WeekKey Concepts Distinguish between financial and managerial
accounting. Define cost terms used in planning, control, and
decision making. Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs.
Describe the flow of product costs in a manufacturing firm's
accounts. Explain the relationship between the cost of jobs and the
Work in Process Inventory, Finished Goods Inventory, and Cost of
Goods Sold accounts.American Insurance Group (AIG) Scandal of 2005
was a multinational insurance corporation that committed massive
insurance fraud in the amount of (allegedly) $3.9 billion dollars,
as well as participating in bid-rigging and stock price
manipulation. It has been alleged that CEO Hank Greenberg booked
loans as revenue, and lead clients to insurers that AIG had pay off
agreements with, and had traders to inflate the stock prices.
Greenberg was fired and I don't believe he faced any criminal
charges. AIG settled with the Stock Exchange Commission (SEC) for
$10 million in 2003, $1.64 million in 2006.
Our company promotes an ethical environment by having employee's
reading and signing our companies Standards of Excellence and
certificate of compliance. The Standards of Excellence is details
of what's expected of your as an employee and the certificate of
compliance is stating is a disclosure describing an entities in
which employee or member of their household has a significant
financial interest/position with competitor or that person maybe in
a position that would have conflict when doing business with our
company.I found a really interesting website of the worlds top ten
most unethical companies in the world. Some I have heard of some I
haven't. I am truly surprised at some of them. Here they are:1.
Monsanto Co. - an agricultural company, mostly know for the
herbicide Roundup2. Halliburton - an oilfield services
corporation3. Chevron - an oil and gas company4. Freeport-McMoran -
a copper and gold company5. Phillip Morris - cigarette
manufacturer6. Occidental Petroleum - an oil and gas corporation7.
Ryanair - an Irish airline8. Syngenta - a Swiss agricultural and
chemical company9. Grupo Mexico - the Mexican mining enterprise10.
Total - a French oil and gas corporationIsn't it a little bizarre
that most of the unethical companies in the world are oil and gas
and large mining companies? I find that very
interesting.http://www.actionforourplanet.com/#/top-10-unethical-companies/4545796858As
most of you wrote:Class:The following is from your lecture:Costs
can be classified in regard to how they respond to changes in the
activity level. Total variable costs change in proportion to
changes in the activity level. If production decreases 20%,
variable costs will also decrease 20%. However, the unit variable
cost remains the same regardless of the production level. For
example, if it costs $5 to produce one unit of Product X, total
variable costs are $10,000 if 2,000 units are produced. If
production decreases to 1,000 units, total variable costs decrease
to $5,000. Notice that while the total variable costs decreased in
proportion to the decrease in production, unit variable costs
remained the same at $5 per unit.Total fixed costs are not affected
by a change in the activity level. However, the unit fixed cost
varies inversely with changes in the activity level. As production
decreases, unit fixed costs increase because there are fewer units
to absorb the cost. For example, assume the rent on a production
facility is $5,000 per month. The total cost for rent will be
$5,000, regardless of whether the company produces 2,000 or 1,000
units. However, the unit fixed cost is $2.50 if 2,000 units are
produced and $5.00 if 1,000 units are produced. As you can see, the
unit fixed cost increases as production decreases.
Question:If the 1000 units costs our company $11,000 made of $8
per unit plus fixed cost of $3000 what would 2000 units cost? SHOW
ALL WORK.
RE: #2 Cost BehaviorsVariable: 2,000 units * $8/unit =
$16,000$16,000 + $3,000 fixed cost = $19,000 Total Cost
Class: #3Which of the following are considered "Direct Product
Cost"? WHY?1) Shipping2) Wages of assembly workers3) salary of
office accountant4) Advertising5) factory insurance6) Material to
make the product7) Automobiles for the salesmen8) Tickets to Cubs
games for clientsSolution to Problem #3
Firstly, Insurance on the FACTORY is part of INDIRECT
Manufacturing cost. So it does not qualify as DIRECT.
Therefore, only 2 and 6 are DIRECT manufacturing cost.
Post YOUR work even though I may have posted a solution.
Shipping could depend on who pays for the shipping.
Of course, Insurance is a fixed cost and shipping is a variable
cost.
CLASS: PROBLEM #4
This problem emphasizes how variable and fixed costs work.
