Managerial Accounting: Class 3

What is an incremental cost?

An incremental cost is the increase in cost that would be incurred by switching from one alternative to another.

(E3.2) 1. Your friend Dilly is concerned about the childhood obesity epidemic, so she decides to start an ice cream shop. She sells ice cream to people, but only after they sign a waiver pledging not to eat nothing but pickles the rest of the day. For Dilly's shop, the cost of ice cream is probably a: a. Variable cost b. Fixed cost

a. Variable cost

(E3.2) 2. For a company that sells advertising, the cost of sales commissions paid to the sales force is likely to be a: a. Variable cost b. Fixed cost c. Product cost

a. Variable cost

(E3.2) 8. The cost of bicycle maintenance for a food delivery company that uses bicycles is likely to be a: a. Variable cost b. Fixed cost c. Product cost

a. Variable cost

(E3.2) 3. You decide to start your own consulting firm and rent a space at a startup incubator for $600/month. For your company, the cost of rent is a: a. Variable cost b. Fixed cost c. Product cost

b. Fixed cost

(E3.2) 6. For a large retailer, the number hours that employees spend performing customer service activities is a function of the number of customer complaints. The number of customer complaints is therefore a _____________ with respect to the cost of customer service. a. Marginal cost b. Variable cost c. Cost driver

c. Cost driver

(E3.2) 7. A purchasing manager at a university is deciding whether to purchase organic apples or non-organic apples for its staff. The manager currently purchases non-organic apples for $1.50/pound. The cost of organic apples is $4/pound. If the manager were to switch to buying organic apples: a. There would be a decremental cost of $2.50/pound b. There would be a decremental cost of $4.00/pound c. There would be an incremental cost of $2.50/pound d. Your professor would be invigorated by the new apples and accounting class would actually become exciting

c. There would be an incremental cost of $2.50/pound

(E3.1) Questions 1 through 4 pertain to Chameleon, a company that manufactures ties which change their design when you push a tiny button on the underside of the tie. Use the financial data below to answer each question. (Assume all Raw Materials are Direct Materials.) Raw Materials Inventory(bb) = 50 Raw Materials Inventory(eb) = 300 Work in Progress Inventory(bb) = 100 Work in Progress Inventory(eb) = 200 Finished Goods(bb) = 400 Finished Goods (eb) = 650 Raw Materials purchased = 2,500 Direct Labor costs = 3,000 Manufacturing Overhead costs = 1,500 1) What is the cost of Raw Materials used during the period? 2) What is the Total Manufacturing Cost for the period? 3) What is the Cost of Goods Manufactured for the period? 4) What is the Cost of Goods Sold for the period?

1) Raw Materials Used = Raw Materials Inventory(bb) + Raw Materials purchased - Raw Materials Inventory(eb) = 50 + 2,500 - 300 = 2,250 2) Total Manufacturing Cost = Raw Materials Used + Direct Labor + Manufacturing Overhead = 2,250 + 3,000 + 1,5000 = 6,750 3) Cost of Goods Manufactured = Total Manufactured Cost + WIP Inventory(bb) - WIP Inventory(eb) = 6,750 + 100 - 200 = 6,650 4) Cost of Goods Sold = Finished Goods Inventory(bb) + Cost of Goods Manufactured - Finished Goods Inventory(eb) = 400 + 6,650 - 650 = 6,400

(Example: Food Pedaler) 1) What are some fixed costs? 2) What are some variable costs? 3) What are some cost drivers?

1) Rent, administrative salaries, business licensing costs, accounting fees, web hosting, computers/tech, bicycles 2) Food Pedaler wages (to some extent, fixed); maintenance (bikes, tech); utilities; advertising 3) # of orders; # of customers; # of restaurant partners

(E3.1) Questions 5 through 8 pertain to Bieber Blankets, a company that manufactures blankets from locks of Justin Bieber's hair. Use the financial data below to answer each question. (Assume all Raw Materials are Direct Materials). Raw Materials Inventory(bb) = 750 Raw Materials Inventory(eb) = 1,000 Work in Progress Inventory(bb) = 500 Work in Progress Inventory(eb) = 1,700 Finished Goods(bb) = 2,400 Finished Goods (eb) = 0 Raw Materials purchased = 5,000 Direct Labor costs = 2,000 Manufacturing Overhead costs = 3,000 5) What is the cost of Raw Materials used during the period? 6) What is the Total Manufacturing Cost for the period? 7) What is the Cost of Goods Manufactured for the period? 8) What is the Cost of Goods Sold for the period?

5) Raw Materials Used = Raw Materials Inventory(bb) + Raw Materials purchased - Raw Materials Inventory(eb) = 750 + 5,000 - 1,000 = 4,750 6) Total Manufacturing Cost = Raw Materials Used + Direct Labor + Manufacturing Overhead = 4,750 + 2,000 + 3,000 = 9,750 7) Cost of Goods Manufactured = Total Manufacturing Cost + WIP Inventory(bb) - WIP Inventory(eb) = 9,750 + 500 - 1,700 = 8,550 8) Cost of Goods Sold = Finished Goods Inventory(bb) + Cost of Goods Manufactured - Finished Goods Inventory(eb) = 2,400 + 8,550 + 0 = 10,950

What is a cost driver?

A cost driver is an activity that causes a cost to be incurred. For example, the number of orders drives labor costs at Amazon. When Amazon receives more orders for the holidays, Amazon hires more pickers for its warehouses (more orders lead to more warehouse picks, which requires more pickers).

What is a decremental cost?

