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Cost Classifications

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Welcome to ACCG200
Fundamentals of Management Accounting
Week 1
Department of Accounting and Corporate Governance
1
Unit Guide and Assessment Guide
Staff:
Unit Convenor: Ms Sophia Su
Lecturers: Ms Sophia Su (Tuesday stream)
Dr Ranjith Appuhami (Friday stream from week 3)
Teaching Administrator: Ms Claudia Chau
Unit Email: [email protected]
Unit Webpage: http://ilearn.mq.edu.au/login/MQ/
2
Assessments
To PASS the unit you MUST pass the final exam
To APPLY for a special consideration in the final exam you MUST
have attained a minimum of 45% in the coursework completed up
to the application closing date (i.e. 40Г—45%=18 marks)
3
Class Participation: 5%
• Attendance: 11 out 12
• The willingness to express ideas in each
class
• The ability to articulate your thoughts
4
Weekly Assignments: 15%
Weekly assignments will be collected by your
tutor at the end of each week’s tutorial:
S+: 1.5 marks
S: 1
S-: 0.75
I:
0.5
Best 10 (out of 11) will count with marks
towards the 15% weightings.
5
Excel Assignments: 20%
Topic
Due in
Time and Date for submission
Cost volume profit analysis
Week 4
Friday 6pm 24 August
Product costing system- job costing
Week 7
Friday 6pm 14 September
Variable and absorption costing
Week 10
Friday 6pm 19 October
Activity-based costing
Week 12
Friday 6pm 2 November
1.
The excel assignment questions will be emailed to your student email
account by the end of week 3.
2.
Must read the document “ACCG200 Excel Assignment Notes S2 2012”
provided in the “Excel Assignments” folder on iLearn website.
3.
Submit your assignment via iLearn.
6
Final Exam: 60%
20% Multiple choice questions
Practice multiple choice questions will be available
under the folder “Practice online quizzes” on the iLearn
website
80% Practical questions
Lecture examples and tutorial questions
7
Peer Assisted Learning (PAL)
• PAL is offered in this unit – go to BESS
(E4A106) for more information
• This is a free program that is run by students
who have previously studied the unit and
achieved excellent grades.
8
Introduction and Course Overview
This unit consists of four main parts:
1.Cost concepts, cost classifications and cost flow (week 1)
2.Using costs for decision making (week 2-4)
3.Costing techniques, including job/process costing and
overhead cost allocation (week 5-10)
4.Budget setting and evaluating performance against the
budget (week 11-12)
9
What is Management Accounting?
Management accounting can be defined as:
… the processes and techniques that focus on the effective
and efficient use of organisational resources to support
managers in their tasks of enhancing both customer value
and shareholder value.
Examples of management accounting decisions:
•Pricing
•Add or drop a product
•Accept a special order or not
10
Difference between Management Accounting
and Financial Accounting
Management accounting Financial accounting
?
11
Cost concepts
What are costs?
– Resources given up to achieve a particular objective
– Measured in monetary terms
What is a cost object?
An item for which management wants a separate measure of costs
What is a cost driver?
A factor or activity that causes a cost to be incurred
What is the level of activity?
The level of work performed in the organisation (e.g. hours worked,
units produced)
12
Cost classifications
Different cost classifications are used for different purposes,
and the same cost can be classified in a number of ways
depending on the intended use of the cost information.
Basis of classifications
Cost Classifications
1.Behaviour
Variable and fixed costs
2.Traceability
Direct and indirect costs
3.Timing of the expense
Product and period costs
4.Manufacturing costs
Direct material, direct labour and manufacturing
overhead
5.Value chain
Upstream, manufacturing and downstream costs
6.Controllability
Controllable and uncontrollable costs
13
Cost classifications cont.
1. Basis of classification: Behaviour
• Variable cost
– Changes in total in proportion to changes in the level of
activity ( e.g. cost of electricity used to manufacture a
product)
• Fixed cost
– Remain unchanged in total despite changes in the level of
activity (e.g. rent paid for factory remains unchanged no
matter how many units we produce)
14
Lecture example 1
ABC Ltd manufactures wooden toys.
