ACCT 201b notes ch 1

fixed cost

A cost that remains constant, in total, regardless of changes in the level of the activity. If expressed on a per-unit basis, the average fixed cost per unit varies inversely with changes in activity.

Differential revenue

A difference in revenue between two alternatives

Activity base

A measure of what causes the activity of a variable cost. (cost driver) ex: Units produced Machine hours Miles driven Labor hours

manufacturing costs

ALL manu. cost can be categorized into 3 categories 1. Direct material (DM) 2. Direct labor (DL) 3. Manufacturing Overhead (MOH)

COST BEHAVIOR TABLE GET DIS

CENTER POINT constants: TOTAL FIXED COST, VARIABLE COST PER UNIT

2-6 traditional and contribution format income statement?????????????????????

Cherokee Inc. is a merchandiser that provided the following information: Required: Prepare a traditional income statement. Prepare a contribution format income statement 1. TRADITIONAL INCOME STATEMENT beg. Inv + purchased Inv. =Goods Available -ending Inv =COGS

sunk costs

Costs that have already been incurred and cannot be changed by any decision made now or in the future (original price) These costs should be ignored when making decisions

Conversion Cost

Direct Labor + Manufacturing overhead

Prime Cost

Direct Materials + Direct Labor

2-4

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22. *fixed cost is 1200 variable cost is .22 per cup what is constant? TOTAL FIXED COST & VARIABLE COST what varies? FIXED COST & TOTAL VARIABLE COST

2-10 cost behavior; contribution format income statement

Harris Company manufactures and sells a single product. A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given below: Required: Complete the schedule of the company's total and unit costs above. 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 COST var cost per unit = 180000/30000=6 fixed cost do not change total cost

Transfer of product costs

In production, Direct materials (costs)--> raw materials --> work in process DL and MO get added to work in process to direct materials--> finished goods Units of products transfer work in process --> finished goods Once sold to customer, finished goods--> cost of goods sold

cost chart

MANU COST = DM + DL + MOH Prime cost = DM + DL Consumer cost = DL + MOH

what are all the cost?

MANUFACTURING COST direct material - - raw materials direct labor - touch the material manufacturing overhead - everything else NOT mat NOT labor, but IS manufacturing cost NON-MANUFACTURING COST selling administrative

Discretionary

May be altered in the short term by current managerial decisions

study of accounting

Rules, or specifically GAP rules

2-3

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 it finance its growth. The bank requires financial statements before approving such a loan. You have been asked to help prepare the financial statements and were given the following list of costs: 1. Depreciation on salespersons' cars. PERIOD 2. Rent on equipment used in the factory. PERIOD 3.Lubricants used for machine maintenance. PRODUCT 4.Salaries of personnel who work in the finished goods warehouse. PERIOD (finished goods are done not inventories any more) 5. Soap and paper towels used by factory workers at the end of a shift. PRODUCT (workers wash hands) 6. Factory supervisors' salaries. (PERIOD) 7. Heat, water, and power consumed in the factory. PRODUCT 8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.) *PERIOD (sellling, cost of shipping to buyer) 9. Advertising costs. PERIOD 10. Workers' compensation insurance for factory employees. PRODUCT (MOH) 11. Depreciation on chairs and tables in the factory lunchroom. (PRODUCT) 12. The wages of the receptionist in the administrative offices. (PERIOD) 13. Cost of leasing the corporate jet used by the company's executives. PERIOD 14. The cost of renting rooms at a Florida resort for the annual sales conference. PERIOD 15. The cost of packaging the company's product. PRODUCT Required: Classify the above costs as either product costs or period costs for the purpose of preparing the financial statements for the bank.

TRADITIONAL INCOME STATEMENT VS. CONTRIBUTION INCOME STATEMENT

TRADITONAL SALES sales -COGS -cogs = GM =gross margin -EXP -operating expenses =NI =net operating income CONTRIBUTION SALES -VC =CM -FC =NI *SAME. variable cost = cost of goods sold which is a variable cost fixed cost = operating expenses, exact same thing.

2-5 HI-LO EXAM

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer Required: Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month? STEP 1: GET VAR COST Pick a Hi&Low activity not dollars ***CHANGES IN COST/CHANGES IN ACTIVITY (5148-1588)/(2406-124) = 1.56/DAY OF OCCUPANCY STEP 2: GET FIXED COST *TOTAL FIXED COST = TOTAL COST - TOTAL VARIABLE COST (total cost = total fixed cost + total variable cost total fixed cost = total cost - total variable cost) 5148-1.56(2046)=1394.64 STEP3: MAKE FORMULA y = b+mx TOTAL COST = 1395 + 1.56(ACTIVITY DAY)

2-2

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 are incurred at the company. For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost. 1. The cost of a hard drive installed in a computer. -DM 2. The cost of advertising in the Puget Sound Computer User newspaper. - SELLING 3. The wages of employees who assemble computers from components. - DL 4. Sales commissions paid to the company's salespeople. - SELLING 5. The wages of the assembly shop's supervisor. -MOH 6. The wages of the company's accountant. - MOH (MANU) 7. Depreciation on equipment used to test assembled computers before release to customers. MOH 8. Rent on the facility in the industrial park. -MOH or SPLIT (based on space on each function they are in)

Administrative Costs

The costs associated with the general management of an organization rather than with manufacturing or selling.

