engm 661 engineering economics for managers cost accounting
TRANSCRIPT
-
ENGM 661Engineering Economics for Managers
Cost Accounting
-
Accounting EquationOwner Equity = Assets - Liabilities
-
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300
Total Liabilities$193,200$207,900
Owner's Equity
Paid In Capital100,000100,000
Retained Earnings93,90075,900
Total Liabilities &
Owner Equity$387,100$383,800
Sheet2
Sheet3
-
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300
Total Liabilities$193,200$207,900
Owner's Equity
Paid In Capital100,000100,000
Retained Earnings93,90075,900
Total Liabilities &
Owner Equity$387,100$383,800
Sheet2
Sheet3
-
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300K-Corp Cash Flows
Total Liabilities$193,200$207,900
Owner's EquityNet Income$18,000
Paid In Capital100,000100,000Add (deduct) items
Retained Earnings93,90075,900Depreciation Exp16,400
Total Liabilities &Increase in Accts Rec.-8,200
Owner Equity$387,100$383,800Increase in Invent.-6,000
Increase in Accts. Pay6,800
Increase in Notes Pay-15,000
Net Cash from Operations$12,000
Cash from Investing0
Cash from Financing
Retire long term dept-6,500
Issue of long term dept0
Sale of common stock0
Payment of Dividends0
Net Increase in Cash$5,500
Sheet2
K-Corp Pro-Forma Cash Flows
Cash Flows from Ops.FebMarAprMayJun
Net Income$250$500$600$750$900
Depreciation5050505050
Increase in Receivables0(250)(475)(600)(900)
Increase in Inventory(10)(100)(300)(500)(900)
Increase in Current Liab5075100150180
Net Increase/Decrease$340$275($25)($150)($670)
Beginning Cash250590865840690
Ending Cash$590$865$840$690$20
Sheet3
Firm with No Leverage
Balance Sheet
Assets$100,000
Liabilities$0
Owner Equity100,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense0
Net Income$18,000
Firm with Leverage
Balance Sheet
Assets$100,000
Liabilities$50,000
Owner Equity50,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense4,000
Net Income$14,000
Sheet4
K-Corp Schedule of Cost of Goods Sold
Direct Materials
Invnetory, Dec. 1996$48,200
Purchases130,000
Cost of Direct materials
available for use178,200
Inventory, Dec. 199754,200
Direct Materials Used$124,000
Direct Labor209,500
Facotry Overhead:
Indirect labor43,000
Indirect material27,000
Utilities5,000
Depreciation16,200
Miscellaneous4,00095,200
Total Manufactirng Costs$428,700
K-Corp Income Statement
Net Sales$574,800
Less: Cost of Goods Sold
Finished Goods, Dec. 1996$42,000
Cost of Goods Manuf.0
Cost of Goods Avail
for sale$42,000
Finished Goods, Dec. 199739,400
Cost of Goods Sold2,600
Gross Margin574,800
Operating Expenses
Sales Expenses87,400
Depreciation Equip7,200
Depreciation Bldg9,200
Administrative14,500
Utilities4,600
Total Operating$122,900
Income from Operations451,900
Taxes5,600
Net Income$446,300
-
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300K-Corp Cash Flows
Total Liabilities$193,200$207,900
Owner's EquityNet Income$18,000
Paid In Capital100,000100,000Add (deduct) items
Retained Earnings93,90075,900Depreciation Exp16,400
Total Liabilities &Increase in Accts Rec.-8,200
Owner Equity$387,100$383,800Increase in Invent.-6,000
Increase in Accts. Pay6,800
Increase in Notes Pay-15,000
Net Cash from Operations$12,000
Cash from Investing0
Cash from Financing
Retire long term dept-6,500
Issue of long term dept0
Sale of common stock0
Payment of Dividends0
Net Increase in Cash$5,500
Sheet2
K-Corp Pro-Forma Cash Flows
Cash Flows from Ops.FebMarAprMayJun
Net Income$250$500$600$750$900
Depreciation5050505050
Increase in Receivables0(250)(475)(600)(900)
Increase in Inventory(10)(100)(300)(500)(900)
Increase in Current Liab5075100150180
Net Increase/Decrease$340$275($25)($150)($670)
Beginning Cash250590865840690
Ending Cash$590$865$840$690$20
Sheet3
Firm with No Leverage
Balance Sheet
Assets$100,000
Liabilities$0
Owner Equity100,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense0
Net Income$18,000
Firm with Leverage
Balance Sheet
Assets$100,000
Liabilities$50,000
Owner Equity50,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense4,000
