COMM 1102 Chapter 2 LO5-7

Cost Accounting Basics

Overview of Inventory Stages

  • Three Types of Inventories in Manufacturing:

    • Raw Materials

    • Work in Process (WIP)

    • Finished Goods

Cost of Goods Sold (COGS) Calculations

  • Merchandising Company vs. Manufacturing Company

    • Merchandising Company:

    • Uses simpler COGS calculation.

    • COGS formula:

      • Calculation:

      • COGS = Beginning Inventory + Purchases - Ending Inventory

    • Reference: Discussed in column 11-1.

Cost of Goods Manufactured (COGM)

  • Importance of COGM

    • Necessary for calculating the COGS in a manufacturing setting.

    • More complex than merchandising companies.

Steps to Calculate COGS for a Manufacturing Company

  1. Raw Materials Inventory

    • Identify raw materials purchased throughout the year.

    • Goods Available for Use Calculation:

      • Goods Available = Beginning Raw Materials + Purchases

    • Cost of Raw Materials Used Calculation:

      • Cost of Raw Materials Used = Goods Available - Ending Raw Material Inventory

  2. Work in Process Inventory

    • Starting with the previous period's balance sheet:

      • Beginning Work in Process: From last period's balance sheet.

    • Inputs to Work in Process Calculation:

      • Raw Materials Used (calculated previously)

      • Direct Labor (added separately as it's not categorized as inventory)

  3. Ending Work in Process

    • Determine:

      • Ending Work in Process = Beginning WIP + Raw Materials Used + Direct Labor

Components of Product Cost

  • Simplified view of product costs based on three main components:

    • Materials

    • Labor

    • Manufacturing Overhead

  • These components combine in calculated totals to derive total product costs.

  • Final emphasis on Work in Process:

    • Begin by establishing Beginning Work in Process from balance sheets, and calculate components of inventory for period effectively.

Practical Application

  • Exercises involved in learning COGM and COGS will help in understanding inventory flow from raw materials to finished goods.

  • Ensure a comprehensive understanding by practicing suggested problems and scenarios relating to customer manufacturing.

Decision Making and Relevant Costs

  • Definition of Relevant Costs

    • Relevant costs are those costs that are pertinent to decision making, especially when choosing between alternatives.

    • They inform future decision-making and should be considered when evaluating different options.

  • Irrelevant Costs

    • Irrelevant costs are expenses that have already occurred and cannot be changed or recovered.

    • Specifically, they refer to past costs that should not impact future decision making.

Specific Examples of Costs in Decision Making

  • Flat vs Creep Costs

    • Discussion on car premiums as an example of fixed costs:

    • The insurance premium is set at $2,500 regardless of driving distance.

    • Driving either 10,000 kilometers or 2,000 kilometers does not affect the premium paid.

    • This cost is characterized as flat: it remains constant and is unaffected by the level of usage, which illustrates the nature of certain fixed costs.

Types of Costs in Operations

  • Fixed Costs

    • Fixed costs do not change with the level of goods or services produced within a certain range.

    • Example: Premiums or rents that remain constant regardless of production volumes.

  • Variable Costs

    • Variable costs, on the other hand, fluctuate depending on the level of output.

    • Examples include costs directly tied to production such as materials or labor that vary with production volumes.

    • Illustrations in the context of food: direct materials for flavors or ingredients that vary with production amounts.

Mixture of Cost Types

  • Combination of Fixed and Variable Costs

    • Many operational expenses feature both fixed and variable components.

    • Example discussing agriculture:

    • "Great vegetables" could suggest that some aspects of growing or producing vegetables have fixed costs (like land or equipment) while direct material costs for ingredients (like flavors) can shift based on production needs.