Name: Le Ngoc Tuong Vi (Vicky) Class: SUD 10

I.

Cost classification

Seagate Technology is a company that develops and sells hard drives and storage solutions for data protection and data retention management. It was incorporated in 1978 as Shugart Technology. Cost is very important with many businesses and also Seagate, it has many definitions. General, Cost means the total money, time and resources associated with a purchase or activity of business. Cost classification is the process of grouping costs according to their common features. Base on different aims, cost classification can dividend into different groups such as cost classification for stock valuation and profit measurement, for decision making and for control. A cost is composed of three elements, material, labor and other expenses. Material cost is the cost of material of any nature used for the purpose of production of a product or a service. Labor cost means the payment made to the employees, permanent or temporary, for their services. Expenses are other than material cost or labor cost which are involved in an activity. For stock valuation and profit measurement, each of three elements can be direct and indirect. Direct cost and indirect cost usually occur on production department. Direct cost is the cost which is directly chargeable to the product manufactured. It is easily and economically identifiable. Direct cost consists of three elements are direct material cost, direct labor cost and direct expenses cost. Sum of all direct cost is called prime cost. A product cannot be manufactured without basic raw materials. Direct material cost is the cost of basic raw material used for manufacturing a product. It is easily identifiable and chargeable to the product. The main products of Seagate are hard disc drives, solid state drives and solid state hybrid drives. Direct material cost includes all materials specially and all components purchased for production or the process such as cost of procurement, freight inwards, taxes and duties for protect environment (for example the money which Seagate used for waste treatment), wrappings, cardboard boxes, etc. which is necessary for protection of product when transferred.

Direct labor cost is the cost of wages of those workers who are engaged in the manufacturing line for conversion of raw materials into finished goods and it can be identified or linked with a cost center. In the case of Seagate, the direct labor cost is not only the wages of the workers but also the money paid for, insurance, wages for holidays and idle time (worker to be on maternity leave) etc. Other direct expenses are incurred on specific product other than direct materials and direct labors. Seagate company can have direct expenses for hiring charges for tools and equipment for a cost center or paying royalties in connection to a product. Indirect cost is another grouping when cost classification for stock valuation and profit measurement. Indirect cost/ Overheads are the costs incurred in the course of making a products or providing a service or run department, but which cannot be traced directly. It consists of three elements: indirect material, indirect labor and indirect expenses. Indirect material is the cost of the material other than direct material which cannot be charged to the product directly. It cannot be treated as a part of the product. When the process to produce a hard disk, indirect material include lubricants, cotton waste, oil, grease, stationery, small tools for general use, etc. Indirect labor is the amount of salary paid to those staff who is not engaged on the manufacturing line. Examples of indirect labor are salaries of staff in administration department, marketing department, sales and distribution department, general supervision, salaries of security staff. Indirect expense is the amount of expenses which is not chargeable to the product directly. It is the cost of giving service to the production department. It includes factory expenses, administrative expenses, selling and distribution expenses, etc. Furthermore, Costs should be classified according to the major functions for which the elements are used into the following four major functions: Production, Administration, Selling and Distribution, etc. Production Cost is the cost of all items involved in the production of a product. It includes all direct costs and all indirect costs related to the production. Production overhead is also termed as factory overhead or manufacturing overhead. Salaries for staff for production planning, technical supervision, factory administration, normal idle time cost, expenses for stores
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management, security expenses in the factory, labor welfare expenses, depreciation of plant and machineries, repair and maintenance of factory building and plant and machineries, insurance are examples of production overheads. Administration costs are expenses incurred for general management of Seagate. These are in the nature of indirect costs and are also termed as administrative overhead. Examples of items to be included in administrative overhead such as salaries of administrative and accounts staff, general office expenses like rent, lighting, rates and taxes, telephone, stationery, postage, bank charges, legal expenses, depreciation and repair and maintenance of office building, etc. Seagate company has another direct cost is selling and distribution cost. Selling and distribution costs are indirect costs related to selling of products and include all indirect cost in sales management. Selling costs include all costs relating to regular sales and sales promotion activities. Examples of expenses which are included in selling cost are: salaries (such as salaries of drivers and packing staff), advertisement cost, show room expenses, , market research cost, royalty on sale, etc. Another way to divided costs are based on decision making and costs classified as fixed cost, variable cost and semi-variable cost depending upon response to the changes in the activity levels. Fixed Cost is the cost which does not vary with the change in the volume of activity in the short run. These costs are not affected by temporary fluctuation in activity of an enterprise. Examples for fixed cost of Seagate are salary of general manager, foreman, rent cost of office/ building, audit fees, depreciation, etc. Variable cost is the cost which tends to vary directly with the volume of activities. It means that if there is increase in volume of products, this cost will increase. Materials consumed, direct labor, sales commission, utilities, freight, packing, etc. are instance of variable cost. SemiVariable Costs contain both fixed and variable elements. They are partly affected by fluctuation in the level of activity. Examples of such expenses are depreciation of plant and machinery, maintenance of factory building etc. These expenses will increase if factory is run from single shift to double or triple shifts. Depreciation and maintenance will increase but not in the same ratio, the output increases. Thus these expenses are neither fixed nor variable cent percent.