EVERYONE should work on this even if others have completed it.
Share your work with the class-- even if you are not sure.
1) Sarah's Toys projects Material costs of $375,000 and labor
costs of $125,000 in a period when 25,000 toys are produced.
a) What is the variable cost per unit? b) If production is
expected to drop to 20,000 toys in the next period, what is the
expected labor cost in the next period? Why?
2) If Sarah's Toys also had rent expense of $30,000 a) What is
the fixed cost per unit? b) What would be the rent expense when the
units drop to 20,000? c) What is the fixed cost per unit at 20,000
units? Why?
3) What is the combined variable plus fixed cost PER UNIT at
a)25,000 units? b) At 20,000 units? c) Why did it change? d) By
what amount did it change? Why?
(Note that this is not a quiz. I am hoping we all can SHARE and
SHOW our work on this important problem. Comment on other students
work.Class: Problem #4 SOLUTION.Don't review until you have worked
on the problem. Many of you have done a great (and correct)
job!
SHARE your work EVEN THOUGH I have posted the solution.
The answers to the problems are as follows:
1). A variable cost is (375,000 +125,000=500,000)
(500,000/25000=$20.00) The variable cost per unit is $20.00
B. There was a decrease of 5000 units.(5,000/25000=.20) So there
was a percentage decrease of 20%. (125,000*.20=25,000)
(125,000-25000=100,000) The expected labor cost in the next period
dropped to $100,000 because not as many hours of labor needed to
produce less product.
2).a (30,000/25,000=1.20 per unit) the fixed cost per unit would
be 1.20 per unit.
B. rent expense still would be 30,000 because it is a fixed
cost.
C. (30,000/20,000=1.50) the fixed unit cost would be $1.50
because rent is a constant and divided by the units produced.
3). ...............25,000........................ 20,000 .Per
unit ..............Per Unitmaterials cost ..... 375,000 15.00 ...
300,000 15.00Labor cost..........125,000 5.00....... 100,000
5.00rent cost......... $30,000 1.20........$30,000 1.50
Variable plus fixed cost per unit at 25,000 units is
$21.20.Variable plus fixed cost per unit at 20,000 units is
$21.50.The variable cost per unit stayed the same because variables
dropped all around by 20 percent, however the rent stayed the same
which increased the cost per unit because the company has to pay
the same rent for less units.
Please comment on parts that you do not understand or parts that
you now understand.
Basic concepts1)Variable expensesExample: Material is always
exactly the same per unit but always increases as you produce more.
Never changes per unit for that problem.2)Fixed expenses do not
change in TOTAL.Rent is always the same for that company. Always
stay the same for that problem.3)Managerial Acctg is directed at
INTERNAL;Financial Acctng is directed to outsiders.4)Managerial
Acctng does not have GAAP.5)Managerial is often non-monetary and
places an emphasis on the future not the past.Insurance on
Manufacturing Plant (to manufacturer) is an INDIRECT Manufacturing
cost; Insurance on office is an Indirect Administrative cost. Fixed
cost but thats not the issue here. It is an INDIRECT cost meaning
it is not a DIRECT manufacturing cost.Materials and Direct Labor
are DIRECT Manufacturing costs.
Any questions on this?
Class,One of the main points of this week is that totalfixed
costs are not affected by a change in the activity level. However,
the unit fixed cost varies inversely with changes in the activity
level. As production decreases, unit fixed costs increase because
there are fewer units to absorb the cost. For example, assume the
rent on a production facility is $5,000 per month. The total cost
for rent will be $5,000, regardless of whether the company produces
2,000 or 1,000 units. However, the unit fixed cost is $2.50 if
2,000 units are produced and $5.00 if 1,000 units are produced. As
you can see, the unit fixed cost increases as production
decreases.
TCO2Given a job costing accounting system, prepare the entries,
tracking the cost flow from material purchases to cost of goods
sold; close out of over- or under-applied overhead, and explain the
importance of the applied overhead rate
Key Concepts Discuss the three inventory accounts of a
manufacturing firm. Discuss the types of product costing systems.