Selling Cost

The costs incurred to secure customer orders and get the finished product to the customer.

opportunity cost

The potential benefit that I give up when I select one alternative over another

what's up with fixed costs and relevant range?

Total cost doesn't change for a WIDE range of activity, and then JUMPS to a new higher cost for the next higher range of activity

Contribution Format

Used primarily by management (in order) -Sales -Var. exp. -Contribution Margin -Fixed expenses -Net operating income

Traditional Format

Used primarily for external reporting (in order) -Sales -Cost of goods sold -gross margin -Selling and administrative exp. -Net operating income

WHAT IS IMPORTANT IN HI-LO? EXAM!!!

VARIABLE COST PER UNIT = CHANGE IN COST/CHANGE IN UNIT

variable cost

Varies, in total, in direct proportion to changes in the level of activity. A variable cost per unit is constant.

total mixed cost line Y=a+bX

Y = The total mixed cost (Var. and Mixed) a = The total fixed cost (the vertical intercept of the line) b = The variable cost per unit of activity(the slope of the line) X = The level of activity

mixed cost relationship equation

Y = a +bX y = total mixed cost a = total fixed cost b = variable cost per unit of activity X = level of activity

fixed cost

add risk advantage has operating leverage (small increase in sale BIG increase in profit) reduce financial flexibility

manufacturing overhead

all indirect costs incurred during the production process. ex: Depreciation of manufacturing equipment Utility costs Property taxes Insurance premiums incurred to operate a manufacturing facility

financial acct

annual report overview within reports global, U.S. Gap (Generally accepted Principles)

raw material

any materials that go into the final product

variable cost

beneficial when low cash since fixed cost will NOT go away

business cost

business need to analyze and break cost down into categories all VARIABLE cost and all FIXED costs

merchandising

buy finished good sell finished good

skillset from chapter 2

categorize costs into above 3 categories

types of fixed costs

committed: long term planning. ex. depreciation of buildings and equipment. investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes. discretionary: costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research

Finished goods

consist of completed units of product that have not yet been sold to customers.

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.

Mixed Costs

contains both variable and fixed elements

direct cost

cost that can be easily and conveniently traced to a specific cost object.

Direct Labor DL

cost that can be traced easily to the product ex: supervisers are not included in DL, while ASSEMBLY LINE workers are.

indirect cost

cost that cannot be easily and conviniently traced to a specified cost object. (common cost)

differential costs and reveneues

costs and revenues that differs between alternatives in a decision making situation. THIS IS THINKING ON THE MARGIN. WHAT THE DIFFERENCE IS IF I TOOK THE OTHER ROUTE. i have a job paying 1500 per month in hometown. I have offer in a neighborhood city pay 2000 per month/ commuting cost to the city is 300 per month DIFFERENTIAL REVENUE IS 2000-1500 = 500 DIFFERENTIAL COST IS 300

managerial acct

daily reprots of many aspects of the business provides managers with information to effectively run the business NOT GAP

who is managerial accounting target?

decision making role (manager), system provide managers ith info they need

mixed cost

have both fixed and variable component (base amount and usage amount)

product cost

include all the 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. Includes: direct materials, direct labor, and manufacturing overhead.

Raw Materials

include any materials that go into the final product.

Differential costs or (incremental costs)

is the difference in cost between any two alternatives.

direct material "DM"

material that can be physically traced to a product AND it is convenient to do so. ex: a radio for a car

manufacturing

produce finished good sell finished good has more complicated accounting 1. has WIP (work in progress) 2. raw material 3. finished goods

cost behavior

refers to how a cost will react tochanges in the level of activity. ex: Variable costs, Fixed costs, Mixed costs.

what is the contribution format income statement?

sales -vc =cm -fx =ni

non-manufacturing cost

selling and marketting (adv, comission, shipping) administrative cost (exe. salaries, corporate headquarter, clerks)

period cost

selling expenses and administrative expenses

sunk cost!!! exam

sunk costs: has already been incurred and it can never be changed. ex. I bought an automobile that cost 10000 two years ago. The 10000 cost it sunk because I drive it, park it, trade it, or sell it, I cannot change the 10000 cost.

opportunity costs

the potential benefit that is given up when one alternative is selected over another

classification for cost behavior

when business activity changes, how will cost react what happen to cost when activity INCREASE what happen to cost when activity DECREASE