Nota² ku: Jawapan MA 12th ed- Chapter 2

CHAPTER 2
AN INTRODUCTION TO COST TERMS AND PURPOSES

2-1

A cost object is anything for which a separate measurement of costs is desired.

Examples include a product, a service, a project, a customer, a brand category, an activity, and a department.

2-2

Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a cost object.

· Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way.

· Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way.

2-3

Managers believe that costs that are traced to a particular cost object are more accurately assigned to that cost object than are allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.

2-4

Factors affecting the classification of a cost as direct or indirect include:
· the materiality of the cost in question,
· available information-gathering technology,
· design of operations, and
· contractual arrangements.

2-5

A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar.

A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year).

2-6

A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.

2-7

The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.

2-8

A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

2-9

Manufacturing-sector companies purchase materials and components and convert them into various finished goods.

Merchandising-sector companies purchase and then sell tangible products without changing their basic form.

Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits.

2-10

Manufacturing companies typically have one or more of the following three types of inventory.

1. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process.

2. Work-in-process inventory. Goods partially worked on but not yet fully completed. Also called work in progress.

3. Finished goods inventory. Goods fully completed but not yet sold.

2-11

Inventoriable costs are all costs of a product that are regarded as assets when they are incurred and then become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are "inventoried") to build up the costs of creating these assets.

Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs in the period they incurred matches expenses to revenues.

2-12

No. Service sector companies have no inventories and, hence, no inventoriable costs.

2-13

Direct materials costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods), and that can be traced to the cost object in an economically feasible way.

Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object.(work in process and then finished goods) in an economically feasible way.

Indirect manufacturing costs are all manufacturing costs that are related to the cost object (work in process and then finished goods), but that cannot be traced to that cost object in an economically feasible way. This cost category is also referred to as manufacturing overhead costs @ factory overhead costs.

Prime costs are all direct manufacturing costs (direct materials and direct manufacturing labor).
Conversion costs are all manufacturing costs other than direct material costs.

2-14

Overtime-premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates.

Idle-time is a subclassification of indirect labor that typically represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.

2-15

A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include:
• Pricing and product mix decisions.
• Contracting with government agencies.
• Preparing financial statements for external reporting under generally accepted accounting principles.

2-16 Computing and interpreting manufacturing unit costs.

1.

2.
The unit costs in requirement 1 includes $20 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the unit volume changes for August 2007, the use of unit costs from the past month at a different unit volume level (both in aggregate and at the individual product level) will yield incorrect estimates of total costs in August 2007.

2-17 Direct and indirect costs, effect of changing the classification of a cost item.

1. Direct costs are costs that are related to the particular paper products (Supreme, Deluxe, or Regular) and can be traced to each one in an economically feasible (cost-effective) way.
Indirect costs are costs that are related to the particular paper products (Supreme, Deluxe, or Regular) but cannot be traced to each one in an economically feasible (cost-effective) way.

2. Energy costs of $90 million can be traced to each individual production line. This tracing will result in a more accurate assignment of costs to products than when the $150 million of indirect manufacturing costs ($20 million of which is fixed) is allocated. Accurate product costing results in assignment of costs to different products in a manner than avoids undercosting and overcosting of the product lines.

3. _______________________

2-18 Classification of costs, merchandising sector.

Cost object: Video section of store
Cost variability: With respect to changes in the number of videos sold

There may be some debate over classifications of individual items. Debate is more likely as regards cost variability.

2-19 Classification of costs, manufacturing sector.

Cost object: Type of car assembled (Corolla or Geo Prism)
Cost variability: With respect to changes in the number of cars assembled

There may be some debate over classifications of individual items. Debate is more likely as regards cost variability.

2-21 Cost drivers and the value chain.

1.

2-22 Cost drivers and functions.

1.

2-23 Total costs and unit costs.

1.
(a) $100,000 ÷ 2,000 = $50.00 per package
(b) $100,000 ÷ 6,000 = $16.67 per package
(c) $100,000 ÷ 10,000 = $10.00 per package
(d)[$100,000 + (10,000 × $8)] ÷ 20,000
.....=$180,000 ÷ 20,000 = $9.00 per package

The unit cost to ECG decreases on a per-unit base due to the first $100,000 payment being a fixed cost. The $8 amount per package beyond 10,000 units is a variable cost. The cost function is:

2.
ECG should not use any of the unit costs in requirement 1 when predicting total costs. Up to 10,000 units, the total cost is a fixed amount. Beyond 10,000 units, the total cost is a combination of a fixed amount plus a per-unit (beyond 10,000 unit) variable amount. The total costs at different volume levels cannot be predicted by using the unit cost at a specific volume level. The total cost should be predicted by combining the total fixed costs and total variable costs rather than multiplying a unit cost amount by the predicted number of packages sold.