II.

Income statement and schedule of cost of goods manufactured of SEAGATE Corporation

The income statement of a corporation includes the same types of revenues and expenses as companies organized as sole proprietors and partnerships with one difference. A corporation is a legal entity and therefore, it must pay taxes. The major advantage of the income statement is that it shows the profitability of the company over a period of time. Based on the Income statement, Seagate company can determine the major revenues it earned through this income. Furthermore, an income statement is also significant because it is based on the matching principal and it shows the expense incurred by a company to earn the revenues. Shareholders of Seagate are also interested in the net income because the dividends are paid out of the total income. Moreover, income statement also helps the companies to analyze their expenses and to take into account the major streams of operating revenues of the company. Understanding the important of Income statement, Seagate Corporation always prepare clearly it for each year. Here is the Seagate Corporation Income statement of 2011. Seagate Corporation Income Statement for the Year Ended December 31, 2011 (in millions) Revenues 335 Cost of goods sold: Beginning finished goods, Jan. 1, 2011 47 Add Cost of goods manufactured (below) 228 Cost of goods available for sales 275 Less Ending finished goods, Dec. 31, 2011 11 Total 264 Gross profit 71 Marketing, distribution, and customer-service costs 94 Operating income (23) Net Income from Continuing Operations (23) The cost of goods manufactured schedule is used to calculate the cost of producing products for a period of time. The cost of goods manufactured amount is transferred to the finished goods inventory account during the period and is used in calculating cost of goods sold on the income statement. The cost of goods manufactured schedule reports the total manufacturing costs for the period that were added to work-in-process, and adjusts these costs for the change in the work-in4

process inventory account to calculate the cost of goods manufactured. The Schedule of Cost of Goods Manufactured is very important because it also help the Seagate calculate and prepare the Income statement. Here is the Seagate Corporations Schedule of Cost of Goods Manufactured for 2011. Seagate Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2011 (in millions) Direct materials costs: Beginning inventory, Jan. 1, 2011 Purchases of direct materials Cost of direct materials available for use Ending inventory, Dec. 31, 2011 Direct materials used in production Direct manufacturing labor costs Overhead cost Indirect manufacturing costs: Indirect manufacturing labor Plant supplies used Plant utilities Depreciationplant and equipment Miscellaneous plant overhead Property taxes on plant Total Manufacturing costs incurred during 2011 Add beginning work-in-process inventory, Jan. 1, 2011 Total manufacturing costs to account for Deduct ending work-in-process, Dec. 31, 2011 Cost of goods manufactured 32 84 116 8 108 42

27 4 9 6 15 2 63 213 18 231 3 228

III.

An income statement and a supporting schedule of cost of goods manufactured; total prime costs and total conversion costs; total inventoriable costs and period costs of Seagate

A company's production department is full of costs, the materials are all added at the beginning of the process while the labor and overhead costs are incurred throughout the process. Each cost (materials, labor or overhead cost) needed to produce finished goods. Prime Costs are direct costs of a product before any manufacturing overhead is added which consists of: direct raw

materials, direct labor and direct expense. In this case of Seagate company, Prime Costs = Direct material costs + Direct Labor costs. Seagate Corporation Prime Cost (in millions) Direct Material Costs Direct Labor Costs Total 108 42 150

Labor and overhead are also called conversion costs because they convert the materials into a product. Conversion costs include direct labor and manufacturing overhead. Besides that conversion cost can be calculate by: Cost of goods manufactured Direct Material Costs. Seagate Corporation Conversion Cost (in millions) Cost of goods manufactured Deduct Direct Material Costs Total 228 108 120

Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory to build up the costs of creating these assets. Inventoriable cost is the product costs of direct materials, direct labor, and manufacturing overhead and it is the cost of goods sold. Seagate Corporation Cost of goods sold for the Year Ended December 31, 2011 (in millions) Cost of goods sold: Beginning finished goods, Jan. 1, 2011 Add Cost of goods manufactured (below) Cost of goods available for sales Less Ending finished goods, Dec. 31, 2011 Total 47 228 275 11 264

Period costs are all costs in the income statement other than cost of goods sold. These costs are reported on the income statement as they are incurred. Period cost is not part of manufacturing overhead, not related to making the product. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods. In Seagate company, Design costs and R&D costs are the period costs because they are not considered product costs for financial statement purposes. Suppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product. Assume that yearly depreciation is computed on a straight-line basis. Assume that the implied cost-behavior patterns in requirement above persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost.

Production Volume (Units) Direct Mater Cost Depreciation on plant and equipment Total Cost

Total (Million) 2 108 6 114

Unit Cost (/Unit) 54 3 57

Assuming that the costs are being predicted for the manufacture of 3 million units of product. Production Volume (Units) Direct Mater Cost Depreciation on plant and equipment Total Cost Total (Million) 3 108 6 114 Unit Cost (/Unit) 36 2 38