Net Income$14,000
Sheet4
K-Corp Schedule of Cost of Goods Sold
Direct Materials
Invnetory, Dec. 1996$48,200
Purchases130,000
Cost of Direct materials
available for use178,200
Inventory, Dec. 199754,200
Direct Materials Used$124,000
Direct Labor209,500
Facotry Overhead:
Indirect labor43,000
Indirect material27,000
Utilities5,000
Depreciation16,200
Miscellaneous4,00095,200
Total Manufactirng Costs$428,700
Add: Work in Process 199638,000
Less: Work in Process 1997(41,000)
Cost of Goods Manufactured$425,700
K-Corp Income Statement
Net Sales$574,800
Less: Cost of Goods Sold
Finished Goods, Dec. 1996$42,000
Cost of Goods Manuf.425,700
Cost of Goods Avail
for sale$467,700
Finished Goods, Dec. 199739,400
Cost of Goods Sold428,300
Gross Margin574,800
Operating Expenses
Sales Expenses87,400
Depreciation Equip7,200
Depreciation Bldg9,200
Administrative14,500
Utilities4,600
Total Operating$122,900
Income from Operations451,900
Taxes5,600
Net Income$446,300
-
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300K-Corp Cash Flows
Total Liabilities$193,200$207,900
Owner's EquityNet Income$18,000
Paid In Capital100,000100,000Add (deduct) items
Retained Earnings93,90075,900Depreciation Exp16,400
Total Liabilities &Increase in Accts Rec.-8,200
Owner Equity$387,100$383,800Increase in Invent.-6,000
Increase in Accts. Pay6,800
Increase in Notes Pay-15,000
Net Cash from Operations$12,000
Cash from Investing0
Cash from Financing
Retire long term dept-6,500
Issue of long term dept0
Sale of common stock0
Payment of Dividends0
Net Increase in Cash$5,500
Sheet2
K-Corp Pro-Forma Cash Flows
Cash Flows from Ops.FebMarAprMayJun
Net Income$250$500$600$750$900
Depreciation5050505050
Increase in Receivables0(250)(475)(600)(900)
Increase in Inventory(10)(100)(300)(500)(900)
Increase in Current Liab5075100150180
Net Increase/Decrease$340$275($25)($150)($670)
Beginning Cash250590865840690
Ending Cash$590$865$840$690$20
Sheet3
Firm with No Leverage
Balance Sheet
Assets$100,000
Liabilities$0
Owner Equity100,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense0
Net Income$18,000
Firm with Leverage
Balance Sheet
Assets$100,000
Liabilities$50,000
Owner Equity50,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense4,000
Net Income$14,000
Sheet4
K-Corp Schedule of Cost of Goods Sold
Direct Materials
Invnetory, Dec. 1996$48,200
Purchases130,000
Cost of Direct materials
available for use178,200
Inventory, Dec. 199754,200
Direct Materials Used$124,000
Direct Labor209,500
Facotry Overhead:
Indirect labor43,000
Indirect material27,000
Utilities5,000
Depreciation16,200
Miscellaneous4,00095,200
Total Manufactirng Costs$428,700
Add: Work in Process 199638,000
Less: Work in Process 1997(41,000)
Cost of Goods Manufactured$425,700
K-Corp Income Statement
Net Sales$574,800
Less: Cost of Goods Sold
Finished Goods, Dec. 1996$42,000
Cost of Goods Manuf.425,700
Cost of Goods Avail
for sale$467,700
Finished Goods, Dec. 199739,400
Cost of Goods Sold428,300
Gross Margin146,500
Operating Expenses
Sales Expenses87,400
Depreciation Equip7,200
Depreciation Bldg9,200
Administrative14,500
Utilities4,600
Total Operating$122,900
Income from Operations23,600
Taxes5,600
Net Income$18,000
-
Cost Behavior & Flexible BudgetingMixed costs are a function of fixed & variable costsCost-Volume formula
Y = a + bx
whereY = mixed cost to break upx = a measure of activity (machine hrs)a = fixed cost componentb = variable rate per unit x
-
High-Low MethodSuppose we have the following:
Sheet1
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Sheet2
Sheet3
MBD000047EE.xls
Sheet1
K-Corp Consolidated BalanceK-Corp Income Statement
19971996
Current AssetsNet Sales$574,800
Cash$22,300$16,800Cost of Goods Sold428,300
Accounts Receivable46,80038,600Gross Margin146,500
Inventories54,20048,200Operating Expenses
Total Current Assets$123,300$103,600Sales Expenses87,400
Other AssetsDepreciation Equip7,200
Land100,000100,000Depreciation Bldg9,200
Building85,40094,600Administrative14,500
Equipment78,40085,600Utilities4,600
