2. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster An Introduction to Cost Terms and Purposes Chapter 2 2 - 1

3. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 2 - 2 Interpret unit costs cautiously.

4. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Total Costs and Unit Costs Example 2 - 3 What is the unit cost (leasing and handlebars) when Bicycles assembles 1,000 bicycles? Total fixed cost $94,500 + Total variable cost $52,000 = $146,500 $146,500 ÷ 1,000 = $146.50

5. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Total Costs and Unit Costs Example 2 - 4 $94,500 $94,500 + $52x $146,500

6. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Use Unit Costs Cautiously 2 - 5 Assume that Bicycles management uses a unit cost of $146.50 (leasing and wheels). Management is budgeting costs for different levels of production. What is their budgeted cost for an estimated production of 600 bicycles? 600 × $146.50 = $87,900

7. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Use Unit Costs Cautiously 2 - 6 What is their budgeted cost for an estimated production of 3,500 bicycles? 3,500 × $146.50 = $512,750 What should the budgeted cost be for an estimated production of 600 bicycles?

8. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Use Unit Costs Cautiously 2 - 7 Total fixed cost$ 94,500 Total variable cost ($52 × 600) 31,200 Total$125,700 $125,700 ÷ 600 = $209.50 Using a cost of $146.50 per unit would underestimate actual total costs if output is below 1,000 units.

9. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Use Unit Costs Cautiously 2 - 8 What should the budgeted cost be for an estimated production of 3,500 bicycles? Total fixed cost$ 94,500 Total variable cost (52 × 3,500) 182,000 Total$276,500 $276,500 ÷ 3,500 = $79.00

10. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Period Costs 2 - 9 Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred.

11. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 10 Bicycles by the Sea had $50,000 of direct materials inventory at the beginning of the period. Purchases during the period amounted to $180,000 and ending inventory was $30,000. How much direct materials were used? $50,000 + $180,000 – $30,000 = $200,000

12. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 11 Direct labor costs incurred were $105,500. Indirect manufacturing costs were $194,500. What are the total manufacturing costs incurred? Direct materials used$200,000 Direct labor 105,500 Indirect manufacturing costs 194,500 Total manufacturing costs$500,000

13. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 12 Assume that the work in process inventory at the beginning of the period was $30,000, and $35,000 at the end of the period. What is the cost of goods manufactured? Beginning work in process$ 30,000 Total manufacturing costs 500,000 Ending work in process 35,000 Cost of goods manufactured$495,000

14. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 13 Assume that the finished goods inventory at the beginning of the period was $10,000, and $15,000 at the end of the period. What is the cost of goods sold? Beginning finished goods$ 10,000 Cost of goods manufactured 495,000 Ending finished goods 15,000 Cost of goods sold$490,000

15. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 14 Work in Process Beg. Balance 30,000495,000 Direct mtls. used200,000 Direct labor105,500 Indirect mfg. costs194,500 Ending Balance 35,000

16. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example 2 - 15 Work in Process 495,000 Finished Goods 10,000490,000 495,000 15,000 Cost of Goods Sold 490,000

17. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Prime Costs 2 - 16 Direct Materials Direct Labor Prime Costs +=

18. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Prime Costs 2 - 17 What are the prime costs for Bicycles by the Sea? Direct materials used$200,000 + Direct labor 105,500 =$305,000

19. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Conversion Costs 2 - 18 Direct Labor Manufacturing Overhead += Conversion Costs Indirect Labor Indirect Materials Other

20. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Conversion Costs 2 - 19 What are the conversion costs for Bicycles by the Sea? Direct labor $105,500 + Indirect manufacturing costs 194,500 =$300,000