WHAT IS THE PROFIT ON A JERSEY?
Does C&C Sports make a profit if a baseball
jersey sells for $14.80?
What does it really cost C&C Sports to make a
baseball jersey? $6.85? $9.00? $11.17?
FUNCTIONAL COST CLASSIFICATIONS
All costs incurred to
manufacture a
product or deliver a
service
WHAT ARE PRODUCT COSTS?
All costs incurred in producing a product
Inventoriable – included in inventory on balance
sheet
Expensed on income statement as COGS when
units are sold
What about for a retailer? An attorney?
FUNCTIONAL COST CLASSIFICATIONS
Costs that easily
can be traced
directly to the
cost object
FUNCTIONAL COST CLASSIFICATIONS
DIRECT MATERIALS
Materials that can be
physically and
conveniently traced directly
to the manufacture of the
product
Often referred to as “raw
materials”
DIRECT LABOR
Labor that can be physically
traced to the production of
the product in a “hands on”
sense (the production line)
Includes wages, taxes, and
benefits
Have seen a drop in
importance due to
automation
FUNCTIONAL COST CLASSIFICATIONS
Costs that cannot
easily be traced
directly to the
cost object
FACTORY OVERHEAD
All product costs that are not
direct materials or direct
labor
Costs related to running the
factory and providing
productive capacity
Indirect materials and
indirect labor are two special
classes of factory overhead
COMPONENTS OF C&C’S PRODUCT COST
$6.85
$1.92
$11.17
$2.40
FUNCTIONAL COST CLASSIFICATIONS
All costs incurred but not
associated with the manufacture
of product or delivery of service
(costs of SG&A activities)
WHAT ARE PERIOD COSTS?
Associated with the passage of time, not the direct
production of products
Non-inventoriable
Selling, general, and administrative (SG&A)
PRODUCT AND PERIOD COSTS AT C&C
PRODUCT COSTS
Balance Sheet
AS SHIRTS ARE
PRODUCED
Inventory
AS SHIRTS
ARE SOLD
Income
Statement
Cost of Goods
Sold
PERIOD COSTS
AS
INCURRED
Income
Statement
Operating
Expenses
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DIRECT/INDIRECT? PRODUCT/PERIOD?
COST FUNCTION AND BEHAVIOR
COST
FUNCTION
Product
Variable
COST
BEHAVIOR
Fixed
•
•
•
•
Period
Direct materials
• Sales commissions
Direct labor (traditionally) • Packaging for delivery
Electricity
Indirect materials
• Machine depreciation
• Factory rent
• Production manager’s
salary
• Depreciation on delivery
trucks
• Marketing vice
president’s salary
• Advertising
WHAT ARE THE 3 STAGES OF PRODUCTION?
Work not started
• Raw materials
• Supplies
Work in process (conversion)
• Direct labor
• Overhead
Finished work
• Includes all costs incurred to produce the product
MANUFACTURING INVENTORY ACCOUNTS
Each stage of production is accounted for in its
own inventory account in the general ledger:
• Raw Materials Inventory
• Work in Process Inventory
• Finished Goods Inventory
All three accounts operate the same way, as
shown on the next slide
INVENTORY COST FLOWS AT C&C
MANUFACTURING COST FLOWS
MANUFACTURING INVENTORY ACCOUNTS
BEGINNING
BALANCE
+
COSTS
ADDED
DURING
THE PERIOD
_
COSTS
REMOVED
DURING
THE PERIOD
ENDING
=
BALANCE
MANUFACTURING COST FLOWS
Cost
of Goods
Manufactured
Total
Manufacturing
Costs
SCHEDULE OF COST OF GOODS MANUFACTURED
CHARACTERISTICS OF JOB ORDER COSTING SYSTEMS
Many different products are produced each period
Custom, made-to-order products
Production process is divided into “batches” or
“jobs” with a definite beginning and ending
Costs are accumulated separately by job
HOW DO YOU TRACK COSTS IN A JOB ORDER SYSTEM?
Job order cost sheet tracks all product costs
Materials requisition slip tracks direct and indirect
materials
Employee time cards/sheets track direct and
indirect labor
MATERIALS REQUISITION SLIP
The materials
requisition slip shows
when direct materials
are requisitioned from
the storeroom and
moved to the
production line. Raw
materials inventory is
decreased and work in
process inventory is
increased.
EMPLOYEE TIME TICKET
Workers record time
spent making products
on an employee time
ticket. This provides
the basis for adding
the direct labor cost to
work in process
inventory.
JOB ORDER COST SHEET
Use the job cost sheet
to accumulate all
manufacturing costs
for each job.
HOW DO JOB COST SHEETS RELATE TO WIP INVENTORY?
PREDETERMINED OVERHEAD RATES
What is a POR?
• A “standard” rate based on budgeted activity used to
assign or “apply” overhead to products
WHY DO WE NEED TO USE PORS?
Without using a POR, we would have to wait until
the end of the period to assign ANY overhead
costs to products. This might hamper decision
making activities.
Using a POR smoothes out seasonal fluctuations
in actual overhead costs that are not related to
activity levels.
Using a POR solves the problem with fixed OH
costs which don’t change on a unit basis.
HOW DO YOU CALCULATE THE POR?
Budget the activity level for the coming year
Budget the total amount of overhead for the
planned production level
Divide budgeted overhead by budgeted activity
level
RECORDING OVERHEAD
WIP
Manufacturing Overhead
Actual overhead
recorded as a
debit as invoices
are received
A/P
Applied overhead
recorded as a
credit during the
period as
overhead is
applied to
specific jobs
MOH REVISITED
Applying manufactured overhead throughout the
period is just an estimate of what overhead costs
will actually be.
Actual overhead for the year will not be known
until all indirect manufacturing costs have been
incurred for the entire year.
Will probably have to make some adjustments at
year end.
APPLIED VS. ACTUAL MOH