A decremental cost is the decrease in cost that would be incurred by switching from one alternative to another.

What is relevant range?

Relevant range is the band of normal activity level or volume and the cost in question. A fixed cost is fixed only for a given range of activity levels and for a specific time span.

COGM = ?

COGM = TMC + WIP(bb) - WIP(eb) - WIP(bb) = the beginning balance of WIP Inventory - WIP(eb) = the ending balance of WIP Inventory - TMC = the total manufacturing cost

What is Cost of Goods Manufactured (COGM)?

COGM is the total manufacturing cost of goods that were finished during the period.

(E3.2) 9. Some costs that are fixed may actually change their behavior outside the relevant range. a. True b. False

a. True

COGS = ? - COGS = Cost of Goods Sold

COGS = FG(bb) + COGM - FG(eb) - FG(bb) = the beginning balance of Finished Goods Inventory - FG(eb) is the ending balance of Finished Goods Inventory - COGM = the Cost of Goods Manufactured

What is a differential cost?

Differential cost is a difference in cost between any two alternatives.

Direct Material Used = ?

Direct Material Used = Raw Materials Inventory(bb) + Raw Materials purchased - Raw Materials Inventory(eb)

(Example: UPS) Given the nature of UPS's operations, what might be a significant variable cost?

Fuel Also, during the holidays UPS might hire more people or give overtime to existing employees, so some of the labor cost is variable. If the number of packages delivered decreases from 4.9 billion to 3 billion, the total cost of fuel would decrease significantly.

(Example) The data below pertain to Tumbleweed's operations over the past year: Raw Materials Inventory(bb) = 100 Raw Materials Inventory(eb) = 150 Work in Progress Inventory(bb) = 400 Work in Progress Inventory(eb) = 250 Finished Goods(bb) = 200 Finished Goods (eb) = 300 Raw Materials purchased = 700 Direct Labor costs = 750 Manufacturing Overhead costs = 900 What is Tumbleweed's COGS?

Step 1) Calculate the amount of direct (raw) material used = Raw Materials Inventory(bb) + Raw Materials purchased - Raw Materials Inventory(eb) = 100 +700 - 150 = 650 Step 2) Calculate the TMC = Raw Materials Used + Direct Labor + Manufacturing Overhead = 650 + 750 + 900 = 2,300 Step 3) Calculate the COGM = TMC + WIP Inventory(bb) - WIP Inventory(eb) = 2,300 + 400 - 250 = 2,450 Step 4) Calculate the COGS = Finished Goods Inventory(bb) + COGM - Finished Goods Inventory(eb) = 200 + 2,450 - 300 = 2,350

TMC = ?

TMC = Direct Materials Used + Direct Labor + Manufacturing Overhead

(E3.2) 4. You decide to start your own company manufacturing cat furniture. You pay $10,000/month to rent a factory where the production will take place. As you produce more units of cat furniture, a. Your total variable cost will decrease b. Your total fixed cost will decrease c. Your fixed cost per unit will decrease d. The number of cats will increase

c. Your fixed cost per unit will decrease

Total Fixed Cost: Total fixed cost does not ____ as the activity level increases. (E.g, Netflix's cost to stream videos to you doesn't increase if you decide to watch three movies instead of one.) (https://drive.google.com/open?id=1G9yrjHDpQYfJYA9eLnDEtQLv-IqcIaN-)

change

Variable Cost Per Unit: Variable cost per unit remains _____ as the activity level changes. (See https://drive.google.com/open?id=1ipifXAcS_5lkHaWYuAffj3TSasC7cUHh)

constant

(E3.2) 5. If the total cost of a resource does NOT change with the level of activity (e.g., with the number of units sold or the amount of services provided), then the cost is a: a. Marginal cost b. Incremental cost c. Variable cost d. Fixed cost e. Happy cost

d. Fixed cost

Fixed Cost Per Unit: Fixed cost per unit _____ as the activity level rises. This is because the total fixed cost is being spread across a larger number of units. (See https://drive.google.com/open?id=1melbbqFLtJfL5R3hVQmwJw1G9DFucBjx)

decreases

If the total cost does NOT change with the level of activity, it is a _____ cost.

fixed

(Example: RV dealership) - Selling more RVs does NOT affect the cost of real estate taxes. Thus, real estate taxes are a _____ cost. - Selling more RVs increases the cost of sales commissions. Thus, sales commissions are a _____ cost.

fixed; variable

Total Variable Cost: Total variable cost _____ as the activity level increases. (See https://drive.google.com/file/d/1EuUYJLqff4FSF0CB9mI9D07WIB1nO-4e/view?usp=sharing)

increases

(Example: McDonald's) The cost of switching to the new oil increased the total cost per week at the average McDonald's restaurant by $385. At the time, McDonald's had 13,000 restaurants open 52 weeks. Thus, the total _____ cost of the switch was $260.3 million.

incremental

Fixed vs. Variable Costs: Caveat Costs may change their behavior outside the relevant _____. For example, the cost of rent for Kayak's Coffee doesn't change whether Kayak's has 0 or 500 customers per month. If Kayak's Coffee were to have 50 million customers per month, however, it would need to expand to additional locations and the total cost of rent would _____. The cost was only _____ within a certain range.

range; increase; fixed

If the total cost changes with the level of activity, it is a _____ cost.

variable

Summary of Variable and Fixed Cost Behavior - Total _____ cost changes as activity level changes. - _____ cost per unit remains the same over wide ranges of activity. - Total _____ cost remains the same even when the activity level changes. - _____ cost per unit goes down as activity level goes up.

variable; variable; fixed; fixed