Chapter 1 Accounting

answers

(x,y) = x=miles driven y= total cost

Budget

A budget is a detailed plan for the future that is usually expressed in formal quantitative terms. As you can see, there are many questions that need to be answered as part of the planning process. Plans are often accompanied by a budget. As the head of recruiting at P&G, your budget would include two key components. First, you would have to work with other senior managers inside the company to establish a budgeted amount of total salaries that can be offered to all new hires. Second, you would have to create a budget that quantifies how much you intend to spend on your campus recruiting activities.

Problem 5A-7

By analyzing the data from the company's income statements, classify each of its expenses (including cost of goods sold) as either variable, fixed, or mixed. Using the high-low method, separate each mixed expense into variable and fixed elements. Express the variable and fixed portions of each mixed expense in the form Y = a + bX. Redo the company's income statement at the 5,000-unit level of activity using the contribution format.

PROBLEM 1-19 Traditional and Contribution Format Income Statements 4. variable cots per unit = total variable cost = COGS plus variable cost admin and selling = 240k /1k = 240

Contribution sales - COGS - variable selling expense - x ( variable administrative expense) = 60k contribution margin x= 12,000 60 - fixed selling expense (x) - fixed admin expense (12,000_ = 18000 x= 30,000 slling price per unit 300k/1k =300 variable cots per unit = total variable cost = COGS plus variable cost admin and selling = 240k /1k = 240 contribution margin per unit = 300-240 = 60

The Linearity Assumption and the Relevant Range

Management accountants ordinarily assume that costs are strictly linear; that is, the relation between cost on the one hand and activity on the other can be represented by a straight line within a narrow band of activity known as the relevant range. The relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.3

EXERCISE 1-6 Traditional and Contribution Format Income Statements LO1-6

Traditional: COGS= Beg + Purchases - Ending Inventory Selling Expenses (including variable) Administrative expenses (including variable) Contribution Format: Variable expenses: COGS+ beg + purchases - ending inventory selling variable administrative variable contribution margin fixed selling fixed administrative

Problem 5A-9 High-Low Method; Contribution Format Income Statement

Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX. In the first quarter of Year 3, the company plans to sell 12,000 units at a selling price of $100 per unit. Prepare a contribution format income statement for the quarter.

Controlling

When answering these questions your goal would be to go beyond simple yes or no answers in search of the underlying reasons why performance exceeded or failed to meet expectations. Part of the control process includes preparing performance reports. A performance report compares budgeted data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performance. Performance reports can also be used as one of many inputs to help evaluate and reward employees

EXERCISE 1-3 Classifying Costs as Product or Period Costs LO1-3 Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its growth. The bank requires financial statements before approving the loan.

answered already materials for shipping that are exception: period costs cost of packaging: product cots

PROBLEM 1-23 Cost Classification LO1-1, LO1-3, LO1-4

anything with finished good warehouse = period cost

answers

differential cost = cost difference between alternatives sunk cost= old machine

PROBLEM 1-18 Direct and Indirect Costs; Variable Costs LO1-1, LO1-4

direct costs of apparel department cost of sales + apparel manager's salary , plus commission direct costs evendale store = store manager + store utilities , janitorial costs, cost of sales, sales commission, apparel manager , commission apparel variable costs = commissions, cost of sales

1-17 answers

shipping : variable and period

1-14

shipping= variable cost and period cost depreciation: product , overhead, sunk cost, fixed

answers

1. to find maintenance cost only of July at 90k production use high to low method utilities (variable) find the ratio from 60k (48k / 60k) = 0.8 times 90k production + supervisor salaries (fixed) +maintenance (x)= 246k maintenance cost for 90k production is 153k 2. cost formula for maintenance = change in total cost of 60k and 90k production / change in machine hours for 60k and 90k production slope= 1.60 fixed cost= 9000

EXERCISE 1-13 Variable and Fixed Cost Behavior fixed cost doesn't change regardless of activity level number 8 !!