Activity level
(No. of toys
produced)
Variable
Annual total
cost per toy fixed costs
Total
Fixed cost
variable cost per toy
1
$12
$10,000
1000
$12
10,000
12,000
10
2000
$12
10,000
24,000
5
$12
$10,000
15
Cost classifications
2. Basis of classification: Traceability
• Direct cost
can be directly identified with or traced or linked to a cost object in an
economic manner.
• Indirect costs
cannot be identified with or traced or linked to a cost object in an
economic manner.
Example: Assume a office desk is a cost object, then:
1.Cost of wood: Direct or Indirect? Direct
2.Cost of glue: Direct or Indirect? Indirect
3.Salary of the production supervisor: Direct or Indirect?
Indirect
16
Cost classifications cont.
3. Basis of classification: timing of the expense
• Product cost
•The cost assigned to goods/services that were manufactured or
purchased for resale. Product cost is regarded as a part of the asset /
inventory until goods are sold.
• Period cost
п‚—The costs expensed in the accounting period in which they are
п‚—incurred rather than being attached to units purchased or produced.
п‚—(e.g. salaries of sales staff, advertising expense, depreciation of office
п‚— equipment)
17
Cost classifications cont.
4. Basis of classification: Manufacturing/ product costs
• Direct material
- Materials that eventually become part of the cost object
- Can be directly traced and linked to the cost object in an economic
manner
• Direct Labour
- All manufacturing labour that can be directly traced or linked
to cost object (e.g. wages paid to production workers, workers’
compensation insurance and superannuation contributions)
• Manufacturing overhead (indirect manufacturing costs)
- All manufacturing costs other than direct material and direct
labour. (e.g. the cost of indirect material, indirect labour, depreciation and
insurance on factory equipment)
18
Lecture example 2
For each of the costs listed below, indicate whether it is
direct material (DM), direct labour (DL), manufacturing
overhead (MOH) or period cost
Cost
Classifications
Flour used in making pizza
DM
Salary of production supervisor
MOH
Wages of production workers
DL
Depreciation on factory building
MOH
Depreciation on head office building
Marketing cost
Period cost
Period cost
19
Manufacturing Overhead
Manufacturing overhead costs also usually include overtime
premium and the cost of idle time:
• Overtime premium: extra wages paid to an employee who works beyond
normal working hours.
e.g. Assume regular wage =$30/hr ; overtime wage = $45/hr, assume John
worked an additional hour and was paid $45 , then the $45 can be classified
into:
DL:
$30
MOH (overtime premium): $15
• Idle time: the cost of employees’ non-productive time, arising from events
such as equipment breakdowns or new setups of production runs.
20
Lecture example 3
Highlander Cutlery manufactures kitchen knives. One of the employees, whose job
is to cut out wooden knife handles, worked 48 hours during a week in January,
including 1 hour idle time due to power outage. The employee earns $10 per hour
for a 38-hour week. For additional hours, the employee is paid an overtime rate of
$15 per hour.
Calculate:
(1)The total cost of the employee’s wages during the week
(2)Determine the portion of this cost to be classified in DL, MOH (idle time), MOH
(overtime premium).
21
Lecture example 3 solutions
(1)
=
=
=
Total wages
38Г—$10+ (48-38)Г—$15
$380+ $150
$530
(2) Direct Labour = (48-1) Г—$10 = $470
MOH (overtime premium) = (48-38) Г—($15-$10)
= 10 hrs Г—$5
= $50
MOH (idle time) = 1 Г— $10 = $10
22
Cost classifications cont.
Total Manufacturing cost
Direct Material cost
Direct labour cost
Prime cost
Manufacturing overhead
Conversion cost
23
Lecture example 4
The following data relates to a greeting card manufacturer, Haven Ltd.
Calculate each of the following costs:
(1) Total prime costs; (2) Total manufacturing overhead costs
(3) Total conversion costs; (4) Total product costs
(5) Total period costs
24
Lecture example 4 solutions
(1) Total prime costs:
Direct Materials
Direct labour (wages)
Total prime costs
2100
150
$2250
(2) Total manufacturing overhead costs
Depreciation on factory building
Indirect wages
Plant manager’s salary
Overtime premium paid
Cost of idle (production)
Fire Insurance on plant equipment
Total MOH costs
$100
200
40
60
40
10
$450
25
Lecture example 4 solutions
(3) Total conversion costs
Direct labour
Manufacturing overhead
Total Conversion costs
$150
450
$600
(4) Total product costs
Direct materials
Direct labour
Manufacturing overhead
Total product costs
$ 2100
150
450
$2700
(5) Total period costs
Administrative cost
Sales commissions
Total period costs
130
15
145
26
Cost classifications cont.
