Chapter 2: Cost Terms And Purposes

Chapter 2:Cost Terms and PurposesHHorngren13e132 -1AN OVERVIEW OF COST TERMSPurpose of classificationCost classificationsPreparing an income statement andbalance sheet Product costs Direct materials Direct labor Manufacturing overhead Period costs (nonmanufacturing costs) SellingS lli costst Administrative costsPredicting changes in cost due tochanges in activity Variable costs Fixed costsAssigning costs Direct costs Indirect costsMaking decisions Differential costs Sunk costs costs2 -2

PRODUCT vs. PERIOD COSTSFactorySales & Administration

LEARNING OBJECTIVE1. Define and illustrate a cost object2 -5LEARNING OBJECTIVE1. Define and illustrate a cost object[EXERCISE]Lucas Manufacturing has three cost objects that it uses to accumulate costs for itsmanufacturing plants. They are:Cost object #1: The physical buildings and equipmentCost object #2: The use of buildings and equipmentCost object #3: The availability and use of manufacturing laborThe following manufacturing overhead cost categories are found in the accounting records:a. Depreciation on buildings and equipmentb. Lubricants for machinesc Property insurancec.d. Supervisors’ salariese. Fringe benefitsf. Property taxesg. UtilitiesRequired: Assign each of the above costs to the most appropriate cost object.2 -6

LEARNING OBJECTIVE1. Define and illustrate a cost object[SOLUTION]Cost object #1: The physical buildings and equipmenta. Depreciation on buildings and equipmentc Property insurancec.f. Property taxesCost object #2: The use of buildings and equipmentb. Lubricants for machinesg. UtilitiesCost object #3: The availability and use of manufacturing labord. Supervisors’ salariese. Fringe benefits2 -7LEARNING OBJECTIVE2. Distinguish between direct costs and indirect costs2 -8

LEARNING OBJECTIVE2. Distinguish between direct costs and indirect costs[EXERCISE]Archambeau Products Company manufactures office furniture. Recently, the companydecided to develop a formal cost accounting system and classify all costs into threecategories. Categorize each of the following items as being appropriate for (1) cost tracingto the finished furniture,furniture (2) cost allocation of an indirect manufacturing cost to the finishedfurniture, or (3) as a nonmanufacturing item.ItemCarpenter wagesDepreciation- office buildingGlue for assemblyLathe department supervisorLathe depreciationLathe maintenanceLathe operator wagesLumberSamples for trade showsMetal brackets for drawersFactory washroom suppliesCostTracingCostAllocationNonmanufacturing2 -9LEARNING OBJECTIVE2. Distinguish between direct costs and indirect costs[SOLUTION]Archambeau Products Company manufactures office furniture. Recently, the companydecided to develop a formal cost accounting system and classify all costs into threecategories.gCategorizegeach of the followingg items as beingg appropriatepp pfor (1)( ) cost tracinggto the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finishedfurniture, or (3) as a nonmanufacturing item.ItemCarpenter wagesp- office buildinggDepreciationGlue for assemblyLathe department supervisorLathe depreciatio nLathe maintenanceLathe operator wagesLumberSamples for trade showsMetal brackets for drawersFactory washroom XXXXXXXXXX2 -10

LEARNING OBJECTIVE3. Explain variable costs and fixed costs2 -113. Explainpvariable costs and fixed costs2 -12

LEARNING OBJECTIVE3. Explain variable costs and fixed costs[EXERCISE]ButlerBtl HospitalH it l wantst tot estimateti t theth costt forf eachh patientti t stay.tIt iis a generall healthh lth carefacility offering only basic services and not specialized services such as organ transplants.Required: a. Classify each of the following costs as either direct or indirect with respectt eachtoh patient.ti tb. Classify each of the following costs as either fixed or variablewith respect to hospital costs per day.DirectIndirectFixedVariableElectronic monitoringgMeals for patientsNurses' salariesParking maintenanceSecurity2 -13LEARNING OBJECTIVE3. Explain variable costs and fixed costs[SOLUTION]ButlerBtl HospitalH it l wantst tot estimateti t theth costt forf eachh patientti t stay.tIt iis a generall healthh lth carefacility offering only basic services and not specialized services such as organ transplants.Required: a. Classify each of the following costs as either direct or indirect with respectt eachtoh patient.ti tb. Classify each of the following costs as either fixed or variablewith respect to hospital costs per day.DirectElectronic monitoringMeals for patientsNurses salariesParking maintenan ceSecurityIndirectFixedXXVariableXXXXXXXX2 -14

