Lab tests by outside A particular patient contractor X 8. Cost of the old X-ray machine The salary of the head of the Radiology Department The salary of the head of the Pediatrics Department Cost of the new color laser printer Rent on the space occupied by Radiology The cost of maintaining the old machine Benefits from a new DNA analyzer Cost of electricity to run the X-ray machines X Note: The costs of the salaries of the head of the Radiology Department and Pediatrics Department and the rent on the space occupied by Radiology are neither differential costs, nor opportunity costs, nor sunk costs.
These costs do not differ between the alternatives and therefore are irrelevant in the decision, but they are not sunk costs because they occur in the future.
Product cost; variable cost 2. Conversion cost 3. Opportunity cost 4. Prime cost 5. Sunk cost 6. Period cost; variable cost 7. Product cost; period cost; fixed cost 8. Product cost 9.
Period cost Advertising by a dental office Apples processed and canned by Del Monte X X 4. Shipping canned apples from a Del Monte plant to customers Salary of a supervisor overseeing production of printers at Hewlett-Packard Commissions paid to Encyclopedia Britannica salespersons Depreciation of factory lunchroom facilities at a General Electric plant Steering wheels installed in BMWs Batteries purchased Batteries used in production 7, — Motorcycles completed and transferred to Finished Goods see above Motorcycles sold during the month above The purpose of this problem is to get the student to start thinking about cost behavior and cost purposes; try to avoid lengthy discussions about how a particular cost is classified.
Property taxes, factory Boxes used for packaging detergent produced by the company Depreciation, executive autos Wages of workers assembling computers Insurance, finished goods warehouses Lubricants for production equipment Microchips used in producing calculators Shipping costs on merchandise sold Magazine subscriptions, factory lunchroom Thread in a garment factory Billing costs Executive life insurance Ink used in textbook production Fringe benefits, assembly-line workers Yarn used in sweater production Wages of receptionist, executive offices Electricity to run production equipment Rent on a factory building Cloth used to make drapes Wages of laborers assembling a product Depreciation of air purification equipment used to make furniture Janitorial salaries Peaches used in canning fruit Sugar used in soft drink production Property taxes on the factory Wages of workers painting a product Depreciation on cafeteria equipment Insurance on a building used in producing helicopters.
Cost of rotor blades used in producing helicopters In preparing the income statement for August, Sam failed to distinguish between product costs and period costs, and he also failed to recognize the changes in inventories between the beginning and end of the month.
Once these errors have been corrected, the financial condition of the company looks much better and selling the company may not be advisable. The controller is correct that the salary cost should be classified as a selling marketing cost. The duties described in the problem have nothing to do with manufacturing a product, but rather deal with moving finished units from the factory to distribution warehouses. Selling costs include all costs necessary to secure customer orders and to get the finished product into the hands of customers.
Coordination of shipments of finished units from the factory to distribution warehouses falls in this category.
No, the president is not correct. The reported net operating income for the year will differ depending on how the salary cost is classified. If the salary cost is classified as a selling expense all of it will appear on the income statement as a period cost.
However, if the salary cost is classified as a manufacturing product cost, it will be added to Work in Process inventory along with other manufacturing costs for the period. To the extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work in Process inventory account.
Only that portion of the salary cost that has been assigned to finished units will leave the Work in Process inventory account and be transferred into the Finished Goods inventory account. In like manner, to the extent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the Finished Goods inventory account.
Only the portion of the salary that has been assigned to finished units that are sold during the period will appear on the income statement as an expense part of Cost of Goods Sold for the period. The remainder of the salary costs will be on the balance sheet as part of inventories. Meriwell Company Income Statement Sales Because fixed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises.
The average product cost per set would increase if the production drops. This is because the fixed costs would be spread over fewer units, causing the average cost per unit to rise. He might expect a price even higher than this to cover a portion of the administrative costs as well. The brother-in-law probably is thinking of cost as including only direct materials, or, at most, direct materials and direct labor.
The term is opportunity cost. The full, regular price of a set might be appropriate here, because the company is operating at full capacity, and this is the amount that must be given up benefit forgone to sell a set to the brother-in-law.
Even though the cost was incurred to start the business, it is a sunk cost. Whether Staci produces pottery or stays in her present job, she will have incurred this cost. Raw materials used in production Cost of goods manufactured Because fixed costs do not change in total as the activity level changes, the average cost per unit will decrease as the activity level rises.
A cost that is classified as a period cost will be recognized on the income statement as an expense in the current period. A cost that is classified as a product cost will be recognized on the income statement as an expense i.
If some units are unsold at the end of the period, the costs of those unsold units are treated as assets. Therefore, by reclassifying period costs as product costs, the company is able to carry some costs forward in inventories that would have been treated as current expenses.
