The cost of steel or tires can easily be traced or identified with the BMW X5. Workers on the BMW X5 line request materials from the warehouse and the material requirements document determines the cost of the material supplied to the X5. For example, the salaries of the plant managers (including the plant manager) who oversee the production of the many different types of cars produced at the Spartanburg plant are indirect cost X5.
In general, managers are more confident about the accuracy of the direct costs of cost items such as the steel and tire costs for the X5. In contrast, the cost of invoice paper included in the package would be classified as an indirect cost. Although paper costs can be traced back to the individual customer, this is not cost-effective.
For example, the cost of a General Chemicals plant dedicated to the production of sodium carbonate is the direct cost of soda ash. For example, the number of vehicles assembled is a cost driver of the total cost of steering wheels. Thus, it calculates the unit cost of the event by dividing the total cost by the expected number of people who will attend.
Unit costs exist in all areas of the value chain - for example, unit costs for product design, sales visits and customer service calls.
Learning Objective 5
STEP 4
Part of the production costs incurred in 2011 are retained as costs for ending the inventory of work in progress. The ending work-in-process inventory of $7,000 becomes the beginning inventory for the following year, and the cost of goods produced in 2011 of $104,000 "empties" the work-in-process inventory while "filling" the finished goods inventory box. . Looking at the finished goods inventory box in Figure 2-7, we see that the beginning finished goods inventory of $22,000 and the cost of goods produced in 2011 of $104,000 “fill out” the finished goods inventory box.
The ending finished goods inventory of $18,000 becomes the beginning inventory for the following year, and the cost of goods sold during 2011 of $108,000. Notice how the cost of goods manufactured is the cost of all goods completed during the accounting period. These costs are cost of goods sold in the accounting period when the goods are sold.
The $70,000 of operating costs that include R&D, design, marketing, distribution and customer service costs are Mobile Products period costs. These period costs include, for example, salespeople's salaries, depreciation on computers and other equipment used in marketing, and the cost of renting warehouse space for distribution. Operating income equals total income from operations minus cost of goods sold and (period) operating costs (not including interest expense and income taxes) or, equivalently, gross margin minus period costs.
When these costs are incurred in marketing or corporate headquarters, they are period costs. Exhibit 2-10 shows inventory costs and period costs for a retailer or wholesaler that purchases goods for resale. Purchased goods are held as goods inventory, the cost of which is shown as an asset on the balance sheet.
As the goods are sold, their cost is shown in the income statement as cost of goods sold. For example, power costs can be measured in specific areas of a plant and identified as a direct cost of specific products. The ratio of the overtime premium does not "penalize" - add to the cost of - a specific product just because it happened to be worked on during the overtime hours.
Learning Objective 6
For example, some government agencies specifically exclude marketing, distribution, and customer service costs from eligible product costs and may only partially reimburse research and development costs. The second bracket in Exhibit 2-11 shows how product cost calculations for a particular contract may include all of the design and manufacturing costs, but only a portion of the research and development costs. As Exhibit 2-11 shows, measures of product costs range from a narrow set of costs for financial statements—a set that includes only costs that can be inventoried—to a broader set of costs for government contract reimbursement to an even broader set of costs for decisions about prices and product mix.
This section focused on how different purposes result in the inclusion of different cost items of the business function value chain in product costing. The same caution about being clear and precise about cost concepts and their measurement applies to each cost classification presented in this chapter. Using the five-step process described in Chapter 1, consider how these different cost classifications help managers make decisions and evaluate performance.
1.Business function 3.Behavior pattern in relation to a.Research and development, the activity level or volume b.Design of products and processes a.Variable costs. This requires forecasting the amount of products managers expect to sell and understanding fixed and variable costs. Managers control costs and learn by comparing actual total costs and unit costs with forecast amounts.
