ACCT 2302

Fundamentals of Accounting II

Spring 2011

Lecture 3

Professor Jeff Yu

Review: cost behavior

__________ per unit does NOT change when activity level changes.

Total ____________ does NOT change when activity level changes.

________________ increases when activity level increases.

________________ decreases when activity level increases.

________________ is the range of activity within which the assumptions about cost behavior are valid.

Review: cost classification for decision making

______________ are costs that differ between two (or more) alternatives.

______________ is the value of the next best alternative foregone as the result of making a decision.

______________ is a cost that has already been incurred and cannot be changed by any decision made now or in the future.

______________ is not a differential cost and should be ignored when making decisions.

DirectMaterial

DirectLabor

ManufacturingOverhead

Manufacturing Costs = ________ Costs

Marketing/ Selling Costs

Administrative Costs

Nonmanufacturing Costs = _______ Costs

Review: cost terms under Absorption Costing

Merchandising vs. Manufacturing Firms

Merchandisers . . .Buy finished goods.

Sell finished goods.

Manufacturers . . .Buy raw materials.

Produce and sell finished goods.

MegaLoMart

Balance Sheet

Merchandiser Current assets

CashReceivablesPrepaid ExpensesMerchandise

Inventory

Manufacturer

Current Assets Cash Receivables Prepaid Expenses Inventories

• Raw Materials• Work in Process• Finished Goods

Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Merchandising Company

Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$

Basic Inventory Flows

Beginningbalance

$$

Beginningbalance

$$

Additions$$$

Additions$$$+ Available

$$$$$

Available$$$$$=

Withdrawals$$$

Withdrawals$$$

_Available$$$$$

Available$$$$$

Endingbalance

$$

Endingbalance

$$=

How to illustrate inventory flows using T-accounts?

If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month?

Quick Check

Manufacturing Cost Flows

Selling and Administrative

costs

Raw Material

Work in Process

FinishedGoods

Cost of Goods Sold

Raw Material Purchases

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

ManufacturingOverhead

Selling and Administrative

Direct Material

Cost of GoodsManufactured Goods Sold

Which of the following transactions would immediately result in an expense?

(There could be more than one correct answer.)

A. Work in process is completed.

B. Finished goods are sold.

C. Raw materials are placed into production.

D. Administrative salaries are accrued and paid.

Quick Check

Manufacturing Cost Flows

How to calculate Direct Material cost?

Beginning Balance of Raw Materials Inventory + Raw Materials Purchased Raw Materials Available for Use - Indirect Material used - Ending Balance of Raw Materials Inventory Direct Material

Q: How to do it using the T-account?

Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. Assume the firm doesn’t use any indirect material, what is the cost of direct material?

Example

Manufacturing Cost Flows

How to calculate Manufacturing Costs?

Direct Material+ Direct Labor + Manufacturing Overhead * Manufacturing Costs

* Note: use actual MOH only if we have the actual number at the time of the decision. However, in most real world situations, we don’t and hence have to use an estimated number (applied MOH) to provide timely info for the decision.

In May 2010, DFW Inc. used $280,000 of Direct material. Direct labor cost was $375,000 and applied manufacturing overhead was $180,000. What were total manufacturing costs incurred for the month?

Example

How to calculate Cost of Goods Manufactured?

Beginning Balance of Work in Process Inventory + Manufacturing Costs Total Costs to Account For - Ending Balance of Work in Process Inventory Cost of Goods Manufactured

Manufacturing Cost Flows

Q: How to do it using the T-account?

Beginning work in process inventory was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

Example

Manufacturing Cost Flows

How to calculate Cost of Goods Sold:

Beginning Balance of Finished Goods Inventory + Cost of Goods Manufactured Cost of Goods Available for Sale - Ending Balance of Finished Goods Inventory Cost of Goods Sold

Q: How to do it using the T-account?

Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?

Example

Summary of Manufacturing Cost Flows: T-Accounts

Office Oasis, an office furniture manufacturer, provides you with the following accounting information for the month of May:

Direct Material: $20,000Raw Materials purchased: $30,000Direct Labor: $15,000Applied MOH: $35,000Ending Raw materials inventory: $20,000Ending Work-in-process inventory: $10,000Cost of Goods Manufactured: $90,000

Based on the above cost data, calculate:1) The beginning Raw material inventory for the month of May. 2) The beginning Work-in-process inventory for the month of May.

Practice Problem

Jan 1 Dec 31Raw materials inventory $ 90 65Work-in-process inventory 180 175Finished good inventory 150 165 Sales 800Raw materials purchases 75Selling expenses 140Direct Labor expenses 180Applied Manufacturing Overhead 35Administrative expenses 110

Based on the above data (in thousands), calculate:1) Direct Material cost during the year;2) Cost of Goods Manufactured for the year;3) Cost of Goods Sold for the year;4) Net operating income for the year.

Practice Problem

For Next Class

Read chapter 3 Attempt the assigned HW problems

Administrative salaries $160Raw materials purchases 290Sales commissions 140Depreciation of office equipments in headquarter 30Applied Manufacturing overhead 270

Jan 1 Dec 31Raw materials inventory $ 40 10Work-in-process inventory 42 __Finished good inventory 50 __

Total manufacturing cost is $683, CGM is $690, CGS is $660.

Q: based on the above data (in thousands):1) What is the Direct Labor cost?2) What is the balance of Work-in-process inventory on Dec 31? 3) What is the balance of Finished good inventory on Dec 31?

Homework Q1

Q: based on the above data (in thousands):1) What is the Cost of Goods Manufactured for the year?2) What is the Net Operating Income for the year?

Homework Q2

Jan 1 Dec 31

Raw Materials Inventory 90 60

Work in Process Inventory 150 100

Finished Goods Inventory 80 180

Raw materials purchases 720

Selling and Administrative expenses

300

Direct Labor cost 150

Applied MOH 350

Sales 2,500