2-24 Inventoriable costs versus period costs.

1.
Manufacturing-sector companies (General Electric) purchase materials and components and convert them into different finished goods.

Merchandising-sector companies (Safeway) purchase and then sell tangible products without changing their basic form.

Service-sector companies (Google) provide services or intangible products to their customers—for example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.

2.
Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are "inventoried") to build up the costs of creating these assets.

Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs in the period they incurred matches expenses to revenues.

3.
(a) Mineral water purchased for resale by Safeway—inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the mineral water is sold.

(b) Electricity used at GE assembly plant—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.

(c) Depreciation on AOL's computer equipment—period cost of a service company. AOL has no inventory of goods for sale and, hence, no inventoriable cost.

(d) Electricity for Safeway's store aisles—period cost of a merchandising company. It is a cost that benefits the current period and is not traceable to goods purchased for resale.

(e) Depreciation on GE's assembly testing equipment—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.

(f) Salaries of Safeway's marketing personnel—period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits).

(g) Water consumed by AOL's engineers—period cost of a service company. AOL has no inventory of goods for sale and, hence, no inventoriable cost.

(h) Salaries of AOL's marketing personnel—period cost of a service company. AOL has no inventory of goods for sale and, hence, no inventoriable cost.

2-26 Computing cost of goods purchased and cost of goods sold.

(a)

(b)

2-27 Cost of goods manufactured.

1.

2-28 Income statement and schedule of cost of goods manufactured.

2-29 Terminology, interpretation of statements (continuation of 2-28).

1.

2.
Inventoriable costs (in millions) for Year 2007

Period costs (in millions) for Year 2007
Marketing, distribution, and customer-service costs ............$ 90

3.
Design costs and R&D costs may be regarded as product costs in case of contracting with a governmental agency. For example, if the Air Force negotiated to contract with Lockheed to build a new type of supersonic fighter plane, design costs and R&D costs may be included in the contract as product costs.

4.
Direct materials used = $105,000,000 ÷ 1,000,000 units = $105 per unit
Depreciation .............= $ ..9,000,000 ÷ 1,000,000 units = $ 9 per unit

5.
Direct materials unit cost would be unchanged at $105. Depreciation unit cost would be $9,000,000 ÷ 1,500,000 = $6 per unit. Total direct materials costs would rise by 50% to $157,500,000 ($105 per unit × 1,500,000 units). Total depreciation cost of $9,000,000 would remain unchanged.

6.
In this case, equipment depreciation is a variable cost in relation to the unit output. The amount of equipment depreciation will change in direct proportion to the number of units produced.

(a) Depreciation will be $4 million (1 million × $4) when 1 million units are produced.
(b) Depreciation will be $6 million (1.5 million × $4) when 1.5 million units are produced.

2-31 Fire loss, computing inventory costs.

1. = $50,000
2. = $28,000
3. = $62,000

This problem is not as easy as it first appears. These answers are obtained by working from the known figures to the unknowns in the schedule below. The basic relationships between categories of costs are:

Prime costs (given)
= $294,000

Direct materials used
= $294,000 – Direct manufacturing labor costs
= $294,000 – $180,000
= $114,000

Conversion costs
= Direct manufacturing labor costs ÷ 0.6
= $180,000 ÷ 0.6
= $300,000

Indirect manufacturing costs
= $300,000 – $180,000 (or 0.40 x $300,000)
= $120,000

Some instructors may wish to place the key amounts in a Work in Process T-account. This problem can be used to introduce students to the flow of costs through the general ledger (amounts in thousands):

2-32 Comprehensive problem on unit costs, product costs.

1.
If 2 pounds of direct materials are used to make each unit of finished product, 100,000 units × 2 lbs., or 200,000 lbs. were used at $0.70 per pound of direct materials ($140,000 ÷ 200,000 lbs.). (The direct material costs of $140,000 are direct materials used, not purchased.) Therefore, the ending inventory of direct materials is 2,000 lbs. x $0.70 = $1,400.

2.

Average unit manufacturing cost:
= $233,000 ÷ 100,000 units
= $2.33 per unit

3.
Units sold in 2007 = Beginning inventory + Production – Ending inventory
..........................= 0 + 100,000 – 9,000
..........................= 91,000 units
Selling price per unit in 2007 = $ 436,800 ÷ 91,000
..........................................= $ 4.80 per unit

4.