Describe how direct material, direct labor, and manufacturing
overhead are assigned to jobs. Explain the role of a predetermined
overhead rate in applying overhead to jobs. Explain why the
difference between actual overhead and overhead allocated to jobs
using a predetermined rate is closed to Cost of Goods Sold or is
apportioned among Work In Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold.TCO3Given a process costing
environment, determine the value of goods transferred out of the
department using equivalent units of production, and prepare the
entries to assign costs to the next production department and to
ending inventory.Key Concepts Describe how products flow through
departments and how costs flow through accounts. Discuss the
concept of an equivalent unit. Calculate the cost per equivalent
unit. Calculate the cost of goods completed and the ending work in
process balance in a processing department. Describe a production
cost report.
CLASS: Problem #1 for EVERYONE to try to work On:
Kit Company uses a predetermined overhead rate of $8.00 per
machine hour. 60,000 machine hours were worked this year and actual
overhead costs of $465,000 were incurred.What was the amount of
under-applied or over-applied overhead?Indicate if it is
over-applied or under applied.
Share your work.Class: Solution to Problem #1:Everyone should
work on this and share their answer even though I posted the
solution.
The correct answer is$15,000 over applied.
As you wrote they applied 480,000 but only spent 465,000.
Therefore they need to reduce the COGS since they expensed
$480,000.
If it helps, you might want to prepare T accounts. However, it
is not necessary.Note that: The $480,000 went into the COGS as an
expense even though they only actually spent $465,000.Therefore the
Cost of Goods Sold needs to be reduced by $15,000, so it will be
credited for the $15,000.
Class: Problem #2Note that this problem looks very confusing
because it has a great deal of extraneous information. It is
actually not difficult if you eliminate extraneous material.It is
very important to see that all that is being asked for is the
application rate. Focus on that and ignore all the information that
has nothing to do with the application rate.
Devonshire Corp. uses a budgeted factory overhead rate to apply
overhead to production. The following data is available as of the
year ended 12/31/13:Budgeted Factory Overhead $888,800Actual
Factory Overhead $765,000Budgeted Direct Labor Cost $444,400Actual
Direct Labor Cost $550,000
Certain end of year balances are as follows:Raw Material
Inventory $333,000Work in Process Inventory $642,000Finished Goods
Inventory $911,000Cost of Goods Sold $677,000
If the company uses direct labor cost to allocate overhead,
compute the application rate. Note that it is based on COST not
hours.
Please SHARE your work with the class.Solution to #2: CLASS,
The problem only asked for the application rate. The estimated
overhead is $888,800 and the allocation base is $444,400- therefore
most of you were correct that the application rate is $2 PER DOLLAR
of LABOR COST. For every dollar of Labor cost we will add (apply)
$2 of overhead cost.
Some problems use hours as a base and some problems use dollars
as a base. You need to clearly see what the base is.If anyone does
not follow please post.
Class: Problem #3 (a bit easier than #2)Happy Co estimates that
its employees will work 500,000 direct labor hours during the
coming year. Total overhead costs are estimated to be $9,600,000
and direct labor costs are estimated to be $12,500,000. If Happy
Co. allocates overhead based on direct labor COST (per dollar, NOT
per hour), what is the predetermined overhead rate?Try to do this
problem even if others have answered or even if I answered the
problem.
The formula of predetermined overhead rate is written above and
so yes I would like to agree with Christopher as It relates to the
equation calculated. Also, I realizedthe formula of predetermined
overhead rate is entirely based on estimates. The overhead applied
to products or job orders would, therefore, be different from the
actual overhead incurred by jobs or products. This difference is
eliminated at the end of the period. The elimination of difference
between applied overhead and actual overhead is known as
disposition of over or under applied overhead.Solution to Problem
#3:CLASS: Many of you eventually were able to get this right. Very
nice work.
The problem says that the cost is based on Labor COST not Labor
hours so the rate is 9,600,000/12,500,000=.768 per dollar of labor
Cost. (.77 is fine) The key is understanding that the rate is not
per hour but rather per dollar.
My suggestion would be to remember that the allocation base can
be different things depending on the particular organization and
what they want to know. Since in this problem it was specified the
labor cost was the allocation base, we should use the labor cost.