QUIZ QUESTION2 -15QUIZ QUESTION[SOLUTION]2 -16

LEARNING OBJECTIVES4. Interpret unit costs cautiously forfor many decisions,decisions managers should use totalcosts, not unit costs.[EXERCISE]Combs, Inc. reports the following information for September sales:SalesVariable costsFixed costsOperating income 15,000- 3,000- 4,000 8,000Required:If salesl doubled bl ini October,O t b whath t iis ththe projectedj t d operatingti iincome?2 -17LEARNING OBJECTIVES4. Interpret unit costs cautiously forfor many decisions,decisions managers should use totalcosts, not unit costs.[SOLUTION]Combs, Inc. reports the following information for September sales:SalesVariable costsFixed costsOperating income 15,000- 3,000- 4,000 8,000Required:If salesl doubled bl ini October,O t b whath t iis ththe projectedj t d operatingti iincome?Answer: (15,000 x 2) - ( 3,000 x 2) - 4,000 20,0002 -18

LEARNING OBJECTIVES4. Interpret unit costs cautiously forfor many decisions,decisions managers should use totalcosts, not unit costs.[EXERCISE]Axle and Wheel Manufacturing currently produces 1,000 axles per month. The followingper unit data apply for sales to regular customers:Direct materialsDirect manufacturing laborVariable manufacturing overheadFixed manufacturing overheadTotal manufacturing costs 200306040 330The plant has capacity for 2,000 axles.Required:a.b.c.What is the total cost of producing 1,000 axles?What is the total cost of producing 1,500 axles?What is the per unit cost when producing 1,500 axles?2 -19LEARNING OBJECTIVES[SOLUTION]AxleAl andd WhWheell MManufacturingf t i currentlytl producesd11,000000 axlesl per month.th ThThe ffollowingll iper unit data apply for sales to regular customers:Direct materialsDirect manufacturing laborVariable manufacturing overheadFixed manufacturing overheadTotal manufacturing costs 200306040 330The plant has capacity for 2,000 axles.Required:a.b.c.What is the total cost of producing 1,000 axles?What is the total cost of producing 1,500 axles?What is the per unit cost when producing 1,500 axles?Answer:a. [( 200 30 60) x 1,000 units] ( 40 x 1,000 units) 330,000b. [( 200 30 60) x 1,500 units] 40,000 475,000c. 475 000 / 1,500 475,0001 500 316.67 316 67 per unitit2 -20

LEARNING OBJECTIVES5. Distinguish among manufacturingcompanies merchandising companies,companies,companies andservice-sector companies differentdifferent types of companies face differentaccounting issues.2 -21LEARNING OBJECTIVES6. Describe the three categories of inventoriescommonly found in manufacturing companies Direct Materials Work in Process Finished Goods7 Differentiate inventoriable costs7. assets when incurred, then cost of goodssoldsod fromo peperiodod costs expenses of the period when incurred.2 -22

[EXERCISE]Helmer Sporting Goods Company manufactured 100,000 units in 20x3 and reported thefollowing costs:Sandpaper 32,000Materials handling320,000Coolants & Lubricants22,400Indirect manufacturing labor 275,200Di t manufacturingDirectf t i laborl b2 176 0002,176,000Direct materials, 1/1/x3384,000Finished goods, 1/1/x3672,000Finished goods, -in-process, 12/31/x364,000Leasing costs - Equipment 384,000Depreciation - Equipment224,000Property taxes - Equipment 32,000Fire insurance - Equipment16,000Di t materialDirectt i l purchasesh3 136 0003,136,000Direct materials , 12/31/x3275,200Sales revenue12,800,000Sales commissions640,000Sales salaries576,000Advertising costs480,000Administration costs800,000Required:a.b.c.d.What is the amount of direct materials used during 20x3?What manufacturing costs were added to WIP during 20x3?What is cost of goods manufactured for 20x3?What is cost of goods sold for 20x3?2 -232 -24

2 -25[SOLUTION]Required:a.bb.c.d.What is the amount of direct materials used during 20x3?What manufacturing costs were added to WIP during 20x3?What is cost of goods manufactured for 20x3?What is cost of goods sold for 20x3?Answ er:a. 384,000 3,136,000- 275,200 3,244,800b. 3,244,800 2,176,000 32,000 320,000 22,400 275,200 384,000 224,000 32,000 16,000 6,726,400c. 6,726,400 96,000d. 6,758,400 672,000- 64,000 6,758,400- 1,280,000 6,150,4002 -26

QUIZ QUESTION2 -27QUIZ QUESTION2 -28

QUIZ QUESTIONS2 -29QUIZ QUESTIONS2 -30

Chapter 2: Cost Terms and Purposes 3 H 1 2 -1 Horngren 13e . decided to develop a formal cost accounting system and classify all costs into three . Categorize each of the following items as being appropriate for (1) cost tracing to the finished furniture, (2) cost allocation of an indirect manufacturing