1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 5 Professor Jeff Yu

2. Review: Job-order costing vs. Process costing A firm making built-to-order products typically use ___________ costing. A firm mass-producing a single product typically use _________ costing. Under job-order costing, product costs are accumulated by _______ to get the average product cost for each unit. Under process costing, product costs are accumulated by _______ to get the average product cost for each unit. Service companies typically use ______________ costing. Both job-order costing and process costing are _______ costing systems.

3. Manufacturing overhead is applied (allocated) to individual jobs (work-in-process) based on a ___________ rate (POHR). Review: MOH Application in job-order costing POHR = Estimated total MOH cost / __________ total activity level Applied MOH = POHR * ________ activity level _______ MOH - Applied MOH At the ________ of the period, calculate: ________ the period, calculate: At the _______ of the period, calculate: to determine whether MOH was underapplied or overapplied.

4. Review: Job-Order Costing 1. If Applied MOH>Actual MOH, then MOH is ________ for the period. If Applied MOH<Actual MOH, then MOH is __________ for the period. 2. What is the journal entry to apply MOH to jobs during the period? 3. What is the adjusting journal entry to close the overapplied (underapplied) MOH to CGS at the end of the period?

5. Review: Product Cost Flow in Job-order Costing Finished Goods Cost of Goods Sold Direct Labor Applied MOH Direct Materials Work-in-Process (JOB)

6. Thought Questions 1. What effect will the year-end adjustment of overapplied MOH have on a firm’s Cost of Goods Sold? Gross Margin? Net operating income? (choices: increase, decrease or unaffected) 2. What effect will the year-end adjustment of underapplied MOH have on a firm’s Cost of Goods Sold? Gross Margin? Net operating income?

7. Objectives: Introduce further classification of Variable costs and Fixed costs Analyze Mixed Costs Discuss High-Low Method and Cost Function Discuss the contribution format income statement (Contribution Approach) Chapter 5: Cost Behavior

8. Review: The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost Units produced Miles driven Labor hours Machine hours

9. Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function Review: Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)

10. Review: Cost Behavior In TotalPer Unit Variable Cost Fixed Cost Within the Relevant Range, how will each of the following cost change as activity level increases (decreases)?

11. Units Produced DM Cost True Variable Cost For example, Direct Material is typically a true variable cost because the amount used during a period will vary in direct proportion to the level of production activity.

12. Step-Variable Cost Costs increase or decrease only in response to fairly wide changes in activity. Volume Cost

13. Activity Cost Total cost remains constant within a narrow range of activity Total cost increases to a new higher cost for the next higher range of activity Step-Variable Cost

14. Examples Advertising; R&D; Management Development program Examples Advertising; R&D; Management Development program Examples Depreciation on Equipment; Real Estate Taxes Examples Depreciation on Equipment; Real Estate Taxes Fixed Cost: Two types Discretionary Fixed Cost May be altered in the short-term by current managerial decisions Discretionary Fixed Cost May be altered in the short-term by current managerial decisions Committed Fixed Cost Long-term, cannot be significantly reduced in the short term. Committed Fixed Cost Long-term, cannot be significantly reduced in the short term.

15. Fixed Monthly Utility Charge Variable Cost based on the usage Activity (Kilowatt Hours) Total Utility Cost X Y A mixed cost has both fixed and variable components. Consider the example of utility cost. Mixed Cost Total mixed cost

16. Activity (Kilowatt Hours) Total Utility Cost X Y Mixed Cost Total mixed cost

17. Mixed Cost Example TXU charges a fixed monthly fee of $20 plus $0.1 per kilowatt hour. In March you used 2,000 kilowatt hours. Q: 1) What is the amount of your electricity bill for March? 2) What is the average cost per kilowatt hours for March? 3) What will be the average cost per kilowatt hours for April if you only use 1,000 kilowatt hours?

18. Practice…Hospital Costs True variable, step variable, mixed, discretionary fixed or committed fixed? Spending on medical student internship Nursing supervisor salaries – supervisor needed for every 10 nursing personnel Operating costs of x-ray equipment ($95,000 per year plus $3 per film) Insurance for all full time employees

19. Y = a + bX Total Cost Activity Level (Cost Driver) Variable Cost per Unit Total Fixed Costs Cost Function Q: what can we say about a and b for each of the costs below 1)True variable cost; 2) Fixed Cost; 3) Mixed Cost

20. For each of the costs below, please specify whether it is a Fixed Cost, True Variable Cost, Mixed Cost, or Step Variable Cost? Example Activity Level within relevant range 100 Units200 Units250 Units Cost A$200$400$500 Cost B$350$550$650 Cost C$300 $600 Cost D$150

21. (1) Choose the two data points with the highest- and the lowest- activity level: (X H, Y H ), (X L,Y L ) (2) Set up the equations: Y H = a + b X H Y L = a + b X L (3) Solve the equation for “a” (total fixed cost) and “b” (VC per unit): b = (Y H -Y L )/(X H -X L ) = change in cost / change in activity a = Y L – b*X L Estimate Cost Function: the High-low Method

22. Sebolt recorded the following activity and costs for 4 quarters: (1)Using the high-low method, estimate a cost function in the form of Y=a+bX (2)What is total fixed cost and per unit variable cost? (3)What will be the total cost if we increase the production level to 150 units? Example QuarterUnits producedTotal cost 1110$5500 290$4500 3130$6000 440$2400

23. For Next Class  Complete assigned readings  We will finish Chapter 5 with the contribution format income statement, and start Chapter 6: CVP analysis  Attempt the assigned HW problems  We will work on a lot of problems next class!

24. Homework Problem 1 Neptune Rental operates a boat rental service and its relevant range is 5,000 to 8,000 hours of operating time. When the boats were operated for 6,000 hours, Neptune’s total costs were $192,000, among which $168,000 was total fixed cost. Q: If it is estimated that on Saturday the boats will be operated for 8,000 hours, what will be the estimated average cost per hour?

25. Q: Identify each of the expenses above as either fixed, true variable or mixed (assume there is no step variable cost). Homework Problem 2 JulyAugust Sales in units11,00010,000 Sales$165,000$150,000 Cost of goods sold 72,600 66,000 Gross margin 92,400 84,000 Selling and administrative expenses: Rent12,000 Sales commissions13,20012,000 Maintenance expenses13,50013,000 Clerical expense 16,000 15,000 Total selling and administrative expense 54,700 52,000 Net operating income$ 37,700$ 32,000 Comparative income statements for Boggs Co. for the last two months are presented below.

26. Bakeman Corporation has provided the following production and average cost data for two levels (highest and lowest) of monthly production volume. The company produces a single product. Homework Problem 3 2,000 units3,000 units Average DM cost$36.10 per unit Average DL cost$48.00 per unit Average MOH cost$51.00 per unit$40.90 per unit Q: 1) Identify the cost behavior of DM, DL and MOH as fixed, true variable or mixed. 2) What is the best estimate of Variable MOH cost per unit? 3) What is the cost function for total manufacturing cost?

27. Golden Co’s MOH costs consists of utilities (true variable), supervisory salaries (fixed) and maintenance (mixed). At 40,000 machine hours, the breakdown of overhead costs are $52,000 for utilities, $60,000 for supervisory salaries and $58,200 for maintenance. (1)How much of the $241,600 MOH cost in June was maintenance cost? (2)Use high-low method to estimate cost function of maintenance cost. (3)Use high-low method to estimate cost function of total MOH cost. Homework Problem 4 MonthMachine HoursTotal MOH cost March50,000$194,000 April40,000$170,200 May60,000$217,800 June70,000$241,600