Posted: December 7th, 2022
1. As reviewed in the previous chapter, the focus in Chapter 21 is Process Order Costing vs. Job Order Costing. Job Order Costing is for a unique product or job…such as a custom-made guitar or, in the service industry, completing an accounting audit for a client. In both Job Order and Process Order, you still have ‘3’ costs: Material, Labor and Overhead, and ‘3’ inventories: Raw Materials, WIP-Work In Process-, and FG-Finished Goods. The Big difference in Process Costing: there are more than ‘1’ WIP accounts-SEE the HERSHEY video in Assignment 1-and the products created are all the same or Homogeneous…and processed in LARGE volumes (paint, canned goods, cereal etc.) With Job Order, there’s only ‘1’ WIP account…and the product or service is unique or Heterogeneous.
The Accounting: When finished, all the costs from the last WIP account (in Process Costing) goes into FG-Finished Goods. From FG, when SOLD, the costs go into COGS-Cost of Goods Sold, which then creates your Sales (at least 2x your cost) and A/R-Accounts Receivable.
Conversion Cost is your Labor and Overhead, working on the Materials to create a Finished Good.
Equivalent Units-EQ: Converting all your WIP goods into completed units, based on the % of completion. This starts getting complex. Here’s an example: Your school wants to compute the cost of Instruction-like paying me-for each Full Time-FT- Student. The Total cost of Instruction: $9,000,000. Total Full Time Students: 900; Total Part Time-PT-Students 1000. You can not divide by 1900 because of the PT students. However, you know the PT students, on average, take 60% of FT classes. Here’s the math: Multiply 1000 x .60 = 600 FT equivalent students added to 900 FT students = 1500. Divided $9,000,000 by 1500 = $6000 per FT student is what it costs the school to teach each student. That also means that each FT student’s tuition would have to be greater than $6000 in order for the school to make money. Whew!
Compute EQ based on you taking 4 classes. Each class requires a term paper. Rather than start ‘1’ and finish, you decided to start all ‘4’ at the same time. You finished ‘1’, and are 50% completed in paper #2, and 75% completed on papers #3 and #4. What is your EQ for all ‘4’ papers. Or, in other words, IF you had started only ‘1’ at a time, how many papers would you have completed. Show your work.
2. This chapter deals with Sales, Variable and Fixed Costs-FC, Contribution Margin and Break-Even Analysis. Total Variable Costs-VC-are Direct Materials and Direct Labor. As production increases, total VC increases, but the per unit VC stays the same. It’s the opposite for FC-property taxes, depreciation, rent, insurance etc-total FC stays the same, but as production increases, the per unit FC Decreases.
The Contribution Margin-CM-definition: Sales minus VC. The CM must be large enough to cover FC and show a profit. Otherwise, you are out of business.
The Break-Even-BE-Analysis is easy: Total Sales minus Total Costs = ZERO…you did not make any money, but you did not lose any money.
REQUIRED: Analyze ‘2’ scenarios: a) To be competitive, you have decided to decrease your sales price. What must happen in order for your profits to either stay the same or increase?
b) You’ve decided to increase wages, which are Variable Costs. What can you do to maintain or increase your profits?
HINT: In both scenarios, the variables involved: sales price, VC, FC, sales volume, new and existing customers.
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