Total Assets$387,100$383,800Total Operating$122,900
Income from Operations23,600
Current LiabilitiesTaxes5,600
Accounts Payable$62,400$55,600Net Income$18,000
Notes5,00020,000
Total Current Liabilities$67,400$75,600
Mortgage125,800132,300K-Corp Cash Flows
Total Liabilities$193,200$207,900
Owner's EquityNet Income$18,000
Paid In Capital100,000100,000Add (deduct) items
Retained Earnings93,90075,900Depreciation Exp16,400
Total Liabilities &Increase in Accts Rec.-8,200
Owner Equity$387,100$383,800Increase in Invent.-6,000
Increase in Accts. Pay6,800
Increase in Notes Pay-15,000
Net Cash from Operations$12,000
Cash from Investing0
Cash from Financing
Retire long term dept-6,500
Issue of long term dept0
Sale of common stock0
Payment of Dividends0
Net Increase in Cash$5,500
Sheet2
K-Corp Pro-Forma Cash Flows
Cash Flows from Ops.FebMarAprMayJun
Net Income$250$500$600$750$900
Depreciation5050505050
Increase in Receivables0(250)(475)(600)(900)
Increase in Inventory(10)(100)(300)(500)(900)
Increase in Current Liab5075100150180
Net Increase/Decrease$340$275($25)($150)($670)
Beginning Cash250590865840690
Ending Cash$590$865$840$690$20
Sheet3
Firm with No Leverage
Balance Sheet
Assets$100,000
Liabilities$0
Owner Equity100,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense0
Net Income$18,000
Firm with Leverage
Balance Sheet
Assets$100,000
Liabilities$50,000
Owner Equity50,000
Total Liability &
Owner Equity$100,000
Income from Operations$18,000
Interest Expense4,000
Net Income$14,000
Sheet4
K-Corp Schedule of Cost of Goods Sold
Direct Materials
Invnetory, Dec. 1996$48,200
Purchases130,000
Cost of Direct materials
available for use178,200
Inventory, Dec. 199754,200
Direct Materials Used$124,000
Direct Labor209,500
Facotry Overhead:
Indirect labor43,000
Indirect material27,000
Utilities5,000
Depreciation16,200
Miscellaneous4,00095,200
Total Manufactirng Costs$428,700
Add: Work in Process 199638,000
Less: Work in Process 1997(41,000)
Cost of Goods Manufactured$425,700
K-Corp Income Statement
Net Sales$574,800
Less: Cost of Goods Sold
Finished Goods, Dec. 1996$42,000
Cost of Goods Manuf.425,700
Cost of Goods Avail
for sale$467,700
Finished Goods, Dec. 199739,400
Cost of Goods Sold428,300
Gross Margin574,800
Operating Expenses
Sales Expenses87,400
Depreciation Equip7,200
Depreciation Bldg9,200
Administrative14,500
Utilities4,600
Total Operating$122,900
Income from Operations451,900
Taxes5,600
Net Income$446,300
Sheet5
DirectFactory
MonthLaborOverhead
April2750250
May2480280
June2690230
July2330190
August2610210
Sept2910270
-
High-Low Method X YHigh2802480Low1902330Difference 90 150
Variable rate = 150/90 = $1.67 per DLH
-
High-Low MethodFixed Cost Portion
Total Mixed - Variable = $2,480 - 1.67(280) = $2,012
-
High-Low MethodFixed Cost Portion
Total Mixed - Variable = $2,480 - 1.67(280) = $2,012
Total Mixed Cost = $2,012 + 1.67 X
-
Least Squares
Chart1
2750
2480
2690
2330
2610
2910
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
Sheet1
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Sheet1
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
Sheet2
Sheet3
-
Least SquaresY = $1,900.27 + 3.054 x
Chart2
27502663.9726027397
24802755.6164383562
26902602.8767123288
23302480.6849315068
26102541.7808219178
29102725.0684931507
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Sheet1
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Sheet1
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
Sheet2
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Sheet3
-
Flexible BudgetingGeared towards a range of activitiesDynamic rather than static
-
Flexible BudgetingGeared towards a range of activitiesDynamic rather than static
Need to understand rudiments of cost accountingJob order costingProcess costingActivity based costing
-
Job Order CostingK-Corp collects its cost data by the job order cost system. For each job, they know the amount and material costs. Direct labor costs are $9.50 per hour. Factory overhead rate is computed at $4.50 per hour.