Other problems may specify per hour.Class: Problem #4(I will post
the answer Friday so you can see it. HOWEVER: Try to post your
solution. The best way to learn the week 2 material is to work on
problems. You do not have to do all the problems but try to
understand all the problems. Future weeks will not have as many
problems):
Green Co. incurred costs of $900,000 for direct materials
(raw)purchased. Direct labor was $10,000 and factory overhead was
$10,000 for March.
Inventories were as follows:raw materials beginning $1,000;raw
materials ending $2,000
work in process beginning $190,000;work in process end
$170,000
finished goods beginning $10,000;finished goods ending
$10,500
What is the cost of goods manufactured?
This problem is a bit more difficult than it appears as the
student needs to calculate many different items and complete a Cost
of Goods Manufactured Statement. It is not enough to just calculate
the last step.
SHARE your work so all can see.
A little help on Problem #4 We start with the Raw materials
used. Beginning was 1,000, plus 900,000 minus 2000; therefore the
materials used were 899,000.Class: SOLUTION to Problem#4:(Please
postyoursolution for all to share before you review this solution.
That is the best way for all of us to learn this material.)
We start with the Raw materials used. Beginning was 1,000, plus
900,000 minus 2000; therefore the materials used were 899,000.
Then what about the Work in Process? The beginning $190,000 plus
the 899,000 , plus the Labor $10,000 plus the Overhead $10,000,
MINUS THE END $170,000 = CURRENT MANUFACTURING COSTS of
$939,000.
Thereforethe Cost of Goods Manufactured= $939,000.
The problem asks for the cost of goods manufactured. We have the
answer.
(Then we add COG Manufactured plus the beginning Finished goods
of $10,000 minus the ending finished goods of $10,500; we get
$938,500 and that is the Cost of Goods Sold. This was not required
as part of the problem but hopefully it will help you see the
entire flow of the goods. It may be helpful to put this into a few
T accounts.)
Please reviewClass: Problem #5At December 31, 2013,TE Inc. has a
balance in the Work in Process Inventory account of $60,000. At
January 1, 2013, the balance was $46,000. Current manufacturing
costs for the year are $300,000. How much is cost of goods
manufactured?Beginning Work in Process: $46,000Ending Work in
process: $60,000Current Manufacturing Costs: $300,000
$46,000 + $300,000 - $60,000 = 286,000 (Cost of goods
Manufactured)You all got the right answer!!To get the Cost of Goods
Manufactured you take Beginning$46,000 +Current
Manufacturing$300,000 Ending $60,000. So Cost of Goods Manufactured
= $286,000
Class,One of the main points of this week is that: Once a
relevant allocation base has been selected, we calculate the
overhead allocation rate. This predetermined rate is based on
estimates of both the manufacturing overhead and the quantity of
the allocation base for the coming period.Predetermined Overhead
Rate = Estimated Manufacturing Overhead Costs Estimated Allocation
BaseWe use estimated data to calculate the predetermined overhead
rate for several reasons. First, actual costs and activity are
unknown until the end of the period. Because the price charged for
a job often depends on the cost, we cannot wait until the end of
the period to allocate overhead. Estimates are also used so that
the allocation rate remains the same from one month to another.
Seasonal fluctuations, such as increased utilities in summer
months, would cause the costs of identical jobs to differ if the
rate were calculated every month.Now that we have selected an
allocation base and calculated the predetermined overhead rate, we
can apply manufacturing overhead to jobs by multiplying this rate
by the actual amount of the allocation base used by the job.
Can you share other important items we learned this week?The
difference between cost of manufacture and total item cost. The
cost of manufactured items does not take into account the starting
and ending manufactured goods. cost of goods on hand would be the
goods manufactured that period plus the goods that were in process
at the end of last period minus the goods in process at the end of
the current period. This is a good point. The beginning and ending
are necessary to find out how much was used.TCO 4Given a firm's
cost-volume-profit structure, determine the break-even point in
terms of the units and revenue dollars to achieve a targeted
pre-tax and after-tax profit goal, and analyze the impact on risk
and reward factors resulting from changes in the cost structure,
sales price, and volume.Key Concepts Identify common cost behavior
patterns. Estimate the relationship between cost and activity using
account analysis and the high-low method. Perform
cost-volume-profit analysis for single products. Perform
cost-volume-profit analysis for multiple products. Discuss the
effect of operating leverage. Use the contribution margin per unit
of the constraint to analyze situations involving a resource
constraint.
