AMA Cost concept

7/30/2019 AMA Cost concept

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Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 1Managerial Accounting and CostConcepts

PowerPoint Authors:

Jon A. Booker, Ph.D., CPA, CIA

Charles W. Caldwell, D.B.A., CMA

Susan Coomer Galbreath, Ph.D., CPA


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Work of Management

Planning

Controlling

Directing and

Motivating

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Planning

Identifyalternatives.

Select alternative that doesthe best job of furtheringorganizations objectives.

Develop budgets to guideprogress toward theselected alternative.

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Directing and MotivatingDirecting and motivating involves managing day-to-day activities to keep the organization runningsmoothly.

Employee work assignments. Routine problem solving.

Conflict resolution.

Effective communications.

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Controlling

The control function ensuresthat plans are being followed.

Feedback in the form of performance reportsthat compare actual results with the budgetare an essential part of the control function.

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Planning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Measuringperformance(Controlling)

Implementingplans (Directingand Motivating)

Comparing actualto planned

performance(Controlling)

Begin

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Comparison of Financial and Managerial

AccountingFinancial Accounting Managerial Accounting

1. Users External persons who Managers who plan for

make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focuses on segmentsthe whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format

7. Requirement Mandatory for Not

external reports Mandatory

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Learning Objective 2

Identify and give examples of

each of the three basicmanufacturing cost

categories.

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The Product

DirectMaterials DirectLabor ManufacturingOverhead

Manufacturing Costs

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Direct Materials

Raw materials that become an integralpart of the product and that can be

conveniently traced directly to it.

Example: A radio installed in an automobile

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Direct Labor

Those labor costs that can be easilytraced to individual units of

product.

Example: Wages paid to automobile assembly workers

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Manufacturing Overhead

Manufacturing costs cannot be traceddirectly to specific units produced.

Examples: Indirect materials and indirect labor

Wages paid to employees

who are not directlyinvolved in productionwork.

Examples: Maintenanceworkers, janitors and

security guards.

Materials used to support

the production process.

Examples: Lubricants andcleaning supplies used in theautomobile assembly plant.

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Classifications of

Nonmanufacturing Costs

Selling Costs

Costs necessary to getthe order and deliverthe product.

AdministrativeCosts

All executive,organizational, andclerical costs.

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Distinguish between

product costs and periodcosts and give examples

of each.

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Product Costs Versus Period Costs

Inventory

Cost ofGoods Sold

BalanceSheet

IncomeStatement

Sale

Product costsincludedirect materials, direct

labor, and

manufacturingoverhead.

Period costsare notincluded in product

costs. They are

expensed on theincome statement.

Expense

IncomeStatement

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Quick Check

Which of the following costs would beconsidered a period rather than a product costin a manufacturing company? (There may bemore than one correct answer.)

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.

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Which of the following costs would beconsidered a period rather than a product costin a manufacturing company? (There may be

more than one correct answer.)A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.

Quick Check

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Prime Cost and Conversion Cost

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:

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Comparing Merchandising and

Manufacturing ActivitiesMerchandisers . . .

Purchase finishedgoods from suppliers

for resale tocustomers.

Manufacturers . . .

Purchases rawmaterials from

suppliers.

Produce and sellfinished goods tocustomers.

MegaLoMart

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Balance Sheet

Merchandiser

Current Assets

Cash

Receivables

Prepaid Expenses

Merchandise Inventory

Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses

Inventories:

1. Raw Materials

2. Work in Process

3. Fin ished Goods

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Merchandiser

Current Assets

Cash

Receivables

Prepaid Expenses

Merchandise Inventory

Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses

Inventories:

1. Raw Materials

2. Work in Process

3. Fin ished Goods

Balance Sheet

Partially complete

products

somematerial, labor, oroverhead has been

added.

Completed products

awaiting sale.

Materials waiting tobe processed.

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Prepare an income

statement includingcalculation of the cost of

goods sold.

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The Income StatementCost of goods sold for manufacturers differs only

slightly from cost of goods sold for merchandisers.