-
Sheet1
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Sheet1
0
0
0
0
0
0
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
Sheet2
00
00
00
00
00
00
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Sheet3
Job Order Costing
Direct MaterialsHrsRateCost
7/14 Issued$1,200
7/20 Issued800
7/25 Issued500
Total$2,500
Direct Labor
Week 7/20180$9.50 / hr$1,710
Week 7/26160$9.50 / hr1,520
Total Labor$3,230
Cost Sumamry
Direct Material$2,500
Direct Labor3,230
Factory Overhead340$4.50 / hr1,530
Total Cost$7,260
Sell Price
Job PriceCost + 40%$10,164
-
Process CostingA Company produces and sells a chemical product. During a given month the company purchases 15,000 gallons of chemicals at a cost of $30,000. 10,000 gallons are completed and transferred to the next department. 5,000 gallons are 20% complete as to conversion. Factory overhead for the month is $20,000.
-
Fixed_Var
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Fixed_Var
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
JobOrder
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Process
Job Order Costing
Direct MaterialsHrsRateCost
7/14 Issued$1,200
7/20 Issued800
7/25 Issued500
Total$2,500
Direct Labor
Week 7/20180$9.50 / hr$1,710
Week 7/26160$9.50 / hr1,520
Total Labor$3,230
Cost Sumamry
Direct Material$2,500
Direct Labor3,230
Factory Overhead340$4.50 / hr1,530
Total Cost$7,260
Sell Price
Job PriceCost + 40%$10,164
Process Order Costing
ItemsUnitsCostCost/Unit
Chemicals15,000$30,000$2.00
Conversion Costs
Chemicals Transferred10,000
Work in Process
(20% of 5,000)1,000
Total Conversion11,000$20,000$1.82
Total Costs$50,000$3.82
Ending Work in ProcessUnitsCost/UnitCost
Materials5,000$2.00$10,000
Conversion Cost1,000$1.821,818
Total Work in Process$11,818
Completed & Transferred10,000$3.8238,182
Total Costs Accounted$50,000
-
Activity Based CostingHistoricallydirect labor & material constitute significant elements of cost of goods soldCurrentoverhead costs dominate the cost of productionActivity-based costing is designed to meet the challenge of a changing cost mix by associating manufacturing costs with activities which drive them
-
ABC Two-Step ProcessDefine Cost Pools(usually support functions)Identify Cost Drivers(trace costs to the cost pools)
-
ABC ExampleA multinational firm uses traditional accounting to allocate manufacturing and management support costs. However, travel is typically allocated on the basis of employees at plants in France, Germany, Italy, and Greece. Consequently, some plants are likely generating much more management travel than others. The ABC system is chosen to more precisely allocate travel costs to major product lines.