1. true variable expense per unit will remain the same 2. false the fixed cost will increase 3. true the total manufacturing cost will be greater 4. true 5. false 6. false 7. true 70 times 0.4 = 28 8. false total manufacturing cost doesn't change don't use 10050 but the original 10k for fixed 9. true 10. average fixed cost per unit = 42 times 10k / 10,050 = 41.79 11. false total variable cost = 28 * 10, 050 = 281,400 12. total manufacturing cost per unit = 42 times 10k plus 28(10,050)= 701400/ 10050 = 69.79

a7

1st step find mixed costs 2nd to high-low on each mixed cost aka shipping and commissions to find slope equation for each 34d. contribution statement variable expenses use slope only for mixed costs and fixed part used the y intercept as a fixed cost

Fixed Cost

A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, property taxes, rent, and supervisory salaries. Similarly, selling and administrative costs often include fixed costs such as administrative salaries, advertising, and depreciation of nonmanufacturing assets. Unlike variable costs, fixed costs are not affected by changes in activity. Consequently, as the activity level rises and falls, total fixed costs remain constant unless influenced by some outside force, such as a landlord increasing your monthly rent can change but not related to activity For planning purposes, fixed costs can be viewed as either committed or discretionary. Committed fixed costs represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Examples include investments in facilities and equipment, as well as real estate taxes, insurance premiums, and salaries of top management. Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized. Discretionary fixed costs (often referred to as managed fixed costs) usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary fixed costs include advertising, research, public relations, management development programs, and internships for students. Discretionary fixed costs can be cut for short periods of time with minimal damage to the long-run goals of the organization Committed: Long term, cannot be significantly reduced in the short term, ex: depreciation on buildings and equipment and real estate taxes Discretionary: may be altered in the short term bu current managerial decisions : ex: advertising and research and development aka you can choose to spend them

Mixed Costs

A mixed cost contains both variable and fixed cost elements. Mixed costs are also known as semivariable costs. To continue the Nooksack Expeditions example, the company incurs a mixed cost called fees paid to the state. It includes a license fee of $25,000 per year plus $3 per rafting party paid to the state's Department of Natural Resources. If the company runs 1,000 rafting parties this year, then the total fees paid to the state would be $28,000, made up of $25,000 in fixed cost plus $3,000 in variable cost. Exhibit 1-6 depicts the behavior of this mixed cost. no activity= cost still variable and fixed part

Variable Costs

A variable cost varies, in total, in direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.2'' For a cost to be variable, it must be variable with respect to something. That "something" is its activity base. An activity base is a measure of whatever causes the incurrence of a variable cost. An activity base is sometimes referred to as a cost driver. Some of the most common activity bases are direct labor-hours, machine-hours, units produced, and units sold. as activity doubles = cost doubles, lo activity= no cost constant rate proportional

Planning , controlling, and decisionmaking: planning

As mentioned in Exhibit P-1, managerial accounting helps managers perform three vital activities—planning, controlling, and decision making Assume that you work for Procter & Gamble (P&G) and that you are in charge of the company's campus recruiting for all undergraduate business majors. In this example, your planning process would begin by establishing a goal such as: our goal is to recruit the "best and brightest" college graduates. The next stage of the planning process would require specifying how to achieve this goal by answering numerous questions such as: How many students do we need to hire in total and from each major?

EXERCISE 1-7 Direct and Indirect Costs LO1-1

Assume the cost object is units of production: 1a What is the total direct manufacturing cost incurred to make 20,000 units? Total direct manufacturing cost= direct labor + direct materials 1b What is the total indirect manufacturing cost incurred to make 20,000 units? Indirect manufacturing cost variable manufacturing cost fixed manufacturing cost average fixed manufacturing only applicable to production of 20k units Assume the cost object is the Manufacturing Department and that its total output is 20,000 units. 2a How much total manufacturing cost is directly traceable to the Manufacturing Department? direct materials/labor, fixed/variable overhead costs 2bHow much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department? nothing is an indirect cost to the manufacturing department Assume the cost object is the company's various sales representatives. Furthermore, assume that the company spent $50,000 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company's sales representatives' compensation. 3aWhen the company sells 20,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives? step 1: total direct selling cost : variable selling cost times 20k = 70k - 50k from advertisement = 20k fixed selling cost to sales representatives $1 commission times 20k plus fixed 20k = 40k 3b When the company sells 20,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives? indirect= 50k advertisement cannot be easily traced 4 Are Kubin's administrative expenses always going to be treated as indirect costs in its internal management reports? could be direct/indirect depending on cost object

EXERCISE 1-11 Cost Behavior; Contribution Format Income Statement fixed cost per unit changes as activity goes up or down no COGS aspect because variable cost and fixed cost are given

Complete the above schedule of the company's total costs and costs per unit. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year. total fixed cost same for all quantities of production same with variable cost per unit so to find 40k production, 6 times 40k = total variable cost = 240k plus 300k fixed (constant) = 540k fixed cost per unit = 300k / 40k = 7.5 total fixed cost reduced when q goes up

Using Different Cost Classifications for Different Purposes

Contrasting these two types of income statements enables us to illustrate the chapter's unifying theme of different cost classifications for different purposes. Traditional income statements are prepared primarily for external reporting purposes. They rely on cost classifications for preparing financial statements (product and period costs) to depict the financial consequences of past transactions. Contribution format income statements are prepared for internal management purposes. They use cost classifications for predicting costs behavior (variable and fixed costs) to better inform decisions affecting the future.