The decision to postpone expenditures is questionable. It is one thing to postpone expenditures due to a cash bind; it is quite another to postpone expenditures in order to hit a profit target.
Postponing these expenditures may have the effect of ultimately increasing future costs and reducing future profits. Postponing maintenance on equipment is particularly questionable. See William J. Bruns, Jr. Such a reclassification would be a violation of the principle of consistency in financial reporting and is a clear attempt to mislead readers of the financial reports.
Hopefully, the auditors would discover any such attempt to manipulate annual earnings and would refuse to issue an unqualified opinion due to the lack of consistency. However, recent accounting scandals may lead to some skepticism about how forceful auditors have been in enforcing tight accounting standards.
To compute the number of units in the finished goods inventory at the end of the year, we must first compute the number of units sold during the year. Visic Corporation Income Statement Sales Conversion cost Then fill in the missing amounts by analysis of the available data.
A Raw materials used in production see above B Cost of goods manufactured see above C , Gross margin The procedure outlined above is just one way in which the solution to the case can be approached.
Some may wish to start at the bottom of the income statement with gross margin and work upwards from that point. Also, the solution can be obtained by use of T-accounts. Product costs e. Because there were ending inventories, some of the product costs should appear on the balance sheet as assets rather than on the income statement as expenses.
Solar Technology, Inc. Before an income statement can be prepared, the cost of the 8, batteries in the ending finished goods inventory must be determined. It is most likely that the insurance contract limits reimbursement for losses to those costs that would normally be considered product costs —in other words, direct materials, direct labor, and manufacturing overhead. Dell succeeds because of its operational excellence customer value proposition.
The first three tenets focus on operational excellence. Dell faces numerous business risks as described in pages of the K. Students may mention other risks beyond those specifically mentioned in the K. Control activities: Maintain a budgeting program that forecasts sales by product line, customer segment, and geographic region.
While the budget is not going to be perfectly accurate, a reasonably accurate forecast would help Dell manage investor expectations. This is of particular concern for Dell because its lean production practices result in minimal inventory levels and because Dell relies on several single- sourced suppliers. Control activities: Install controls such as physical security, data storage backup sites, firewalls and passwords that protect technology assets. Control activities: Develop a formal review process, supervised by legal counsel, to ensure that Dell complies with governmental regulations.
The audit report also contains two opinions dealing with internal control. These two opinions were required by SOX at the time of this K filing.
This report includes a reference to SOX. SOX requires the CEO and CFO to certify that the K and its accompanying financial statements do not contain any untrue statements and are fairly stated in all material respects.
Based solely on the inventories number on the balance sheet, students cannot determine the answer to this question. Nonetheless, students should be able to readily ascertain that Dell is a manufacturer. Examples of indirect inventoriable costs include the costs to sustain the manufacturing plants that cannot be conveniently traced to specific products.
The utility bills, insurance premiums, plant management salaries, and equipment-related costs, etc. The gross margin in dollars has steadily increased and the gross margin as a percent of sales has remained fairly steady for two reasons.
First, the cost of goods sold consists largely of variable costs e. As sales grow, these variable costs increase in total, but as a percentage of sales, they remain fairly stable over time. Some students may ask about the fixed overhead costs that are incurred to run the plants.
Spreading fixed overhead costs over a higher volume of sales would increase the gross margin percentage. Second, pages mention that Dell plans to reduce product costs in four areas: manufacturing costs, warranty costs, design costs, and overhead costs.
Using terminology that will be defined in Chapter 12, Dell grows profits by increasing turnover while holding margin reasonably constant. It also reduces raw materials inventory because suppliers provide just-in-time delivery of the quantities needed to satisfy customer orders. Product costs include those costs involved with making or acquiring the product.
Period costs include all costs that are not product costs. The expenses mentioned in the paragraph above are not involved with making the product so they are expensed as incurred. When the focus changes from external reporting to internal decision making, the need to comply with GAAP disappears. Here are four examples of cost objects for Dell including one direct and one indirect cost for each cost object.
A direct cost would be the cost of raw material component parts and an indirect cost would be factory utility costs.
A direct cost would be the component parts used to make these products and an indirect cost would be factory insurance costs that are assigned to these products. Garvin, Senior Vice President, Worldwide Procurement and Global Customer Experience see page 11 , given that he oversees worldwide procurement operations.
In particular, a stronger emphasis on strategic topics, new authors from Wharton and Stanford, and tutorial MyAccountingLab software based on rock solid technology with millions of students using. For complete information, visit the What's New section.
The first thirteen chapters provide the essence of a one-term quarter or semester course. This book can be used immediately after the student has had an introductory course in financial accounting. Alternatively, this book can build on an introductory course in managerial accounting. The framework in this edition helps students see how the demand for various types of management accounting information is a response to the decision-making needs of managers.
