ACC 2203 Lecture Notes - Lecture 1: Purch Group, Earnings Before Interest And Taxes, Net Operating Loss
2 Jun 2018
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CHAPTER 1 – INTRODUCTION & COST TERMS
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© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
COST BEHAVIOR:
• VARIABLE COST - costs that change depending on the level of activity (like a rate), (pay per ride MetroCard, $2.75 per ride)
• FIXED COST - costs are the same regardless of the level of activity (i.e. monthly MetroCard, unlimited rides for $116.50/month)
• MIXED COST - costs that have both a fixed component and variable component (i.e. salespeople are paid a base salary (fixed) and
commissions (variable - based on how much you sell)
• Direct Cost - is traceable back to the manufactured product or cost center
• Indirect Cost - is not traceable or difficult to trace back to the manufactured product or cost center
MANUFACTURING COSTS: costs related to producing and manufacturing a good
*(THERE ARE 3 TYPES OF COST THAT MAKE UP THE MANUFACTURING COST FOR A FINISHED PRODUCT)
• DIRECT MATERIALS (DM) - raw materials used in production to make a good (i.e. leather used to make sneakers); *must be
traceable back to the finished product
• DIRECT LABOR (DL) – wages paid to workers who physically make the product (i.e. hourly wage paid to assembly workers who
put the sneakers together); * must be traceable back to the finished product
• MANUFACTURING OVERHEAD (OH) – other manufacturing costs incurred for the product to be produced and become a
finished good (costs must be related to manufacturing; factory costs, equipment costs, etc.)
A. Indirect Materials – small costs that are difficult to trace back to the manufactured product (i.e. cleaning supplies for the
machine that produces the sneakers)
B. Indirect Labor – labor costs that contribute to manufacturing the good but cannot be traced back or is difficult to trace back to
the finished good (i.e. wages paid to janitors)
C. Other – other costs that contribute to manufacturing the good (i.e. factory rent, depreciation of manufacturing equipment,
factory taxes, etc.)
CHAPTER 1 – INTRODUCTION & COST TERMS
!
_________________________________________________________________________________________________________________________________
© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
NON-MANUFACTURING COSTS: costs related to preparing or bringing the FINISHED GOOD to the consumer. Note – a finished
good is the final completed product and will no longer incur manufacturing costs because it’s already manufactured.
Note – costs that are not related to manufacturing and non-factory costs
• MARKETING OR SELLING COSTS – costs associated with advertising, selling, and bringing the finished product to the
consumer (i.e. wages paid to sales associate, marketing team, commissions, shipping costs)
• ADMINISTRATIVE COSTS – costs for administrative functions (i.e. salaries paid to executives, rent on headquarters building
etc.)
CHAPTER 1 – INTRODUCTION & COST TERMS
!
_________________________________________________________________________________________________________________________________
© COPYRIGHTED 2014. Y. PAN. ALL MATERIALS ARE COPYRIGHTED AND MAY NOT BE DUPLICATED, DISTRIBUTED,
EXERCISES:
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1.!Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the
average, $1,486 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $2,300
each. 61 Pianos were delivered. The selling and administrative costs that the company incurs in a typical month are presented below!
Costs Cost Formula
Selling: Advertising $949 per month
Sales salaries and commissions $4,771 per month, plus 4% of sales
Delivery of pianos to customers $58 per piano sold
Utilities $656 per month
Depreciation of sales facilities $5,059 per month
Administrative: Executive salaries $13,447 per month
Insurance $716 per month
Clerical $2,549 per month, plus $38 per piano sold
Depreciation of office equipment $902 per month
Traditional Format: Marwick’s Pianos, Inc Income Statement for the Month of August
Amount ($) Amount ($)
SALES ______________ ADMINISTRATIVE EXPENSES: _____________
COST OF GOODS SOLD ______________ _____________
(FILL IN) ______________ _____________
SELLING & ADMIN EXPENSES: _____________
SELLING EXPENSES: ______________ TOTAL ADMIN EXPENSES _____________
______________
______________ TOTAL SELLING & ADMIN _____________
______________
______________ NET OPERATING INCOME _____________
TOTAL SELLING EXPENSES ______________
Document Summary
Indirect cost - is not traceable or difficult to trace back to the manufactured product or cost center. Manufacturing costs: costs related to producing and manufacturing a good. Non-manufacturing costs: costs related to preparing or bringing the finished good to the consumer. Note a finished good is the final completed product and will no longer incur manufacturing costs because it"s already manufactured. Exercises: marwick"s pianos, inc. , purchases pianos from a large manufacturer and sells them at the retail level. Traditional format: marwick"s pianos, inc income statement for the month of august. Cost of goods sold = ,486 x 61 pianos = = ( per month) + (. 04 x ) = Delivery of pianos = x 61 = Clerical ( per month) + ( x 61) = Total selling and administrative = ( + ) = Net operating income = ( - ) =