Manufacturing Company

Cost of goods sold:

Beg. finished

goods inv. 14,200$

+ Cost of goods

manufactured 234,150

Goods availablefor sale 248,350$

- Ending

finished goods

inventory (12,100)

= Cost of goods

sold 236,250$

Merchandising Company

Cost of goods sold:

Beg. merchandise

inventory 14,200$

+ Purchases 234,150

Goods available

for sale 248,350$- Ending

merchandise

inventory (12,100)

= Cost of goods

sold 236,250$

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Inventory Flows

Beginningbalance

Additionsto inventory+ =

Endingbalance

Withdrawalsfrom

inventory

+

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Quick Check

If your inventory balance at the beginning ofthe month was $1,000, you bought $100during the month, and sold $300 during the

month, what would be the balance at the endof the month?

A. $1,000.

B. $ 800.

C. $1,200.D. $ 200.

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If your inventory balance at the beginning ofthe month was $1,000, you bought $100during the month, and sold $300 during the

month, what would be the balance at the endof the month?

A. $1,000.

B. $ 800.

C. $1,200.D. $ 200.

Quick Check

$1,000 + $100 = $1,100$1,100 - $300 = $800

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Prepare a schedule of costof goods manufactured.

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Schedule of Cost of Goods

ManufacturedCalculates the cost of rawmaterials, direct labor and

manufacturing overheadused in production.

Calculates the manufacturingcosts associated with goodsthat were finished during the

period.

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Manufacturing Work

Raw Materials Costs In Process

Beginning raw

materials inventory

+ Raw materials

purchased

= Raw materials

available for use

in production

Ending raw materials

inventory

= Raw materials used

in production

As items are removed fromraw materials inventory andplaced into the production

process, they are called directmaterials.


Manufactured

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Manufacturing Work


Beginning raw Direct materials

materials inventory + Direct labor

+ Raw materials + Mfg. overhead

purchased = Total manufacturing

= Raw materials costs

available for use

in production

Ending raw materialsinventory


in production

Conversioncosts are costs

incurred to

convert thedirect materialsinto a finished

product.

As items are removed from rawmaterials inventory and placed into

the production process, they arecalled direct materials.


Manufactured


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Manufacturing Work


Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing

purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the

in production period

Ending raw materials

Ending work ininventory process inventory

= Raw materials used = Cost of goods

in production manufactured.

Costs associated with the goods thatare completed during the period are

transferred to finished goodsinventory.


Manufactured

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Work

In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory+ Manufacturing costs + Cost of goods

for the period manufactured

= Total w ork in process = Cost of goodsfor the period available for sale

Ending work in - Ending finished

process inventory goods inventory

= Cost of goods Cost of goods

manufactured sold

Cost of Goods Sold

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Manufacturing Cost Flows

Selling andAdministrative

Period Costs

FinishedGoods

Cost of

GoodsSold

Selling andAdministrative

ManufacturingOverhead

Work inProcess

Direct Labor

Balance SheetCosts Inventories

IncomeStatementExpensesMaterial Purchases Raw Materials

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Quick Check

Beginning raw materials inventory was$32,000. During the month, $276,000 of rawmaterial was purchased. A count at the end of

the month revealed that $28,000 of rawmaterial was still present. What is the cost ofdirect material used?

A. $276,000

B. $272,000C. $280,000

D. $ 2,000

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Beginning raw materials inventory was$32,000. During the month, $276,000 of rawmaterial was purchased. A count at the end of

the month revealed that $28,000 of rawmaterial was still present. What is the cost ofdirect material used?

A. $276,000

B. $272,000C. $280,000

D. $ 2,000

Quick Check

Beg. raw materials 32,000$

+ Raw materials

purchased 276,000

= Raw materials available

for use in production 308,000$ Ending raw materials

inventory 28,000


in production 280,000$

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Quick Check

Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were

total manufacturing costs incurred for themonth?

A. $555,000

B. $835,000

C. $655,000

D. Cannot be determined.

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Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were

total manufacturing costs incurred for themonth?