Managerial Accounting

Conversely, managerial accounting is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions. In these contexts, costs are classified in diverse ways that enable managers to predict future costs, to compare actual costs to budgeted costs, to assign costs to segments of the business (such as product lines, geographic regions, and distribution channels), and to properly contrast the costs associated with competing alternatives.

Cost Classifications for Predicting Cost Behavior

Cost behavior refers to how a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant. For planning purposes, a manager must be able to anticipate which of these will happen; and if a cost can be expected to change, the manager must be able to estimate how much it will change. To help make such distinctions, costs are often categorized as variable, fixed, or mixed. The relative proportion of each type of cost in an organization is known as its cost structure.

Cost Classifications for Assigning Costs to Cost Objects

Costs are assigned to cost objects for a variety of purposes including pricing, preparing profitability studies, and controlling spending. A cost object is anything for which cost data are desired—including products, customers, plants, office locations, and departments. For purposes of assigning costs to cost objects, costs are classified as either direct or indirect. Direct Costs: A direct costPage 28 is a cost that can be easily and conveniently traced to a specified cost object. For example, if Adidas is assigning costs to its various regional and national sales offices, then the salary of the sales manager in its Tokyo office would be a direct cost of that office. If a printing company made 10,000 brochures for a specific customer, then the cost of the paper used to make the brochures would be a direct cost of that customer. Indirect Costs: An indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object. For example, a Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager's salary would be an indirect cost of a particular variety, such as chicken noodle soup. The reason is that the factory manager's salary is incurred as a consequence of running the entire factory—it is not incurred to produce any one soup variety. To be traced to a cost object such as a particular product, the cost must be caused by the cost object. The factory manager's salary is called a common cost of producing the various products of the factory. A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost. A particular cost may be direct or indirect, depending on the cost object. While the Campbell Soup factory manager's salary is an indirect cost of manufacturing chicken noodle soup, it is a direct cost of the manufacturing department. In the first case, the cost object is chicken noodle soup. In the second case, the cost object is the entire manufacturing department.

Cost Classifications for Decision Making

Every decision involves choosing from among at least two alternatives. The key to choosing among alternatives is distinguishing between relevant and irrelevant costs and benefits. Relevant costs and relevant benefits should be considered when making decisions. Irrelevant costs and irrelevant benefits should be ignored when making decisions. The remainder of this section expands on these concepts by defining the terms differential cost and revenue, incremental cost, opportunity cost, and sunk cost.

EXERCISE 1-1 Identifying Direct and Indirect Costs

For each cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object by placing an X in the appropriate column. Part 1 Wages paid to pediatric nurses relating to pediatric department are direct cost. Part 2 Prescription drugs for a particular patient are direct costs. Part 3 The cost of heating the hospital for the pediatric patient is an indirect cost. Part 4 The salary of the head of pediatrics relating to pediatric patient is a direct cost. Part 5 The salary of the head of pediatrics relating to a particular pediatric patient is an indirect cost. Part 6 Hospital chaplain's salary relating to particular patient is an indirect cost. Part 7 Lab tests by outside contractor relating to a particular patient is a direct cost. Part 8 Lab tests by outside contractor relating to a particular department is a direct cost.Part 1 Wages paid to pediatric nurses relating to pediatric department are direct cost.

EXERCISE 1-2 Classifying Manufacturing Costs LO1-2 The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.

For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost. The cost of a hard drive installed in a computer. The cost of advertising in the Puget Sound Computer User newspaper. The wages of employees who assemble computers from components. Sales commissions paid to the company's salespeople. The salary of the assembly shop's supervisor. The salary of the company's accountant. Depreciation on equipment used to test assembled computers before release to customers. Rent on the facility in the industrial park.