-
ABC Example
Sheet1
Total Travel$500,000Plant
Total Employment29,100PlantEmployeesBudget% to TravelTravel
Total Vouchers500France12,500$2,000,0005.0%$100,000
Travel Rate$17.18Italy8,600500,00015.0%75,000
Germany4,2001,000,00017.5%175,000
Traditional CostingGreece3,800500,00030.0%150,000
TravelTotal$500,000
PlantEmployeesAllocation
France12,500$214,777Product Line
Italy8,600147,766Plant12345
Germany4,20072,165France5025
Greece3,80065,292Italy803030
Germany1002520
Greece140
Sheet2
Sheet3
-
ABC Example1. Determine Cost Pool
Sheet1
Total Travel$500,000
Total Employment29,100
Total Vouchers500
Travel Rate$17.18
Traditional Costing
Travel
PlantEmployeesAllocation
France12,500$214,777
Italy8,600147,766
Germany4,20072,165
Greece3,80065,292
ABC Cost Pool
Plant
PlantEmployeesBudget% to TravelTravel
France12,500$2,000,0005.0%$100,000
Italy8,600500,00015.0%75,000
Germany4,2001,000,00017.5%175,000
Greece3,800500,00030.0%150,000
Total$500,000
Product Line
Plant12345
France5025
Italy803030
Germany1002520
Greece140
Sheet2
Sheet3
-
ABC Example2. Determine Cost Driver
-
ABC ExampleDriver Distribution
Sheet1
Total Travel$500,000
Total Employment29,100
Total Vouchers500
Travel Rate$17.18
Traditional Costing
Travel
PlantEmployeesAllocation
France12,500$214,777
Italy8,600147,766
Germany4,20072,165
Greece3,80065,292
ABC Cost Pool
Plant
PlantEmployeesBudget% to TravelTravel
France12,500$2,000,0005.0%$100,000
Italy8,600500,00015.0%75,000
Germany4,2001,000,00017.5%175,000
Greece3,800500,00030.0%150,000
Total$500,000
Travel Vouchers
Product Line
Plant12345Total
France502575
Italy803030140
Germany1002520145
Greece140140
Total Vouchers230503020170500
Rate1000
Travel Vouchers
Product Line
Plant12345Total
France50,00025,000$75,000
Italy80,00030,00030,000140,000
Germany100,00025,00020,000145,000
Greece140,000140,000
Total Vouchers$230,000$50,000$30,000$20,000$170,000$500,000
Sheet2
Sheet3
-
ABC ExampleAllocation of Costs
Sheet1
Total Travel$500,000
Total Employment29,100
Total Vouchers500
Travel Rate$17.18
Traditional Costing
Travel
PlantEmployeesAllocation
France12,500$214,777
Italy8,600147,766
Germany4,20072,165
Greece3,80065,292
ABC Cost Pool
Plant
PlantEmployeesBudget% to TravelTravel
France12,500$2,000,0005.0%$100,000
Italy8,600500,00015.0%75,000
Germany4,2001,000,00017.5%175,000
Greece3,800500,00030.0%150,000
Total$500,000
Travel Vouchers
Product Line
Plant12345Total
France502575
Italy803030140
Germany1002520145
Greece140140
Total Vouchers230503020170500
Rate1000
Travel Vouchers
Product Line
Plant12345Total
France50,00025,000$75,000
Italy80,00030,00030,000140,000
Germany100,00025,00020,000145,000
Greece140,000140,000
Total Vouchers$230,000$50,000$30,000$20,000$170,000$500,000
Sheet2
Sheet3
-
Value AddedExamines the difference between the net operating profit (after tax) and the cost of capitalFour ways to create value for shareholderincrease profit margins without increasing capitalinvest in projects that earn more than cost of capitalfree-up capital than earns less than cost of capitaluse debt to reduce the cost of capital
-
Value AddedWhich is the better firm from a shareholders point of view?
