1 Garrison+Chapter2
1 Garrison+Chapter2
1 Garrison+Chapter2
Concepts
Chapter 2
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-2
Learning Objective 1
Understand cost
classifications used for
assigning costs to cost
objects: direct costs and
indirect costs.
2-4
Learning Objective 2
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
2-7
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
2-8
Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
2-9
Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
2-10
Nonmanufacturing Costs
Administrative
Costs
Learning Objective 3
Understand cost
classifications used to
prepare financial
statements: product
costs and period costs.
2-12
Sale
Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
2-14
Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
2-15
Prime Conversion
Cost Cost
2-16
Learning Objective 4
Understand cost
classifications used to
predict cost behavior:
variable costs, fixed
costs, and mixed costs.
2-17
Variable Cost
A cost that varies, in total, in direct proportion to
changes in the level of activity. Your total texting
bill may be based on how many texts you send.
Total Texting Bill
A measure of what
causes the
incurrence of a
variable cost
Miles Labor
driven hours
2-21
Fixed Cost
A cost that remains constant, in total, regardless of
changes in the level of the activity. Your monthly
contract fee for your cell phone may be fixed for the
number of monthly minutes in your contract.
Monthly Cell Phone
Contract Fee
Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced in short term by current
the short term. managerial decisions
Example Examples
Depreciation on Buildings Advertising and
and Equipment Research and
Development
2-24
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Activity
2-25
90
Rent Cost in Thousands
The
The relevant
relevant range
range
Relevant of
of activity
activity for
for aa fixed
fixed
60
of Dollars
cost
cost is
is the
the range
range of of
Range activity
activity over
over which
which
the
the graph
graph ofof the
the
cost
cost is
is flat.
flat.
30
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
2-27
Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-29
Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be more
than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
2-30
Mixed Costs
A
A mixed
mixed cost
cost contains
contains both
both variable
variable and
and fixed
fixed
elements.
elements. Consider
Consider the
the example
example of
of utility
utility cost.
cost.
Y
Total Utility Cost
os t
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
2-31
Mixed Costs
Y
Total Utility Cost
os t
d c
ixe
al m
t
To Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
2-32
In
In account
account analysis
analysis,, each
each account
account isis
classified
classified as
as either
either variable
variable or
or fixed
fixed based
based
on
on the
the analyst’s
analyst’s knowledge
knowledge of of how
how
the
the account
account behaves.
behaves.
The
The engineering
engineering approach
approach classifies
classifies
costs
costs based
based upon
upon an
an industrial
industrial
engineer’s
engineer’s evaluation
evaluation of
of production
production
methods,
methods, and
and material,
material, labor,
labor, and
and
overhead
overhead requirements.
requirements.
2-34
Learning Objective 5
Hours of Maintenance
2-37
$2,400
= $6.00/hour
400
2-38
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
2-41
Quick Check
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
2-42
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are are $10,000
$10,000
when
when 80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when
120,000
120,000 units
units are
are sold.
sold. Using
Using the
the high-low
high-low
method,
method, what
what is
is the
the fixed
fixed portion
portion of
of sales
sales
salaries
salaries and
and commissions?
commissions?
a.
a. $$ 2,000
2,000
b.
b. $$ 4,000
4,000
c.
c. $10,000
$10,000
d.
d. $12,000
$12,000
2-43
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are are $10,000
$10,000
when
when 80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when
120,000
120,000 units
units are
are sold.
sold. Using
Using the
the high-low
high-low
method,
method, what
what is
is the
the fixed
fixed portion
portion of
of sales
sales
salaries
salaries and
and commissions?
commissions?
a.
a. $$ 2,000
2,000
b.
b. $$ 4,000
4,000
c.
c. $10,000
$10,000
d.
d. $12,000
$12,000
2-44
Learning Objective 6
Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.
2-48
Learning Objective 7
Understand cost
classifications used in
making decisions:
differential costs,
opportunity costs, and
sunk costs.
2-51
Opportunity Cost
The potential benefit that is
given up when one alternative
is selected over another.
These
These costs
costs are
are not
not
usually
usually entered
entered into
into the
the
accounting
accounting records
records ofof an
an
organization,
organization, but
but must
must bebe
explicitly
explicitly considered
considered in in all
all
decisions.
decisions.
What
What are
are the
the
opportunity
opportunity costs
costs you
you
incur
incur to
to attend
attend this
this class?
class?
2-54
Sunk Costs
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-56
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
2-57
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-58
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in
this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
2-59
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-60
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
2-61
End of Chapter 2