The following section describes how the basic concepts introduced in this chapter lead to a framework for understanding cost accounting and cost management, which can then be applied to the study of many topics, such as strategy evaluation, quality, and investment decisions. The ideas also form the basis for the study of several topics later in the book. Whatever the purpose, the cost accounting system tracks direct costs and allocates indirect costs to products.
Chapters also discuss how managers use this information to formulate strategy and make decisions about pricing, product mix, and cost control. Managers also use variances and non-financial measures such as defect rates and customer satisfaction scores to monitor and evaluate the performance of various departments, divisions and managers. When making decisions about planning and implementing a strategy, managers need to understand which revenues and costs should be considered and which should be ignored.
Learning Objective 7
Consider whether you want to purchase a product from a third-party supplier or whether you want to make it in-house. The cost system indicates that it costs $25 per unit to make the product in-house. At first glance, it seems like it will cost the company less to buy the product than to make it.
However, assume that of the $25 to make the product in-house, $5 consists of facility rental costs that the company has already paid under the lease. This means that there is no opportunity to profit from putting the plant to an alternative use. Under these conditions, it will cost less to manufacture the product than to buy it.
That's because making the product only costs an extra $20 per unit compared to a supplement. The $5 per unit rental cost is irrelevant to the decision because it is a past (sunk) cost that has already been incurred regardless of whether the product is produced or purchased. Later chapters in the book discuss topics such as strategy evaluation, customer profitability, quality, just-in-time systems, investment decisions, transfer pricing, and performance evaluation.
Each of these topics invariably has product cost, planning and control, and decision-making perspectives. For example, Chapter 13 on Strategy describes the balanced scorecard, a set of financial and non-financial measures used to implement a strategy that builds on the planning and control functions. The section on strategic analysis of the bottom line builds on ideas about product costing and variance analysis.
For all manufacturing items, costs are classified as direct costs or indirect costs and indicated by V or F, whether each is basically a variable cost or a fixed cost (when the cost object is a unit of product). Assume that both the direct material cost and the plant lease cost are for the production of 900,000 units. As a management consultant, briefly explain to the president of the company why the unit cost of direct materials did not change in requirements 2 and 3, but the unit cost of plant lease cost did.
Solution
Period costs are expensed in the accounting period in which they are incurred, and are all costs in an income statement, apart from costs of goods. 2-16 Calculating and Interpreting Unit Costs of Production Minnesota Office Products (MOP) produces three different paper products at its wood mill in Vaasa: Supreme, Deluxe, and Regular. Total production costs for the facility in July 2011 are $150 million (of which $15 million are fixed).
This total is allocated to each production line based on the direct manufacturing costs of each line's labor. 2-17 Direct, indirect, fixed and variable costs. Best Breads produces two types of bread which are sold as wholesale products to various specialty retail bakeries. Variable or fixed (V or F) costs based on how the total cost of a video segment changes as the total number of videos sold changes. When in doubt, choose based on whether the total cost will change significantly if there is a large change in the total number of videos sold.).
Electricity expenses for the HEC store (single bill covers the entire store) C. Cost of videos purchased for sale to customers. 2-22 Variable costs and fixed costs. Consolidated Minerals (CM) owns the rights to extract minerals from beach sands on Fraser Island. Draw a graph of the variable costs and another graph of the fixed costs of CM.
2-21 Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small restaurant. 2-26 Total costs and unit costs. A student association has hired a band and a caterer for a graduation party. 2-29 Calculation of cost of goods purchased and cost of goods sold. The following data is for the Marvin store.
2-30 Cost of goods purchased, cost of goods sold and income statement. The following information is for Montgomery Retail Outlet Stores. -34 Statement of profit and loss and list of costs of manufactured goods. Howell Corporation has the following account balances (in millions):. Is the idle and overtime premium a direct or indirect cost of the products Jim worked on in December.
2-39 Missing items, calculation of storage costs. Ron Williams recently took over as controller for Johnson Brothers Manufacturing. 2-40 Comprehensive problem of unit costing, product costing.Denver Office Equipment manufactures and sells metal shelving.
