and once the benefit is expired, cost used to calculate Expense (Cost of Goods Sold (COGS), Selling, General, and Administrative (SG&A) expenses

Manufacturing Overhead (MOH):

•all manufacturing costs other than DM and DL •Indirect materials, indirect labor, and indirect manufacturing costs

Direct cost

•cost that can be traced to the cost object •Readily associate the cost with the cost object

Indirect cost:

•cost that relates to the cost object but cannot be traced specifically to it •Jointly used among several cost objects

Period costs: (external reporting)

•do not get treated as inventory, immediately expensed •Incurred in other functions of the value chain •"Operating expenses" or "Selling, general, and administrative expenses" •(aka General, Selling & Admin) - Costs that are not product costs. •Expensed immediately on income statement in the period they are incurred. •Examples: Selling costs, administrative costs, etc.

Product costs: (external reporting)

•incurred by manufacturers to produce their products or by merchandisers to purchase their products •Relate to obtaining inventory •(aka Inventoriable Costs) - Costs of production or purchase to obtain inventory and get the goods in the condition and location for sale. •Originally reported as Inventory on balance sheet; once sold, it becomes Cost of Goods Sold (COGS) on income statement.

Manufacturer Pr vs Period

Pr: DM DL MOH Period: All costs except DM, DL, MOH

Merchandiser Pr vs Period

Pr: Net Purchases = Cost of Purchases + Freight In + Sales Tax + Tariffs/Duties + Insurance During transit - Purchase Returns, Discounts, Allowances Period: All costs except Net Purchases

Service Company Pr vs Period

Pr: None Period: all costs on value chain

The order in which the activities take place in the value chain is ________.

R&D, design, production or purchases, marketing, distribution, customer service

Which of the following are merchandising companies?

Both retailers and wholesalers

Merchandising firms consider which of the following cost elements as a period cost?

Merchandising firms consider the cost of leasing the retail locations as a period cost. The cost of merchandise purchased for resale, cost of import duties paid on merchandise purchased from overseas suppliers, and cost of shipping merchandise to the store include examples of period costs at a manufacturing firm.

The specific term for attaching an indirect cost with a cost object, The method of assigning costs that results in a less precise cost figure

allocate

Variable costs

are fixed per unit and vary in total as production levels change.