5. Basis of classification: Value chain
27
Lecture example 5
Ivory Company produces and sells ice-cream. Classify the costs
listed below, using these value chain classifications:
Cost
Classifications
Cost of cream used to make the ice-cream
Manufacturing- DM
Electricity used to store finished ice-cream products
Distribution
Cost of fuel for delivery trucks
Distribution
Wages paid to staff who make the ice-cream
Manufacturing -DL
Wages paid to staff who develop recipes for new
ice-cream flavours
Cost of advertising in the food trade magazines
Research &
development
Marketing
28
Cost classifications cont.
6. Basis of classification: controllability
• Controllable cost
a cost that a specific manager can control or significantly influence.
• Uncontrollable cost
a cost that a manager cannot control or significantly influence.
Example: For a production manager, are the salaries of the CEOs
controllable costs? No.
Are the wages of production workers controllable costs? Yes
29
Cost flow in a manufacturing business
Raw material (RM)
Work in Process (WIP)
Begin. Bal.
DM purchased DM used
Begin.Bal.
DM
DL
MOH
End. Bal.
COGM
Finished goods
Begin.Bal.
COGM
COGS
End. Bal.
End. Bal.
Total manu. cost
Cost of goods
manufactured = Begin. WIP
(COGM)
Cost of goods
sold (COGS)
=
+
Total manufacturing — End. WIP
costs
Begin. Finished
+ COGM — End. Finished goods
goods
30
Cost flow in a manufacturing business
Explanations of T-accounts:
1. Material is purchased: the cost is added to RM inventory;
2. DM are consumed in production: cost is removed from RM inventory
and added to WIP inventory;
3. DL and MOH are accumulated in WIP inventory;
4. Products are completed: costs are transferred from WIP inventory
and added to finished goods inventory;
5. Products are sold: costs are transferred from finished goods
inventory to cost of goods sold expense
31
Lecture example 6
The following data refer to Nani’s Fashions for the current year.
Sales revenue
$ 475,000
Electricity: plant
$20,000
Work in progress inventory, 31 Dec.
15,000
Depreciation: plant and equipment
30,000
Work in progress inventory, 1 Jan.
20,000
Finished goods inventory, 31 Dec.
25,000
Selling & Administrative expenses
75,000
Finished goods inventory, 1 Jan.
10,000
Purchase of raw material
90,000
Indirect material
5,000
Raw material inventory, 31 Dec.
12,500
Indirect labour
7,500
Raw material inventory, 1 Jan.
20,000
Other manufacturing overhead
Direct labour
40,000
100,000
(1) Prepare the schedule of cost of goods manufactured for Nani’s Fashions;
(2) Prepare the schedule of cost of goods sold for Nani’s Fashions.
32
Lecture example 6 solutions
(1)
Cost of goods
Total manufacturing — End. WIP
manufactured = Begin. WIP +
costs
(COGM)
20,000
DM+DL+MOH
Direct material:
Raw material inventory, 1 January
Add: Purchases of raw material
Raw material available for use
Deduct: Raw material inventory, 31 December
Raw material used
Direct labour
Manufacturing overhead:
Indirect material
Indirect labour
Electricity: plant
Depreciation: plant and equipment
Other
Total manufacturing overhead
Total manufacturing costs
Add: Work in process inventory, 1 January
Subtotal
Deduct: Work in process inventory, 31 December
Cost of goods manufactured (COGM)
15,000
$20 000
90 000
110 000
12 500
$97 500
100 000
5 000
7 500
20 000
30 000
40 000
102 500
300 000
20 000
320,000
15 000
$305 000
33
Lecture example 6 solutions
(2) Cost of goods
sold (COGS)
=
Begin. Finished
+ COGM — End. Finished goods
goods
10,000
305,000
Finished goods inventory, 1 January
Add: Cost of goods manufactured (COGM)
Cost of goods available for sale
Deduct: Finished goods inventory, 31 December
Cost of goods sold (COGS)
25,000
$10 000
305 000
315 000
25 000
$290 000
34
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