Introduction to Accounting

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Introduction to Accounting

• Examination 2 review Session
• Professor William F. Bentz

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Agenda for Today

• Cover some basics of product costing, including
  the flow of costs through the customary accounts
• Predetermined overhead rate problem
• Job-order costing problem
• Process cost problem

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Agenda for Today

• Cost behavior notes and simple problem
• Cost-volume-profit (breakeven) analysis
• Variable costing
• Activity Based Costing (ABC)
• Profit planning

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Concept of Cost

• Cost is a sacrifice a measurable cost is the
  relinquishment of a measurable asset or the
  creation of a measurable liability.

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GAAP Product Cost

• For Work-in-Process and Finished Goods inventory
  purposes (GAAP), only manufacturing costs are
  included in product costs. Product costs
  remain in inventory until the associated product
  are sold or decline in value. When the
  associated products are sold, the product cost
  is added to Cost of Goods Sold.

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Meanings of Product Cost
Inventoriable product costs
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GAAP Expenses (Period Costs)

• Costs incurred for non-manufacturing activities
  are charged to expense accounts during the
  accounting period incurred and thus are called
  period expenses.

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GAAP Expenses--Examples

• Administrative Expenses
• Corporate officers (executives)
• Corporate headquarter buildings
• Corporate costs like the annual audit fees
• Corporate costs of issuing stock
• Corporation licenses and fees

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GAAP Expenses--Examples

• Selling (Marketing) Expenses
• Product advertising and promotion
• Salaries commissions of employees working the
  sales and marketing
• Travel costs of sales visits
• Depreciation on computers and other sales office
  equipment

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GAAP Expenses--Examples

• Distribution Expenses
• Depreciation, insurance and property taxes on
  warehouses
• Salaries wages of warehouse employees
• Transportation cost from factories to warehouses
  or to customers, and from warehouses to customers.

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Accounting-Speak
Period Expenses
Expensed During a Period
Costs Incurred
Product Costs (Inventory)
Assets (Prepaids) (PPE)
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TerminologyCosting

• Costing is the process of estimating the cost
  (sacrifice) of taking action. Costs are the
  result of undertaking and maintaining activities.
  Thus, costing is largely a matter of assigning
  costs (sacrifices) with the activities which
  caused those sacrifices.

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TerminologyCost Object

• A cost object is any activity for which a
  separate measurement of cost is desired.
• An activity involves doing something
• Cost objects are derived from the purposes for
  which the cost information is to be used
  (different costs for different purposes).

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TerminologyCosting Systems

• Costing systems are the information systems used
  to accumulate cost data either regularly or
  intermittently. Usually cost systems are
  flexible enough to collect information for a
  variety of purposes.

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TerminologyCosting Systems

• A variety of costing systems may exist in any
  one organization (engineering, accounting,
  production, distribution).

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TerminologyCost Incurred

• Cost incurred is the cost that an entity has
  experienced as a result of the execution of some
  activity for a specified period of time.
  Although it is in the past, cost incurred may
  have to be estimated. Accurate, valid measures
  of cost incurred require information about
  separable activities.

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Product Costs (GAAP)

• Product (inventoriable) costs include all
  manufacturing costs regardless of traceability or
  behavior.
• Direct materials
• Direct labor
• Indirect labor, materials, depreciation,
  services, etc.

Conversion
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The Flow of Costs
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Cost Assignment

• Tracing direct costs can be traced to cost
  objects
• Ability to trace with acceptable accuracy,
  validity, and cost
• Cost-effective to trace costs

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Cost Assignment

• Cost allocation is the process of assigning costs
  to cost objects when those costs cannot be traced
  cost-effectively.

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The Flow of Costs
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Total mixed cost
Total cost
Total cost curve
Activity Volume
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Total mixed cost
Total cost
Total cost curve
Variable component
Fixed component
Activity Volume
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Total mixed cost

• Semivariable or mixed costs are those costs that
  contain both a fixed and a variable component.
  Such costs are normally represented by a simple
  linear equation of the form TC F vX, where TC
  represents total cost, F represents total fixed
  cost, and v represents the variable cost per unit
  of activity, and X is the volume of activity
  during a period.

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Separating mixed costs

• Separation of fixed variable components
• TC2 F vX2 (1)
• TC1 F vX1 (2)
• TC2 TC1 (F F) v(X2 X1) (3) (1)-(2)
• Solving for v and F
• v (TC2 TC1 )/ (X2 X1)
• From (1), F TC2 - vX2

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Separating Mixed Costs

• Suppose TC1 900 for 50 units
• TC2 1,000 for 60 units
• v (1,000 - 900)/(60 50 units)
• 100/10 units
• 10 per unit
• F 1,000 - 10(60) 1,000 - 600
• 400

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Predicting semi-variable costs

• From previous slide,
• TC F vX
• TC 400 10X
• For 45 units,
• TC 400 10(45)
• TC 850

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C-V-P Analysis
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Questions or comments?