MGMT 201: Chapter 2 Notes and Examples
MGMT 201: Chapter 2 Notes and Examples MGMT 201
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This 6 page Class Notes was uploaded by Zach Weinkauf on Friday January 22, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 24 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 01/22/16
Lecture 2: January 14, 2016 Chapter 2: Basic Cost Management Concepts The Management Process Planning, Directing, and Controlling Managers need cost info to perform each of these functions Decision Making What’s a Cost? A measure of resources given up to achieve a particular purpose Are there different kinds of costs? How a cost is defined depends on the timing of its recognition as an expense o Expenses are the consumption of assets for the purpose of generating revenue (the matching principle) o Product costs are costs associated with goods for sale until the time period during which the products are sold, at which time costs become an expenses (COGS – Cost of Goods Sold) o Period costs are costs that are expensed during the time period in which they are incurred (the electric bill) Selling Expenses – Marketing, Sales Personnel Salaries, Sales Commissions Administrative Expenses – Office Supplies, Office Personal Salaries, Office Depreciation Financial Statements Income Statement o Product costs appear on the Income Statement as cost of goods sold in the period in which the products are sold Product Costs Cost of Goods Sold o Period costs appear on the Income Statement in the period in which they are incurred Period Costs Operating Expenses Balance Sheet o Product Costs – Inventories Raw Materials – materials waiting to be processed Work in Process – partially completed products = materials and some labor and/or overhead has been added Finished Goods – completed products awaiting sale Value measured by product cost Manufacturing Costs – COGS Direct Material o Raw Materials added to the production process o Easily traced to the finished product Direct Labor o Salaries, wages and fringe benefits for personnel that work directly on the manufactured product Manufacturing Overhead o All other costs of manufacturing: Indirect Material Materials required for the production process that do not become part of the finished product o Ex. – drills, bits Materials that do become part of the finished product but are insignificant in cost o Ex. – glue, nails, screws Indirect Labor Cost of personnel that didn’t work directly on the product, but whose services are necessary for the manufacturing process (at production facility) o Ex. – factory maintenance workers and janitors Other Manufacturing Costs All other manufacturing-related costs that are not labor or material: o Depreciation on plant and equipment o Production facility property taxes, insurance, utilities o Overtime premiums and unavoidable idle time Prime Costs = Direct Material + Direct Labor Conversion Costs = Direct Labor + Manufacturing Overhead Product costs… o Direct Materials, Direct Labor, Manufacturing Overhead … are stored in inventory… o WIP (Work in Process) Inventory – Balance Sheet o FG (Finished Goods) Inventory – Balance Sheet … until the products are sold. o COGS (Cost of Goods Sold) – Income Statement Cost of Goods Manufactured – the transfer between WIP and FG Cost Drivers Activities that cause costs to be incurred Activities Cost Drivers o Production Scheduling Manufacturing Orders o Machine Setup Set-up Hours o Machine Operations Machine Hours o Inspection Pieces Inspected o Purchasing Purchase Orders o Assembly Support Customer Requests for Help Cost Behavior Relationship of various costs to the activities performed o Variable Costs – changes in TOTAL in direct proportion to a change in the level of activity. So if activity increases by 20%, then TOTAL variable costs increase by 20% as well. However, the variable cost PER UNIT does NOT change Lecture 3: January 19, 2016 Chapter 2: Basic Cost Management Concepts (continued…) Fixed Costs – does NOT change in TOTAL as the level of activity changes within the relevant range. ∆ So if activity increases by 20%, TOTAL fixed costs still remain the same = NO CHANGE within the relevant range ∆ However, the fixed cost PER UNIT does change. Variable and Fixed Cost Summary Cost In Total Per Unit Variable cost per unit Variable Total Variable cost changes remains the same over as activity level changes wide ranges of activity Total fixed cost remains the Fixed cost per unit goes Fixed same even when the activity down as activity level level changes goes up Additional Cost Concepts Responsibility Accounting – tracing costs to departments that incurred them Activity Accounting – tracing costs directly to activities that caused them Cost Object – where a cost is assigned to – product, department, etc. ∆ MBA Program ∆ Krannert School of Management ∆ Accounting Department Direct Costs - can be traced directly to a particular cost or object Indirect Costs – cannot be traced to a particular cost object Controllable Cost – a cost that can be significantly influenced by a particular manager ∆ Examples: A restaurant manager can CONTROL the cost of food used in a restaurant A restaurant manager CANNOT CONTROL the cost of national advertising by restaurant chain Opportunity Cost – the potential benefit given up when one alternative is selected over another ∆ Opportunity Cost of attending Purdue = $41,000 Sunk Costs – all costs incurred in the past that cannot be changed by any decision made now or in the future ∆ Withdraw from Purdue in 1 two weeks, 20% of tuition is nonrefundable (sunk) th ∆ Withdraw from Purdue any time after the 6 week, whole tuition is nonrefundable (sunk) Sunk costs should NOT be considered in decisions Differential Costs – costs that differ between alternatives ∆ Example: You can earn $1,500 per month in your hometown or $2,000 per month in a nearby city. Your commuting costs are $50 per month in your hometown and $300 per month to the city. What is your differential cost? o $300 - $50 = $250 Example 2-28 1. Alhambra Aluminum Schedule of Cost of Goods Manufactured For the year ended December 31, 20XX Direct Material Beginning Raw Material Inventory 55,000 Add: Raw Material Purchased 240,00 0 Raw Material Available for Use 295,00 0 Less: Raw Material Ending Inventory (75,000 ) Raw Material Used in Production 220,00 0 Direct Labor 420,00 0 Manufacturing Overhead Indirect Material 12,000 Indirect Labor 22,000 Depreciation on the Plant 110,00 0 Utilities on the Plant 23,000 Other 35,000 Total Manufacturing Overhead 202,00 0 Total Manufacturing Cost 842,00 0 Add: Beginning Work in Process 110,00 0 Subtotal 952,00 0 Less: Ending Work in Process (125,0 00) Cost of Goods Manufactured 827,00 0 2. Alhambra Aluminum Schedule of Cost of Goods Sold For Year Ended December 31, 20XX Beginning Finished Goods 160,000 Add: Cost of Goods Manufactured 827,000 Goods Available for Sale 987,000 Less: Ending Finished Goods (155,000) Cost of Goods Sold 832,000 Ex. Labrum Luggage 1. Labrum Luggage Schedule of Cost of Goods Manufactured For the year ended December 31, 20XX Direct Material Beginning Raw Material Inventory 20,000 Add: Raw Material Purchased 90,000 Raw Material Available for Use 110,00 0 Less: Raw Material Ending Inventory (12,00 0) Raw Material Used in Production 97,500 Direct Labor 100,00 0 Manufacturing Overhead Indirect Material 5,000 Indirect Labor 7,500 Depreciation on the Plant 30,000 Utilities on the Plant 20,000 Other 40,000 Total Manufacturing Overhead 102,50 0 Total Manufacturing Cost 300,00 0 Add: Beginning Work in Process 20,000 Subtotal 320,00 0 Less: Ending Work in Process (15,00 0) Cost of Goods Manufactured 305,00 0 2. Labrum Luggage Schedule of Cost of Goods Sold For Year Ended December 31, 20XX Beginning Finished Goods 10,000 Add: Cost of Goods Manufactured 305,000 Goods Available for Sale 315,000 Less: Ending Finished Goods (25,000) Cost of Goods Sold 290,000
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