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WHAT IS THE PROFIT ON A JERSEY? Does C&C Sports make a profit if a baseball jersey sells for $14.80? What does it really cost C&C Sports to make a baseball jersey? $6.85? $9.00? $11.17?

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FUNCTIONAL COST CLASSIFICATIONS All costs incurred to manufacture a product or deliver a service

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WHAT ARE PRODUCT COSTS? All costs incurred in producing a product Inventoriable included in inventory on balance sheet Expensed on income statement as COGS when units are sold What about for a retailer? An attorney?

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FUNCTIONAL COST CLASSIFICATIONS Costs that easily can be traced directly to the cost object

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FUNCTIONAL COST CLASSIFICATIONS

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DIRECT MATERIALS Materials that can be physically and conveniently traced directly to the manufacture of the product Often referred to as raw materials

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DIRECT LABOR Labor that can be physically traced to the production of the product in a hands on sense (the production line) Includes wages, taxes, and benefits Have seen a drop in importance due to automation

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FUNCTIONAL COST CLASSIFICATIONS Costs that cannot easily be traced directly to the cost object

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FACTORY OVERHEAD All product costs that are not direct materials or direct labor Costs related to running the factory and providing productive capacity Indirect materials and indirect labor are two special classes of factory overhead

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COMPONENTS OF C&CS PRODUCT COST $6.85 $1.92 $2.40 $11.17

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FUNCTIONAL COST CLASSIFICATIONS All costs incurred but not associated with the manufacture of product or delivery of service (costs of SG&A activities)

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WHAT ARE PERIOD COSTS? Associated with the passage of time, not the direct production of products Non-inventoriable Selling, general, and administrative (SG&A)

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PRODUCT AND PERIOD COSTS AT C&C PRODUCT COSTS PERIOD COSTS Balance Sheet Inventory Income Statement Cost of Goods Sold Income Statement Operating Expenses AS SHIRTS ARE PRODUCED AS SHIRTS ARE SOLD AS INCURRED

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DIRECT/INDIRECT? PRODUCT/PERIOD? Lisa F. Young/iStockphoto pagadesign/iStockphoto Andrew Howe/iStockphoto Igor Karon/iStockphoto

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COST FUNCTION AND BEHAVIOR ProductPeriod Variable Direct materials Direct labor (traditionally) Electricity Indirect materials Sales commissions Packaging for delivery Fixed Machine depreciation Factory rent Production managers salary Depreciation on delivery trucks Marketing vice presidents salary Advertising COST FUNCTION COST BEHAVIOR

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WHAT ARE THE 3 STAGES OF PRODUCTION? Work not started Raw materials Supplies Work in process (conversion) Direct labor Overhead Finished work Includes all costs incurred to produce the product

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MANUFACTURING INVENTORY ACCOUNTS Each stage of production is accounted for in its own inventory account in the general ledger: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory All three accounts operate the same way, as shown on the next slide

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INVENTORY COST FLOWS AT C&C

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MANUFACTURING COST FLOWS

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MANUFACTURING INVENTORY ACCOUNTS BEGINNING BALANCE COSTS ADDED DURING THE PERIOD COSTS REMOVED DURING THE PERIOD ENDING BALANCE + _ =

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MANUFACTURING COST FLOWS Total Manufacturing Costs Cost of Goods Manufactured

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SCHEDULE OF COST OF GOODS MANUFACTURED

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CHARACTERISTICS OF JOB ORDER COSTING SYSTEMS Many different products are produced each period Custom, made-to-order products Production process is divided into batches or jobs with a definite beginning and ending Costs are accumulated separately by job

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HOW DO YOU TRACK COSTS IN A JOB ORDER SYSTEM? Job order cost sheet tracks all product costs Materials requisition slip tracks direct and indirect materials Employee time cards/sheets track direct and indirect labor

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MATERIALS REQUISITION SLIP The materials requisition slip shows when direct materials are requisitioned from the storeroom and moved to the production line. Raw materials inventory is decreased and work in process inventory is increased.

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EMPLOYEE TIME TICKET Workers record time spent making products on an employee time ticket. This provides the basis for adding the direct labor cost to work in process inventory.

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JOB ORDER COST SHEET Use the job cost sheet to accumulate all manufacturing costs for each job.

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HOW DO JOB COST SHEETS RELATE TO WIP INVENTORY?

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PREDETERMINED OVERHEAD RATES What is a POR? A standard rate based on budgeted activity used to assign or apply overhead to products

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WHY DO WE NEED TO USE POR S ? Without using a POR, we would have to wait until the end of the period to assign ANY overhead costs to products. This might hamper decision making activities. Using a POR smoothes out seasonal fluctuations in actual overhead costs that are not related to activity levels. Using a POR solves the problem with fixed OH costs which dont change on a unit basis.

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HOW DO YOU CALCULATE THE POR? Budget the activity level for the coming year Budget the total amount of overhead for the planned production level Divide budgeted overhead by budgeted activity level

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RECORDING OVERHEAD Actual overhead recorded as a debit as invoices are received Applied overhead recorded as a credit during the period as overhead is applied to specific jobs Manufacturing Overhead A/P WIP

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MOH REVISITED Applying manufactured overhead throughout the period is just an estimate of what overhead costs will actually be. Actual overhead for the year will not be known until all indirect manufacturing costs have been incurred for the entire year. Will probably have to make some adjustments at year end.

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APPLIED VS. ACTUAL MOH