Serving as a structure for discussing many management accounting concepts in later chapters, Chapter 1 presents the process p. Chapter 2 p. The framework emphasizes three key ideas:. Chapter 13 p. The balanced scorecard and its four perspectives serve as an organizing framework for topics such as:.
Presented in Chapter 5 p. New material has been added to subsequent chapters on activity-based budgeting, customer-profitability analysis, activity-based costing and activity-based management. A systematic incorporation of new and evolving management thinking has been added including activity-based management, integrated approach to variance analysis, lean accounting and levels of control. For Professors: Instructors can access the Excel worksheets to support in-class discussion, to demonstrate key concepts, to explain difficult points, or to perform what-if sensitivity analysis.
For Students: Excel templates for selected end-of-chapter exercises and problems marked with an icon are available online at www. These templates allow students to complete selected exercises and problems using Excel to understand key concepts within the chapters. Each chapter opens with a vignette p. The vignettes engage the reader in a business situation or dilemma, illustrating why and how the concepts in the chapter are relevant in business.
Some companies featured are:. Serving as a structure for discussing many management accounting concepts in later chapters, Chapter 1 presents the process by:. Each chapter opens with a vignette on a real company situation. The Accountant's Role in the Organization 2.
An Introduction to Cost Terms and Purposes 3. Cost-Volume Profit Analysis 4. Job Costing 5. Master Budget and Responsibility Accounting 7. Inventory Costing and Capacity Analysis Determining How Costs Behave Decision-Making and Relevant Information Pricing Decisions and Cost Management Cost Allocation: Joint Products and Byproducts Process Costing Spoilage Rework, and Scrap Capital Budgeting and Cost Analysis Performance Measurement, Compensation, and Multinational Considerations.
Pearson offers affordable and accessible purchase options to meet the needs of your students. Connect with us to learn more. Horngren is the Edmund W. Harvard University and his Ph. He is also the recipient. Horngren is a member of the Accounting Hall of Fame.
A member of the American Accounting Association, he has been its President and its. Director of Research. He received its first annual Outstanding Accounting Educator Award. He is the first person to have received both awards. Horngren was named Accountant of the Year, Education, by the national professional accounting fraternity, Beta Alpha Psi. Horngren is the author of other accounting books published by Prentice Hall:.
Introduction to Management Accounting , 13th ed. Introduction to Financial Accounting , 9th ed. Horngren is the Consulting Editor for the Charles T. Horngren Series in Accounting. Srikant M. A graduate with distinction from the University of Bombay, he. A Chartered. Accountant, he holds two masters degrees and a Ph.
He has also served on the editorial board of several journals and presented his research to corporate executives and academic audiences in North America, South America, Asia, Africa, and Europe. Datar is a member of the Board of Directors of Novartis A. George Foster is the Paul L. He graduated with a university medal from the University of Sydney and. He has been awarded honorary doctorates from. He has. Research awards Foster has received include the Competitive Manuscript.
He also has worked closely with Computer Aided Manufacturing-International CAM-I in the development of a framework for modern cost management practices.
Foster has presented seminars on new developments in cost accounting in North and South America, Asia, Australia, and Europe. Madhav Rajan is the Gregor G. After completing his doctoral studies, Madhav joined the faculty of the Wharton School of the University of Pennsylvania and was promoted to the rank of tenured Associate Professor in , and Professor in His theoretical work has examined the optimal choice of information and incentive systems and the rationale behind observed internal accounting practices related to cost allocation and capital budgeting.
Madhav has also carried out empirical research, using both archival and field data, on the role of incentive systems, quality-based programs, and buyer-supplier relations. Topics include the efficiency of auction markets at allocating resources across divisions and the usefulness of bonus pools as a means for incorporating subjective measures of managerial performance.
He is also currently involved in a research project that looks at whether and how accounting measures of performance can be used to infer the economic profitability of firms. Madhav has served as an editor of The Accounting Review for the past six years.
He is an associate editor for both the Accounting and Operations areas for Management Science, and for the Journal of Accounting, Auditing and Finance. He also teaches an elective class in financial reporting to students at Stanford Law School. Madhav has won several teaching awards at Wharton and Stanford, including the David W. Hauck Award, the highest undergraduate teaching honor at Wharton. Christopher D. Ittner has received a number of teaching awards from Wharton students, and teaches management accounting courses for doctoral students from throughout the United States and Europe.
His research has been published in leading accounting, marketing, and operations management journals, including The Accounting Review , Journal of Accounting and Economics , Journal of Accounting Research , Management Science , and Operation Research , among others. Ittner is an Associate Editor of Accounting, Organizations and Society and Management Science and serves on the editorial boards of a number of other accounting and operations management journals.
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