A. $555,000

B. $835,000

C. $655,000

D. Cannot be determined.

Quick Check

Direct Materials 280,000$

+ Direct Labor 375,000

+ Mfg. Overhead 180,000

= Mfg. Costs Incurredfor the Month 835,000$

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Quick Check

Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of

partially finished goods remaining in work inprocess inventory at the end of the month.What was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

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Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 of

partially finished goods remaining in work inprocess inventory at the end of the month.What was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

Quick Check

Beginning work inprocess inventory 125,000$

+ Mfg. costs incurredfor the period 835,000

= Total work in processduring the period 960,000$

Ending work in

process inventory 200,000= Cost of goods

manufactured 760,000$

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Quick Check

Beginning finished goods inventory was$130,000. The cost of goods manufactured forthe month was $760,000. The ending finished

goods inventory was $150,000. What was thecost of goods sold for the month?

A. $ 20,000.

B. $740,000.

C. $780,000.

D. $760,000.


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Understand the

differences betweenvariable costs and fixed

costs.

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Cost Classifications for Predicting

Cost Behavior

How a cost will react tochanges in the level of

business activity.

Totalvariable costschangewhen activity changes.

Totalfixed costsremainunchanged when activitychanges.

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Variable Cost

Yourtotal texting bill is based on howmany texts you send.

Number of Texts Sent

TotalTextingBill

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Variable Cost Per Unit

Number of Texts Sent

CostP

erTextSent

The cost per text sent is constant at

5 cents per text.

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Fixed Cost

Yourmonthly contract fee for your cell phone is fixed forthe number of monthly minutes in your contract. Themonthly contract fee does not change based on the

number of calls you make.

Number of Minutes Used

Within Monthly Plan

Monthly

CellPhone

Cont

ractFee

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Fixed Cost Per Unit

Number of Minutes Used

Within Monthly Plan

MonthlyCellPhone

Con

tractFee

Within the monthly contract allotment, the averagefixed cost per cell phone call made decreases as

more calls are made.

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Cost Classifications for Predicting

Cost BehaviorBehavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goes

the same even when the down as activity level goes up.

activity level changes.

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Quick Check

Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be

more than one correct answer.)A. The cost of lighting the store.

B. The wages of the store manager.

C. The cost of ice cream.D. The cost of napkins for customers.

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Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & Robbins shop? (There may be

more than one correct answer.)A. The cost of lighting the store.

B. The wages of the store manager.

C. The cost of ice cream.D. The cost of napkins for customers.

Quick Check

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Understand thedifferences betweendirect and indirect costs.

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Assigning Costs to Cost Objects

Direct costs

Costs that can beeasily and convenientlytraced to a unit ofproduct or other costobject.

Examples: Directmaterial and direct labor

Indirect costs

Costs that cannot beeasily and conveniently

traced to a unit ofproduct or other costobject.

Example: Manufacturingoverhead

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Understand cost

classifications used in makingdecisions: differential costs,opportunity costs, and sunk

costs.

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Cost Classifications for Decision

MakingEvery decision involves a choicebetween at least two alternatives.

Only those costs andbenefits that differ

between alternatives

are relevant to thedecision. All other

costs and benefits can

and should be ignored.

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Differential Costs and Revenues

Costs and revenues that differamong alternatives.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in aneighboring city that pays $2,000 per month. Thecommuting cost to the city is $300 per month.

Differential revenue is:$2,000 $1,500 = $500

Differential cost is:$300

Net Differential Benefit is:

$200


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Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether you

drive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.

B. No, the cost of the train ticket is notrelevant.

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you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether you

drive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.

B. No, the cost of the train ticket is notrelevant.

Quick Check

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Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, butyou dont want to waste money needlessly. Isthe annual cost of licensing your car relevantin this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

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you dont want to waste money needlessly. Isthe annual cost of licensing your car relevantin this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

Quick Check

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Quick Check

Suppose that your car could be sold now for$5,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

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Suppose that your car could be sold now for$5,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

Quick Check

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Summary of the Types of Cost

ClassificationsFinancialReporting

PredictingCost

Behavior

AssigningCosts to Cost

Objects

DecisionMaking

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End of Chapter 1

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AMA Cost concept