TCO5Given a firm's breakdown of product and period costs,
compare and contrast the absorption costing method and the variable
costing method, detailing differences related to planning,
production strategy decisions, and performance evaluation.Key
Concepts Explain the difference between full (absorption) and
variable costing. Prepare an income statement using variable
costing. Discuss the effect of production on full and variable
costing income. Explain the impact of JIT (just-in-time) on the
difference between full and variable costing income. Discuss the
benefits of variable costing for internal reporting purposes.CLASS:
Since the break-even point represents the point at which the
company makes zero profit, why would a company have any interest in
it? How could managers use the break-even point when introducing a
new product?The break-even point is where the cost of doing
business and the income from the business is at the "0" point. The
business neither makes a profit or a loss.The break-even point is
the point where the revenue generated from the sale of product is
equal to the costs of production and materials. There is no profit
or loss. A company would have interest in the break-even point to
ensure the product is generating enough sales to generate a profit.
If the sales are sluggish then the company may need to do
additional marketing or discontinue the production of the product
if it not selling. A manager would be interested in the break-even
point for the product to ensure sales are high enough to generate a
profit and the manager would be in charge of production so they
need to be aware of the break-even point and number of units sold
to make sure they are accounting for unusable or damaged units
which will impact the break-even point.CLASS: Problem#2: This
problem uses the ideas we have learned in week 1 and now week 3.You
just started to work for a new company that sells tee shirts that
reads " I Passed Accounting". Selling price is $10 per shirt;
variable cost is $4 per shirt and fixed costs are $36,000. Compute
the number of tee shirts to A) break-even; and the number B) to
earn a profit of $24,000.
(HELP: I hope you can see that every shirt needs exactly $4 of
materials and labor and other variable expenses. That won't change
per unit but will increase in total as we make more shirts. Our
fixed cost of rent and other fixed costs won't change in total but
will change per unit as we make more units. The rent and insurance
and other Fixed expenses will stay at exactly $36,000 in this
problem.)Profit=SP(x)VC(x)TFCSP = $10, VC = $4, TFC = 36,000Break
Even Point = 6,000 Units0 = 10(x) - 4(x) - 36,0000 = 6(x) - 36,000X
= 6000Profit of $24,000 = 10,000 Units24,000 =10(x) - 4(x) -
36,00024,000 = 6(x) 36,00060,000 = 6(x)10,000 = XClass: Solution to
#2(most of you were able to figure this out. Review only after you
have tried it. Post your work even though an answer is already
posted.)Profit = SP(x) - VC(x) - TFCa) break-even: (point where the
profit is zero)0= 10(x)-4(x)-36,000---> 0=10x-4x-36,000 --->
0=6x-36,0006x= 36,000 ---> x=6,0006,000 T-Shirts made and
sold.B) To earn a profit of $24,000:24,000 = 10(x)-4(x) - 36,000
---> 24,000 = 6(x)-36,000 ---> 24,000+36,000 = 6x --->
x=10,000the company would have to sell 10,000 T-Shirts to earn a
profit of $24,000
Problem #3assume we are manufacturing a product.Assume the sales
price per unit is $60 and the variable cost is $20 per unit and the
fixed cost is $80,000; a) how many units would we need to sell to
breakeven? b) How many units would we need to sell to earn a profit
of $120,000? c) How many units do we need to sell to double that
profit to $240,000? d) Why didn't the number of units double from
Part B to Part C? What do we (the manufacturing company) learn
about our costs from this?
Class: Solution to Problem # 3: (Please post your solution
before reviewing even though I posted my solution. Share your
work). This is what I would put on a blackboard--Step by
step.Profit = SP(x) - VC(x) - TFCwhere "x" = Quantity of units
produced and soldSP = Selling price per unitVC = Variable cost per
unitTFC = Total fixed cost
A: Compute the # of sales needed to break evenHere we set profit
= to zero, because the break-even point is where no loss is
incurred and no profit is earned.$0.00 = $60(x) - $20(x) -
$80,000.00$0.00 = $40(x) - $80,000.00+ $80,000.00 +
$80,000.00---------------- ----------------$80,000.00 =
$40(x)__________ _________