ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 5
Professor Jeff Yu
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.
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.
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?
Review: Product Cost Flow in Job-order Costing
Direct Materials
Direct Labor
Applied MOH
Work-in-Process
(JOB)
Finished
Goods
Cost of
Goods
Sold
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?
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)
Review: The Activity Base (Cost Driver)
Units
produced
Machine
hours
A measure of what
causes the
incurrence of a
variable cost
Miles
driven
Labor
hours
Review: Relevant Range
Total Cost
Economist’s
Curvilinear Cost
Function
Relevant
Range
A straight line
closely
approximates a
curvilinear
variable cost line
within the
relevant range.
Accountant’s Straight-Line
Approximation
(constant unit variable cost)
Activity
Review: Cost Behavior
Within the Relevant Range, how will each of the following
cost change as activity level increases (decreases)?
In Total
Variable Cost
Fixed Cost
Per Unit
True Variable Cost
DM 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.
Units Produced
Step-Variable Cost
Cost
Costs increase or decrease only in response to
fairly wide changes in activity.
Volume
Step-Variable Cost
Total cost increases to a
new higher cost for the next
higher range of activity
Cost
Total cost remains
constant within a
narrow range of
activity
Activity
Fixed Cost: Two types
Committed Fixed Cost
Discretionary Fixed Cost
Long-term, cannot be
significantly reduced in
the short term.
May be altered in the
short-term by current
managerial decisions
Examples
Examples
Depreciation on
Equipment;
Advertising; R&D;
Real Estate Taxes
Management
Development program
Mixed Cost
A mixed cost has both fixed and variable
components. Consider the example of utility cost.
Total Utility Cost
Y
Variable Cost based
on the usage
Activity (Kilowatt Hours)
X
Fixed Monthly
Utility Charge
Mixed Cost
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where:
Total Utility Cost
Y
Activity (Kilowatt Hours)
Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity
X
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?
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
Cost Function
Y = a + bX
Total Cost
Total Fixed Costs
Activity Level
(Cost Driver)
Variable Cost per Unit
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
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
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
Estimate Cost Function: the High-low Method
(1) Choose the two data points with the highest- and the
lowest- activity level: (XH, YH), (XL,YL)
(2) 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 – b*XL
Example
Sebolt recorded the following activity and costs for 4 quarters:
Quarter
Units produced
Total cost
1
110
$5500
2
90
$4500
3
130
$6000
4
40
$2400
(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?
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!
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?
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).
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?
Homework Problem 4
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.
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
(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.