ACCT 2302

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
Review MOH Application in job-order costing
Manufacturing overhead is applied (allocated) to
individual jobs (work-in-process) based on a
___________ rate (POHR).
At the ________ of the period, calculate

POHR Estimated total MOH cost / __________
total activity level
________ the period, calculate
Applied MOH POHR ________ activity level
At the _______ of the period, calculate
_______ MOH - Applied MOH
to determine whether MOH was underapplied or
overapplied.
4
Review Job-Order Costing
1. If Applied MOHgtActual MOH, then MOH is
________ for the period. If Applied MOHltActual
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
Direct Materials
FinishedGoods
Work-in-Process (JOB)
Direct Labor
Applied MOH
Cost of GoodsSold
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Thought Questions

• 1. What effect will the year-end adjustment of
  overapplied MOH have on a firms 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 firms Cost of Goods
  Sold? Gross Margin? Net operating income?

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Chapter 5 Cost Behavior

• 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)

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Review The Activity Base (Cost Driver)
A measure of what causes the incurrence of a
variable cost
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Review Relevant Range
EconomistsCurvilinear Cost Function
Total Cost
Activity
10
Review Cost Behavior

Within the Relevant Range, how will each of the
following cost change as activity level increases
(decreases)?
In Total Per Unit
Variable Cost
Fixed Cost
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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.

DM Cost
Units Produced
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Step-Variable Cost
Costs increase or decrease only in response to
fairly wide changes in activity.
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Step-Variable Cost
Total cost increases to a new higher cost for
the next higher range of activity
Total cost remainsconstant within anarrow range
ofactivity
Cost
Activity
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Fixed Cost Two types
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.
Examples Advertising RD Management Development
program
Examples Depreciation on Equipment Real Estate
Taxes
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Mixed Cost
A mixed cost has both fixed and
variablecomponents. Consider the example of
utility cost.
Total mixed cost
Total Utility Cost
Variable Cost based on the usage
Fixed MonthlyUtility Charge
Activity (Kilowatt Hours)
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Mixed Cost
Total mixed cost
Total Utility Cost
Activity (Kilowatt Hours)
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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?
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PracticeHospital 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

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Cost Function
Y a bX
Total Cost
Activity Level (Cost Driver)
Total Fixed Costs
Variable Cost per Unit

• Q what can we say about a and b for each of the
  costs below
• True variable cost 2) Fixed Cost 3) Mixed Cost

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Example

• For each of the costs below, please specify
  whether it is a Fixed Cost, True Variable Cost,
  Mixed Cost, or Step Variable Cost?

Activity Level within relevant range Activity Level within relevant range Activity Level within relevant range
100 Units 200 Units 250 Units
Cost A 200 400 500
Cost B 350 550 650
Cost C 300 300 600
Cost D 150 150 150
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Estimate Cost Function the High-low Method

• Choose the two data points with the highest- and
  the lowest- activity level (XH, YH), (XL,YL)
• Set up the equations YH a b XH
• YL a b XL
• (3) Solve the equation for a (total fixed cost)
  and b (VC per unit)
• b (YH-YL)/(XH-XL)
• change in cost / change in activity
• a YL bXL

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Example

• Sebolt recorded the following activity and costs
  for 4 quarters
• Using the high-low method, estimate a cost
  function in the form of YabX
• What is total fixed cost and per unit variable
  cost?
• What will be the total cost if we increase the
  production level to 150 units?

Quarter Units produced Total cost
1 110 5500
2 90 4500
3 130 6000
4 40 2400
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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!

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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, Neptunes 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?
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Homework Problem 2
Comparative income statements for Boggs Co. for
the last two months are presented below.
July August
Sales in units 11,000 10,000
Sales 165,000 150,000
Cost of goods sold    72,600    66,000
Gross margin    92,400    84,000
Selling and administrative expenses
Rent 12,000 12,000
Sales commissions 13,200 12,000
Maintenance expenses 13,500 13,000
Clerical expense    16,000    15,000
Total selling and administrative expense    54,700    52,000
Net operating income  37,700  32,000
Q Identify each of the expenses above as
either fixed, true variable or mixed (assume
there is no step variable cost).
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Homework Problem 3

• 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.

2,000 units 3,000 units
Average DM cost 36.10 per unit 36.10 per unit
Average DL cost 48.00 per unit 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?
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Homework Problem 4

• Golden Cos 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.
• How much of the 241,600 MOH cost in June was
  maintenance cost?
• Use high-low method to estimate cost function of
  maintenance cost.
• Use high-low method to estimate cost function of
  total MOH cost.

Month Machine Hours Total MOH cost
March 50,000 194,000
April 40,000 170,200
May 60,000 217,800
June 70,000 241,600