Fixed_Var
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Fixed_Var
0
0
0
0
0
0
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
JobOrder
00
00
00
00
00
00
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Process
Job Order Costing
Direct MaterialsHrsRateCost
7/14 Issued$1,200
7/20 Issued800
7/25 Issued500
Total$2,500
Direct Labor
Week 7/20180$9.50 / hr$1,710
Week 7/26160$9.50 / hr1,520
Total Labor$3,230
Cost Sumamry
Direct Material$2,500
Direct Labor3,230
Factory Overhead340$4.50 / hr1,530
Total Cost$7,260
Sell Price
Job PriceCost + 40%$10,164
ValueAdd
Process Order Costing
ItemsUnitsCostCost/Unit
Chemicals15,000$30,000$2.00
Conversion Costs
Chemicals Transferred10,000
Work in Process
(20% of 5,000)1,000
Total Conversion11,000$20,000$1.82
Total Costs$50,000$3.82
Ending Work in ProcessUnitsCost/UnitCost
Materials5,000$2.00$10,000
Conversion Cost1,000$1.821,818
Total Work in Process$11,818
Completed & Transferred10,000$3.8238,182
Total Costs Accounted$50,000
AB
Assets (millions)$100$200
Owner Equity100200
Net Income2442
ROA24%21%
ROE24%21%
-
Value AddedFirm B has largest Economic Value Added (EVA)
Fixed_Var
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Fixed_Var
0
0
0
0
0
0
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
JobOrder
00
00
00
00
00
00
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Process
Job Order Costing
Direct MaterialsHrsRateCost
7/14 Issued$1,200
7/20 Issued800
7/25 Issued500
Total$2,500
Direct Labor
Week 7/20180$9.50 / hr$1,710
Week 7/26160$9.50 / hr1,520
Total Labor$3,230
Cost Sumamry
Direct Material$2,500
Direct Labor3,230
Factory Overhead340$4.50 / hr1,530
Total Cost$7,260
Sell Price
Job PriceCost + 40%$10,164
ValueAdd
Process Order Costing
ItemsUnitsCostCost/Unit
Chemicals15,000$30,000$2.00
Conversion Costs
Chemicals Transferred10,000
Work in Process
(20% of 5,000)1,000
Total Conversion11,000$20,000$1.82
Total Costs$50,000$3.82
Ending Work in ProcessUnitsCost/UnitCost
Materials5,000$2.00$10,000
Conversion Cost1,000$1.821,818
Total Work in Process$11,818
Completed & Transferred10,000$3.8238,182
Total Costs Accounted$50,000
AB
Assets (millions)$100$200
Owner Equity100200
Net Income2442
ROA24%21%
ROE24%21%
Cost of Capital (12%)1224
EVA ( NI - CoC )$12$18
-
Value AddedFirm B has largest Economic Value Added (EVA) Maximizing ROI is not the right objective!
Fixed_Var
FactoryDirect
MonthOverheadLabor Hrs
April2750250
May2480280
June2690230
July2330190
August2610210
September2910270
Cost
XYEstimate
25027502664
28024802756
23026902603
19023302481
21026102542
27029102725
SUMMARY OUTPUT
Regression Statistics
Multiple R0.5208174034
R Square0.2712507677
Adjusted R Square0.0890634597
Standard Error195.2658882736
Observations6
ANOVA
dfSSMSFSignificance F
Regression156768.264840182756768.26484018271.48885655430.2894099552
Residual4152515.06849315138128.7671232877
Total5209283.333333333
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept1900.2739726027601.98005052893.15670589240.0342923391228.9059460833571.6419991225228.9059460833571.6419991225
X Variable 13.05479452052.50354599331.22018709810.2894099552-3.896177895410.0057669365-3.896177895410.0057669365
Fixed_Var
0
0
0
0
0
0
Laobr Hrs
Overhead
Factory Overhead vs Direct Labor Hrs.
JobOrder
00
00
00
00
00
00
Labor Hrs
Overhead
Factory Overhead vs Direct Labor Hrs
Process
Job Order Costing
Direct MaterialsHrsRateCost
7/14 Issued$1,200
7/20 Issued800
7/25 Issued500
Total$2,500
Direct Labor
Week 7/20180$9.50 / hr$1,710
Week 7/26160$9.50 / hr1,520
Total Labor$3,230
Cost Sumamry
Direct Material$2,500
Direct Labor3,230
Factory Overhead340$4.50 / hr1,530
Total Cost$7,260
Sell Price
Job PriceCost + 40%$10,164
ValueAdd
Process Order Costing
ItemsUnitsCostCost/Unit
Chemicals15,000$30,000$2.00
Conversion Costs
Chemicals Transferred10,000
Work in Process
(20% of 5,000)1,000
Total Conversion11,000$20,000$1.82
Total Costs$50,000$3.82
Ending Work in ProcessUnitsCost/UnitCost
Materials5,000$2.00$10,000
Conversion Cost1,000$1.821,818
Total Work in Process$11,818
Completed & Transferred10,000$3.8238,182
Total Costs Accounted$50,000
AB
Assets (millions)$100$200
Owner Equity100200
Net Income2442
ROA24%21%
ROE24%21%
Cost of Capital (12%)1224
EVA ( NI - CoC )$12$18