Product Costs

For financial accounting purposes, product costs include all costs involved in acquiring or making a product. Product costs "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale. When units of product are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement. Because product costs are initially assigned to inventories, they are also known as inventoriable costs. For manufacturing companies, product costs include direct materials, direct labor, and manufacturing overhead.1 A manufacturer's product costs flow through three inventory accounts on the balance sheet—Raw Materials, Work in Process, and Finished Goods—prior to being recorded in cost of goods sold on the income statement. Raw materials include any materials that go into the final product. Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Finished goods consist of completed units of product that have not yet been sold to customers. When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold. We want to emphasize that product costs are not necessarily recorded as expenses on the income statement in the period in which they are incurred. Rather, as explained above, they are recorded as expenses in the period in which the related products are sold.

EXERCISE 1-8 Product Costs and Period Costs; Variable and Fixed Costs LO1-3, LO1-4 use 100k for fixed overhead - same as 20k production but variable cost changes all because it's in the range

For financial accounting purposes, what is the total amount of product costs incurred to make 20,000 units? Total product cost: direct labor/materials + variable overhead + fixed overhead cost (only cause 20k being produced) For financial accounting purposes, what is the total amount of period costs incurred to sell 20,000 units? period cost= commissions, variable administrative expense, + fixed administrative + fixed selling (only cause 20k being produced) For financial accounting purposes, what is the total amount of product costs incurred to make 22,000 units? use 100k for fixed overhead - same as 20k production but variable cost changes For financial accounting purposes, what is the total amount of period costs incurred to sell 18,000 units? use 120k fixed selling- same as 20k production but variable cost changes

EXERCISE 1-9 Fixed, Variable, and Mixed Costs fixed costs don't change if activity level is in supported range

If 18,000 units are produced and sold, what is the variable cost per unit produced and sold? direct materials/labor plus variable manufacturing overhead, + variable administrative + commission = 14 If 22,000 units are produced and sold, what is the variable cost per unit produced and sold? = same thing as above If 18,000 units are produced and sold, what is the total amount of variable cost related to the units produced and sold? 14 times 18,000 If 22,000 units are produced and sold, what is the total amount of variable cost related to the units produced and sold? 14 times 22,000 If 18,000 units are produced, what is the average fixed manufacturing cost per unit produced? 100k (same fixed cost as 20k production) / 18k If 22,000 units are produced, what is the average fixed manufacturing cost per unit produced? 100k / 22k If 18,000 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production? 100k(remains unchanged) If 22,000 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production? 100k (remains unchanged)

Differential Cost and Revenue

In business decisions, each alternative will have costs and benefits that must be compared to the costs and benefits of other available alternatives. A future cost that differs between any two alternatives is known as a differential cost. Differential costs are always relevant costs. Future revenue that differs between any two alternatives is known as differential revenue. Differential revenue is an example of a relevant benefit. Any future cost or benefit that does not differ between the alternatives is irrelevant and should be ignored. A differential cost is also known as an incremental cost. Although technically an incremental cost should refer only to an increase in cost from one alternative to another, whereas decreases in cost should be referred to as decremental costs. Differential cost is a broader term, encompassing both cost increases (incremental costs) and cost decreases (decremental costs) between alternatives The accountant's differential cost concept can be compared to the economist's marginal cost concept. In speaking of changes in cost and revenue, the economist uses the terms marginal cost and marginal revenue. The revenue that can be obtained from selling one more unit of product is called marginal revenue, and the cost involved in producing one more unit of product is called marginal cost. The economist's marginal concept is basically the same as the accountant's differential concept applied to a single unit of output. Differential costs can be either fixed or variable. To illustrate, assume that Natural Cosmetics, Inc., is thinking about changing its marketing method from distribution through retailers to distribution by a network of neighborhood sales representatives. Present costs and revenues are compared to projected costs and revenues in the following table:

Summary

In total: Total variable cost increases and decreases in proportion to changes in the activity level. Total fixed cost is not affected by changes in the activity level within the relevant range Per Unit Variable cost per unit remains constant. Average fixed cost per unit decreases as the activity level rises and increases as the activity level falls.

Differences between financial and managerial

It recognizes that the fundamental difference between financial and managerial accounting is that financial accounting serves the needs of those outside the organization, whereas managerial accounting serves the needs of managers employed inside the organization. Because of this fundamental difference in users, financial accounting emphasizes the financial consequences of past activities, objectivity and verifiability, precision, and companywide performance, whereas managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance. A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data. Examples of business segments include product lines, customer groups (segmented by age, ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and departments. Finally, financial accounting is mandatory for external reports and it needs to comply with rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), whereas managerial accounting is not mandatory and it does not need to comply with externally imposed rules.

