Accounting Ch.2

What are the three types of companies?
service, merchandisers, manufactureres
Service Companies…
Provide a service only
No inventory
Examples: Advertising agencies, Banks, Law firms, Insurance companies
Merchandisers…
Resell products purchased from suppliers. One inventory account
Examples: Walmart, Best Buy, Amazon.com
Retailers vs. Wholesalers:
Retail sells directly to customer, Wholesale brings product to store
Manufacturers
Use labor and other inputs to convert raw materials into finished products
Material, labor, and overhead
Material-the football
Labor-person who sews the football
Overhead – anything that is not material or labor
Examples:Procter & Gamble, General Mills, Dell Computer
Three inventory accounts
Raw materials, work in process, finished goods
Value chain
Activities that add value to products and services and cost money.
RD, apple finding a way to create a phone for the average person
Design, apple devotes time to adjusting size shape and look of the iphone
Production, apple makes the iphone in China for cheap money
Marketing, apple uses commercials and advertising to sell the iphone
Distribution, apple sells the iphone to customers
Customer service, Apple return policy, warranty, and troubleshooting help
Value Chain Problem
News paper advertisements
payment to consultant for advice on location of new store
purchases of merchandise
freight in (selling expense)
sales people salaries
depreciation expense on delivery trucks
research on whether store should sell satellite radio service
customer complaint department
rearranging store layout
News paper advertisements- marketing
payment to consultant for advice on location of new store- R&D
purchases of merchandise – purchases
freight in (selling expense) – purchases
sales people salaries – marketing
depreciation expense on delivery trucks- distribution
research on whether store should sell satellite radio service- R&D
customer complaint department- customer service
rearranging store layout-design
cost object
Anything for which managers want a separate measurement of cost
direct vs. indirect cost
can be traced to product, cannot be traced to product
direct vs. indirect problem
depreciation of building
cost of costume jewelry on mannequins in juniors department
cost of bags used to package customer purchases at the main registers for the store
the medina kohls store manager salary
cost of security at the medina store
manager of juniors department
juniors department sales clerk
cost of juniors clothing
cost of hangers used to display clothing ins tore
electricity for the building
cost of radio advertising for store
juniors clothing buyers salaries
depreciation of building – I
cost of costume jewelry on mannequins in juniors department-D
cost of bags used to package customer purchases at the main registers for the store-I
the medina kohls store manager salary-I
cost of security at the medina store-I
manager of juniors department-D
juniors department sales clerk-D
cost of juniors clothing-D
cost of hangers used to display clothing ins tore-I
electricity for the building-I
cost of radio advertising for store-I
juniors clothing buyers salaries for all stores-I
Product cost
Total cost- used internally only
inventorial product costs – used for external reporting for making financial statements
inventorial product cost
production or purchases (recorded as inventory) inventory sold goes to COGS.
Period Costs
R&D, design, marketing, distribution, customer service (recorded as operating expenses)
Inventoriable Product Costs – Merchandiser
+ Purchase price from suppliers
+ Cost to get ready for sale
+ Freight-in
+ Import duties or tariffs
Inventoriable Product Costs— Manufacturer
direct materials and labor – direct costs
manufacturing overhead – indirect costs
manufacturing overhead
Indirect costs related to manufacturing that are not direct materials or direct labor
indirect materials and labor
manufacturing overhead
Indirect materials
Something that is hard to track to one specific department.
Indirect labor
Anyone in the factory that does not put things together (managers, schedulers, rework)
prime and conversion costs
prime costs = direct materials + direct labor
conversion costs = manufacturing overhead + direct labor
Service Income Statement equation
SERVICE REVENUE
– OPERATING INCOME
Merchandise Cost of Goods Sold Equation
BEG INVENTORY
+PURCHASES
+DUTIES OR TARIFFS
+FREIGHT IN
=COGAS
-ENDING INVENTORY
Merchandise Income Statement Equation
SALES
-COGS (merchandise)
=GROSS PROFIT
-OPERATING EXPENSES
Direct Materials Used Equation
BEG INVENTORY
+PURCHASES
=COGAS
-ENDING INVENTORY
Cost of Goods Manufactured Equation
BEG WIP INVENTORY
+DIRECT MATERIALS USED
+DIRECT LABOR
+MANUFACTURING OVERHEAD
=TOTAL MANUFACTURING COST
-ENDING WIP INVENTORY
Manufacturing Cost of Goods Sold Equation
BEG FINISHED GOODS INVENTORY
+COGM
=COGAS
-END FINISHED GOODS INVENTORY
Manufacturing Income Statement Equation
SALES
-COGS (manufacturing)
=GROSS PROFIT
-OPERATING EXPENSES
Controllable vs. Uncontrollable costs
Controllable: management can influence or change cost
Uncontrollable: management cannot change or influence cost in the short run
Relevant vs. Irrelevant Costs
Relevant: differential costs, which are costs that differ between alternatives
Irrelevant: costs that do not differ between alternatives. Or “sunk costs” incurred in the past that cannot be changed
Variable costs
change in total cost in direct proportion to changes in volume.
example: Assume we pay 5% sales commissions on all sales.
The cost of sales commissions increases proportionately with increases in sales.
Fixed costs
stay constant in total cost over a wide range of activity levels
Total Cost =
Fixed costs + Vafriable cost per unit x number of units)
example : fixed costs 20,000
variable cost per unit = 50
number of units = 100
Total cost = 20,000 + (50 x 100) = 25000
Average Cost =
Total Cost / number of units
example : 25,000/100 = 250 per unit
* not appropriate for predicting total costs at different levels of output.