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ACCT 208 - Chapter 2 Notes

by: Daphne Vantine

ACCT 208 - Chapter 2 Notes Acct 208

Marketplace > University of Delaware > Accounting > Acct 208 > ACCT 208 Chapter 2 Notes
Daphne Vantine
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Product Costs (DM, DL, OH, etc), Period Costs, Variable/Fixed/Committed/Discretionary/Mixed Costs, High-Low Method
Accounting II
Professor Dragone
Class Notes




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This 2 page Class Notes was uploaded by Daphne Vantine on Friday February 26, 2016. The Class Notes belongs to Acct 208 at University of Delaware taught by Professor Dragone in Spring 2015. Since its upload, it has received 21 views. For similar materials see Accounting II in Accounting at University of Delaware.


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Date Created: 02/26/16
ACCT 208 Chapter 2: Cost Concepts and Relevant Income Statements     Product  Costs  (Manufacturing)     Period  Costs  (Non-­‐‑Manufacturing)     All  costs  involved  in  making/acquiring   *remains  with  the  product     All  other  costs  not  included  as     a  product  OR  performing  a  service   as  an  “asset”  until  the     considered  a  product  cost       product  is  sold  =  matching     Direct  Materials  (DM):   Overhead  (OH):   *Cost  is  expensed  on  the     Integral  part  of  a  finished   All  costs  of  the  factory  not  included  as   income  statement  when     product;  can  be  easily   DM  or  DL   incurred     traced  to  the  product       Direct  Labor  (DL):   Description  should  include:   Selling  Expense   1. Overhead   Same  def  as  DM;  hint:   2. factory   1. Sales  commissions/salaries   “touch”  labor=people   3. Manufacturing   2. Advertising  exp   that  actually  make  the   4. Indirect   3. Securing  the  customer’s  order   product   4. Moving  finalized  product  to     warehouse   Indirect  Material:   5. Cost  of  warehousing  the     Costs  of  material  that  cannot  be  traced  to     a  product;  inexpensive  items  like   finished  product     hardware,  ty-­‐‑wraps,  glue,  etc.       Administrative  Expense     1. Corporate  salaries     Indirect  Labor:   2. Building     Same  def.  as  above;  factory  supervisor,   3. Accounting     factory  security,  factory  janitor     4. IT     Others:  Factory  rent,  factory  insurance,   5. Personell     6. Public  Relations     factory  depreciation,  factory  utilities,   7. Legal  Expenses     repair       Prime  Cost  =  DM  +  DL   Conversion  Cost  =DL  +  manufacturing  overhead;  aka  “Converting”  DM  into  a  finished  product     Cost  driver  units:  i.e.  direct  labor  hours,  machine-­‐‑hours,  units  produced,  units  sold     A.   Identifying  Costs     1.   Variable  Cost     a)   Definition:     TOTAL  COST  [b(x)]:    goes  up/down  in  proportion  to  change  in  volume   UNIT  COST  (b):  Stays  the  same  no  matter  volume  changes  even  though  sales  units  or   cost  driver  units  may  change   2.   Fixed  Cost     a)   Definition:   TOTAL  COST:  remains  the  same  no  matter  changes  in  volume   •   Straight-­‐‑line  depreciation,  insurance,  property  taxes,  rent,  etc.   UNIT  COST:  goes  down  when  volume  goes  up,  vice  versa  (inverse  relationship   between  volume  and  unit-­‐‑fixed  cost)     b)   Committed  Fixed  Costs   Also  known  as  capacity  costs:  multiyear  planning  horizon  that  can’t  be  significantly   reduced  without  making  big  changes;  investments  in  facilities,  equipment,  basic   organizational  structure  (Mgmt)   §   Long  term   §   Emphasis  is  on  utilization  (find  other  uses  for  the  asset)     c)   Discretionary   Arise  from  annual  decisions  (advertising,  research,  training,  travel…)   §   Short  term  (1  yr  or  less)   §   Can  be  cut  for  short  periods  of  time  w/  minimal  damage  to  profits  and  goals       Variable  Unit  Cost  and  Total  Fixed  Cost   are  constant  at  different  volume  levels           Relevant  Range:  range  of  activity  within  which  the  assumption  that  cost  behavior  is  strictly  linear;   outside  of  this  range,  as  cost  may  not  be  strictly  fixed  or  strictly  variable;  assumptions  about  cost   behavior  may  be  invalid  if  activity  falls  outside  of  the  relevant  range     3.   Mixed  Cost:  has  variable  and  fixed  components     a)   Use  High-­‐‑Low  Method     ???? = ???? + ???? ????     Y=total  mixed  cost   A=total  fixed  cost   b=unit  variable  cost   x=total  cost  driver  unit  level  (activity  level)   b(x)=total  variable  cost     ???? = $25,000 + $3.00????       Step  1:  Solve  for  “b”  =  unit  variable  cost     ????????????????????????????????  ???????????????? = ????2 − ????1 = ????????????????  ????????  ????????????ℎ  ????????????????????????????????  ???????????????????? − ????????????????  ????????  ????????????  ????????????????????????????????  ????????????????????   ????2 − ????1 ????????????ℎ  ????????????????????????????????  ???????????????????? − ????????????  ????????????????????????????????  ????????????????????   ????ℎ????????????????  ????????  ???????????????? $2,400 ????????????????????????????????  ???????????????? =   ????ℎ????????????????  ????????  ???????????????????????????????? = 3,000  ????????????????????????????  ???????????????? = $0.80  ????????????  ????????????????????????????  ????????????       Step  2:  Pick  either  the  high  CD  unit  level  or  the  low  CD  units  level     ????????????????????  ????????????????  ???????????????????????????? = ????????????????????  ???????????????? − ????????????????????????????????  ????????????????  ????????????????????????????     ????????????????????  ???????????????? = $9,800 − $0.80  ????????????  ????????????????????????????  ????????????  ×  8,000  ????????????????????????????  ???????????????? = $3,400     ???? = $3,400 + $0.80????  


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