Manufacturing Overhead

Manufacturing overhead, the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. From a product costing standpoint, manufacturing overhead costs are indirect costs because they cannot be readily traced to specific products. For example, manufacturing overhead includes a portion of raw materials known as indirect materials as well as indirect labor. Indirect materials are raw materials, such as the solder used to make electrical connections in a Toshiba HDTV and the glue used to assemble an Ethan Allen chair, whose costs cannot be easily or conveniently traced to finished products. Indirect labor refers to employees, such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product. Since indirect materials and indirect labor are difficult to trace to specific products, their costs are included in manufacturing overhead. Rent, utilities, indirect materials (materials used to support the production process. cleaning supplies), indirect labor (wages paid to employees who are not directly involved in production work, managers, not directly involved with production

Nonmanufacturing Costs

Nonmanufacturing costs are often divided into two categories: (1) selling costs and (2) administrative costs. Selling costs include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. Selling costs can be either direct or indirect costs. For example, the cost of an advertising campaign dedicated to one specific product is a direct cost of that product, whereas the salary of a marketing manager who oversees numerous products is an indirect cost with respect to individual products Administrative costs include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, legal counsel, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Administrative costs can be either direct or indirect costs. For example, the salary of an accounting manager in charge of accounts receivable collections in the East region is a direct cost of that region, whereas the salary of a chief financial officer who oversees all of a company's regions is an indirect cost with respect to individual regions.

Opportunity Cost and Sunk Cost

Opportunity cost is the potential benefit that is given up when one alternative is selected over another. For example, assume that you have a part-time job while attending college that pays $200 per week. If you spend one week at the beach during spring break without pay, then the $200 in lost wages would be an opportunity cost of taking the week off to be at the beach. Opportunity costs are not usually found in accounting records, but they are relevant costs that must be explicitly considered in every decision a manager makes. Virtually every alternative involves an opportunity cost. A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because sunk costs cannot be changed by any decision, they are not differential costs. And because only differential costs are relevant in a decision, sunk costs are irrelevant costs that should always be ignored.

Period Costs

Period costs are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs. Period costs are not included as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting. Keep in mind that the period in which a cost is incurred is not necessarily the period in which cash changes hands. For example, as discussed earlier, the cost of liability insurance is spread across the periods that benefit from the insurance—regardless of the period in which the insurance premium is paid.

Summary

Product costs go on inventory (balance sheet) and when sale occurs transferred to cost of goods sold (income statement) period costs are expensed on the income statement Q1:1. Depreciation on salespersons' cars. Period costs 2. Rent on equipment used in the factory. Product costs 3. Lubricants used for machine maintenance.Product costs 4. Salaries of personnel who work in the finished goods warehouse. Product costs 5. Soap and paper towels used by factory workers at the end of a shift. Product costs 6. Factory supervisors' salaries. Product costs 7. Heat, water, and power consumed in the factory. Product costs 8. Materials used for boxing products for shipment overseas. (Units are not normallyboxed.) Period costs 9. Advertising costs. Period costs 10. Workers' compensation insurance for factory employees. Product costs 11. Depreciation on chairs and tables in the factory lunchroom. Product costs 12. The wages of the receptionist in the administrative offices. Period costs 13. The cost of leasing the corporate jet used by the company's executives. Periodcosts 14. The cost of renting rooms at a Genting Holiday resort for the annual salesconference. Period costs 15. the cost of packaging the company's product Product Cost

EXERCISE 1-12 Product and Period Cost Flows

Raw Materials= 0 (beg) + 8000 (purchases) - withdrawn(7600) = ending balance = 400 * 80 (cost of battery) = 32000 we don't subtract ending balance, cause we're not trying to determine how many used but what's left in the account Work in process: 7500 - 7500 times 0.9 (batteries finished) = 750 * 80 = 60k Finished Goods: 7500 times 0.9 times 0.3 = 2025 * 80 = 162,000 Cost of Goods sold 7500 times 0.9 times 0.7 = 4725 times *80 = 378,000 Selling Expense: 100 (batteries used by salespeople) times 80 = 8000 COGS plus selling expense= income statement

Traditional Format

The cost of goods sold reports the product costs attached to the merchandise sold during the period. The selling and administrative expenses report all period costs that have been expensed as incurred. The cost of goods sold for a merchandising company can be computed directly by multiplying the number of units sold by their unit cost or indirectly using the equation below: COGS= Beg + Purchases - ending inventory Although the traditional income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes. It does not distinguish between fixed and variable costs. For example, under the heading "Selling and administrative expenses," both variable administrative costs ($400) and fixed administrative costs ($1,500) are lumped together ($1,900). Internally, managers need cost data organized by cost behavior to aid in planning, controlling, and decision making. The contribution format income statement has been developed in response to these needs.

