CHAPTER 4
COVERAGE OF LEARNING OBJECTIVES
LEARNING OBJECTIVE FUNDA- MENTAL ASSIGN-MENT MATERIAL CRITICAL THINKING EXERCISES AND EXERCISES PROBLEMS CASES, EXCEL, COLLAB. & INTERNET EXERCISES LO1: Describe the purposes of cost management systems. LO2: Explain the relationship between cost, cost object, cost accumulation, and cost assignment. LO3: Distinguish between direct and indirect costs. LO4: Explain the major reasons for allocating costs. LO5: Identify the main types of manufacturing costs: direct materials, direct labor, and indirect production costs. LO6: Explain how the financial statements of merchandisers and manufacturers differ because of the types of goods they sell. LO7: Understand the main differences between traditional and activity-based costing systems and why ABC systems provide value to managers. LO8: Use activity-based cost information to make strategic and operational control decisions. 31, 34 50 45 56 A1,B1 B2 36, 37, 38, 39, 45, 49 44 33, 41 46 36, 37, 38, 39 56 54 A2 57, 60, 61 A3, A4, B3, B4 33, 40, 41, 42 48, 49, 50 55, 56, 57, 58, 59, 60, 61 A4, B4 32, 37, 43 48, 49, 50 55, 56, 60
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CHAPTER 4
Cost Management Systems and Activity-Based Costing
4-A1 (20-30 min.)
See Table 4-A1 on the following page.
4-A2 (25-30 min.) 1. Merchandise Inventories, 1,000 devices @ $97 2. Direct materials inventory Work-in-process inventory Finished goods inventory Total inventories 3.
NILE ELECTRONICS PRODUCTS Statement of Operating Income For the Year Ended December 31, 20X9
Sales (9,000 units at $170) $1,530,000 Cost of goods sold: Beginning inventory $ 0 Purchases 970,000 Cost of goods available for sale $ 970,000 Less ending inventory 97,000 Cost of goods sold (an expense) Gross margin or gross profit Less other expenses: selling & administrative costs Operating income (also income before taxes in this example)
Copyright ?2011 Pearson Education, Inc., Publishing as Prentice Hall. $97,000 $ 40,000
0
97,000 $137,000 873,000 $ 657,000 185,000 $ 472,000 123
TABLE 4-A1
STATEMENT OF OPERATING INCOME EXTERNAL REPORTING PURPOSE
Sales
Cost of goods sold: Direct material
Indirect manufacturing
Gross profit
Selling and administrative expenses: Commissions
Distribution to warehouses
Total selling and admin. expenses Contribution to corporate expenses and profit
Unallocated expenses:
Administrative salaries
Other administrative expenses Total unallocated expenses Operating income before tax
1
$155,000 40,000 41,000 81,000 74,000 15,000 10,400 25,400 48,600
8,000 4,000 12,000 $ 36,600 OPERATING INCOME BY PRODUCT LINE
INTERNAL STRATEGIC DECISION MAKING PURPOSE Custom Large Small Detailed Std. Std. Cost Type, Assignment Method $30,000 $45,000 $80,000 5,000 15,000 20,000 Direct, Direct Trace
1
28,0005,000 8,000 Indirect, Alloc. – Mach. Hours 33,000 20,000 28,000 (3,000) 25,000 52,000 1,500 3,500 10,000 Direct, Direct Trace
2
1,0003,000 6,400 Indirect, Allocation - Weight 2,500 6,500 16,400 $(5,500) $18,500
$35,600
Total machine hours is 1,400 + 250 + 400 = 2,050. Indirect manufacturing cost per machine hour is then $41,000 ÷ 2,050 = $20. The allocation to custom detailed is $20 × 1,400 machine hours = $28,000. 2
Total weight shipped is 25,000 kg + 75,000 kg + 160,000 kg = 260,000 kg. Indirect distribution costs per kilogram is then $10,400 ÷ 260,000 kg = $0.04. The allocation to custom detailed is $0.04 × 25,000 kg = $1,000.
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4.
5.
Sales (9,000 units at $170)
Cost of goods manufactured and sold: Beginning finished goods inventory Cost of goods manufactured: Beginning WIP inventory $ 0 Direct materials used 530,000 Direct labor 290,000 Indirect manufacturing 150,000 Total mfg. costs to account for $970,000 Less ending work-in- process inventory 0 Cost of goods available for sale Less ending finished goods inventory Cost of goods sold (an expense) Gross margin or gross profit
Less other expenses: selling and administrative costs Operating income (also income before taxes in this example)
ORINOCO, INC.
Statement of Operating Income For the Year Ended December 31, 20X9
$ 0
$1,530,000
970,000 $970,000 97,000
873,000 $ 657,000 185,000 $ 472,000
The balance sheet for the merchandiser (Nile) has just one line for inventories, the ending inventory of the items purchased for resale. The balance sheet for the manufacturer (Orinoco) has three items: direct materials inventory, work-in-process inventory, and finished goods inventory.
The income statements are similar except for the computation of cost of goods available for sale. The merchandiser (Nile) simply shows purchases for the year plus beginning inventory. In contrast, the manufacturer (Orinoco) shows beginning work-in-process inventory plus the three categories of cost that comprise manufacturing cost (direct materials used, direct labor, and factory (or manufacturing) overhead) and then deducts the ending work-in-process inventory. The manufacturer then adds the beginning finished goods inventory to this cost of goods manufactured to get the cost of goods available for sale.
The purpose is providing aggregate measures of inventory value and cost of goods manufactured for external reporting to investors, creditors, and other external stakeholders.
6.
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4-A3 (10-15 min.)
There can be many justifiable answers for each item other than the listed cost driver and behavior. The purpose of this exercise is to generate an active discussion regarding those chosen by First Bank’s managers. One point that should be emphasized is that many times managers choose cost drivers that are not the most plausible or reliable because of lack of data availability. Cost drivers are also used as a basis to allocate activity and resource costs and so the availability of data is often an important consideration.
Cost Driver Number of square feet Number of person hours
Number of computer transactions Number of schedules Number of person hours Number of loan inquiries Number of investments Number of applications Number of person hours Number of minutes Number of person hours Number of loans
Cost Behavior F F V F V V V F
Activity Or Resource a.* R b.** R c. R d. A e. R f. R g.*** A h. A i. R j. R k. R l. A
* An argument can be made that maintenance of the building is an activity. If this was the case, resources such as supplies and labor would be resources consumed, and several resource cost drivers would be needed. In addition, a separate resource and associated cost driver would be needed for insurance costs. However, the company had a contract for maintenance (fixed price), so this was a fixed-cost resource that was added to other occupancy costs such as insurance. The cost driver chosen for all these occupancy costs was square feet occupied by the various departments.
** Normally, the cost driver used for any labor resource is person hours. It is assumed that the staff person hours used are regular hours rather than overtime or temporary labor hours. Thus, the cost is fixed with respect to changes in hours used. As the hours used increases (decreases) the utilization of the resources increases (decreases) and eventually, management will need to make a decision whether to expand capacity (or whether to cut back on labor). This is an example of a step cost that is fixed over wide ranges of cost-driver level.
*** Students may try to determine the cost behavior of activities even though the problem requirements do not ask for it. Point out that activities almost always have mixed cost behavior because they consume various resources. Some of these are fixed-cost and others variable-cost resources. For example, the activity “research to evaluate a loan application” consumes such fixed-cost resources as manager labor time and computers (assumed owned by the bank). This activity also consumes variable-cost resources such as telecommunications time and external computing services.
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