The Contribution Format Income Statement

The crucial distinction between fixed and variable costs is at the heart of the contribution approach to constructing income statements. The unique thing about the contribution approach is that it provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making. The contribution approach separates costs into fixed and variable categories, first deducting all variable expenses from sales to obtain the contribution margin. For a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the contribution format income statement. The contribution margin is the amount remaining from sales revenues after all variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period. The contribution margin can also be stated on a per unit basis. For example, if the company depicted in Exhibit 1-7 sold 500 units, then its contribution margin per unit would be $10 per unit (= $5,000 ÷ 500 u

Cost Classifications for Manufacturing Companies

The materials that go into the final product are called raw materials. This term is somewhat misleading because it seems to imply unprocessed natural resources like wood pulp or iron ore. Actually, raw materials refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company Direct materials refers to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. This would include, for example, the seats that Airbus purchases from subcontractors to install in its commercial aircraft, the electronic components that Samsung uses in its cell phones, and the doors that Whirlpool installs on its refrigerators Direct Labor: Direct labor consists of labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made. Examples of direct labor include assembly-line workers at Toyota, carpenters at the home builder KB Home, and electricians who install equipment on aircraft at Bombardier Learjet. Managers occasionally refer to their two direct manufacturing cost categories as prime costs. Prime cost is the sum of direct materials cost and direct labor cost.

EXERCISE 1-10 Differential Costs and Sunk Costs LO1-5

What is the incremental manufacturing cost incurred if the company increases production from 20,000 to 20,001 units? direct labor plus materials plus variable overhead= 12.50 What is the incremental cost incurred if the company increases production and sales from 20,000 to 20,001 units? same as above but add commissions and variable administrative Assume that Kubin Company produced 20,000 units and expects to sell 19,800 of them. If a new customer unexpectedly emerges and expresses interest in buying the 200 extra units that have been produced by the company and that would otherwise remain unsold, what is the incremental manufacturing cost per unit incurred to sell these units to the customer? incremental cost is 0 cause its a sunk cost cause it already produced them 4. Assume that Kubin Company produced 20,000 units and expects to sell 19,800 of them. If a new customer unexpectedly emerges and expresses interest in buying the 200 extra units that have been produced by the company and that would otherwise remain unsold, what incremental selling and administrative cost per unit is incurred to sell these units to the customer? 1.50 variable cost this one counts because seperate from manufacturing

Cost Classifications for Preparing Financial Statements

When preparing a balance sheet and an income statement, companies need to classify their costs as product costs or period costs. Generally, costs are recognized as expenses on the income statement in the period that benefits from the cost. For example, if a company pays for liability insurance in advance for two years, the entire amount is not considered an expense of the year in which the payment is made. Instead, one-half of the cost would be recognized as an expense each year. The reason is that both years—not just the first year—benefit from the insurance payment. The unexpensed portion of the insurance payment is carried on the balance sheet as an asset called prepaid insurance.

Anwers

contribution = 45 k times 16 - variable expenses = 45k times 6 = contribution margin - fixed costs= 300k =net operating income no COGS aspect because variable cost and fixed cost are given

PROBLEM 1-22 Cost Terminology; Contribution Format Income Statement

conversion cost = direct labor plus manufacturing overhead prime costs= direct labor plus direct materials total manufacturing cosrt + direct labor/materials plus overhead variable sales and admin = sales comission, total variable cost= comission plus direct labor/materials total fixed cost= total selling/admin- comission plus fixed overhead contribution margin= sales= total variable costs

Financial Accounting

financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. In this context, costs are classified in accordance with externally imposed rules to enable the preparation of financial statements.

PROBLEM 1-24 Different Cost Classifications for Different Purposes

total product cost = direct materials/labor + variable/ fixed overhead total period total admin + total selling total direct manufacturing= direct labor/materials total indirect: total overhead total conversion: total labor + overhead prime= total labor/materials total variable cost= does not include fixed but variable selling and admin