MANAGERIAL ACCOUNTING AND COST CONCEPTS Chapter 2 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker,

MANAGERIAL ACCOUNTING AND COST CONCEPTS

Chapter 2

PowerPoint Authors:Susan Coomer Galbreath, Ph.D.,

CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Work of ManagementWork of Management

PlanningPlanning

ControllingControlling

Directing and Motivating

Directing and Motivating

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PlanningPlanning

Identifyalternatives.

Identifyalternatives.

Select alternative that does the best job of furtheringorganization’s objectives.

Select alternative that does the best job of furtheringorganization’s objectives.

Develop budgets to guideprogress toward theselected alternative.

Develop budgets to guideprogress toward theselected alternative.

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Directing and MotivatingDirecting and Motivating

Directing and motivating involves managing day-to-day activities to keep the organization running smoothly. Employee work assignments. Routine problem solving. Conflict resolution. Effective communications.

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ControllingControlling

The control function ensuresthat plans are being followed. 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.

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 CyclePlanning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Formulating long-and short-term plans

(Planning)

Measuringperformance (Controlling)

Measuringperformance (Controlling)

Implementing plans (Directing and Motivating)

Implementing plans (Directing and Motivating)

Comparing actualto planned

performance (Controlling)

Comparing actualto planned

performance (Controlling)

Begin

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Learning Objective 1Learning Objective 1

Identify the major differences and similarities

between financial and managerial accounting.

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Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting

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Identify and give examples of each of the three basic

manufacturing cost categories.

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The ProductThe Product

DirectMaterials

DirectMaterials

DirectLaborDirectLabor

ManufacturingOverhead


Manufacturing CostsManufacturing Costs

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Direct MaterialsDirect Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Example: A radio installed in an automobile

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Direct LaborDirect Labor

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers

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Manufacturing OverheadManufacturing Overhead

Manufacturing costs that cannot be traced directly to specific units produced.

Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor

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Nonmanufacturing CostsNonmanufacturing Costs

Administrative Costs

All executive, organizational, and

clerical costs.

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Distinguish between product costs and period costs and give examples

of each.

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Product Costs Versus Period CostsProduct Costs Versus Period Costs

Period costs include all selling costs

and administrative costs.

Product costs include direct

materials, direct labor, and

manufacturing overhead.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

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Quick Check Quick Check

Which of the following costs would be considered a period rather than a product cost in a manufacturing company?a. Manufacturing equipment depreciation.

b. Property taxes on corporate headquarters.

c. Direct materials costs.

d. Electrical costs to light the production facility.

e. Sales commissions.

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Which of the following costs would be considered a period rather than a product cost in a manufacturing company?a. Manufacturing equipment depreciation.

b. Property taxes on corporate headquarters.

c. Direct materials costs.

d. Electrical costs to light the production facility.

e. Sales commissions.


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Classifications of CostsClassifications of Costs

Manufacturing costs are oftenclassified as follows:

DirectMaterialDirect

MaterialDirectLaborDirectLabor



PrimeCost

ConversionCost

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Comparing Merchandising and Comparing Merchandising and Manufacturing CompaniesManufacturing Companies

Manufacturers . . .Buy raw materials.

Produce and sell finished goods.

Merchandisers . . .Buy finished goods.

Sell finished goods. MegaLoMart

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Balance SheetBalance Sheet

Merchandiser

Current assetsCashReceivablesMerchandise

Inventory

Manufacturer Current Assets

Cash Receivables Inventories

• Raw Materials

• Work in Process

• Finished Goods

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Merchandiser

Current assetsCashReceivablesMerchandise

Inventory

Manufacturer Current Assets

Cash Receivables Inventories

• Raw Materials

• Work in Process

• Finished Goods

Balance SheetBalance Sheet

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Prepare an income statement including

calculation of the cost of goods sold.

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The Income StatementThe Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

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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Basic Equation for Inventory AccountsBasic Equation for Inventory Accounts

Beginningbalance

Beginningbalance

Additionsto inventoryAdditions

to inventory++ == EndingbalanceEndingbalance

Withdrawalsfrom

inventory

Withdrawalsfrom

inventory++

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If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month?a. $1,000.b. $ 800.c. $1,200.d. $ 200.

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If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month?a. $1,000.

b. $ 800.

c. $1,200.

d. $ 200.


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

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Prepare a schedule of cost of goods manufactured.

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Schedule of Cost of Goods Schedule of Cost of Goods ManufacturedManufactured

Calculates the cost of raw material, direct labor, and

manufacturing overhead used in production.

Calculates the manufacturing costs associated with goods that were finished during the

period.

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Manufacturing WorkRaw Materials Costs In Process

Beginning raw Direct materials 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 from raw materials inventory and placed into

the production process, they arecalled direct materials.

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

Product Cost FlowsProduct Cost Flows

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Beginning raw Direct materials materials inventory + Direct labor

+ Raw materials + Mfg. overhead purchased = Total manufacturing

= Raw materials costs

available for use in production



in production


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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



in production


All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

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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 in inventory process inventory

= Raw materials used = Cost of goods

in production manufactured


Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

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Manufacturing Cost FlowsManufacturing Cost Flows

FinishedGoods

Cost of GoodsSold

Selling andAdministrative

Period CostsSelling andAdministrative


Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

Material Purchases Raw Materials

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Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

a. $276,000b. $272,000c. $280,000d. $ 2,000

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Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

a. $276,000b. $272,000c. $280,000d. $ 2,000


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Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?

a. $555,000b. $835,000c. $655,000d. Cannot be determined.

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Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?

a. $555,000b. $835,000c. $655,000d. Cannot be determined.


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Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during 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 month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

a. $1,160,000b. $ 910,000c. $ 760,000d. Cannot be determined.


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Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?a. $ 20,000.b. $740,000.c. $780,000.d. $760,000.

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Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?a. $ 20,000.b. $740,000.c. $780,000.d. $760,000.


$130,000 + $760,000 = $890,000$890,000 - $150,000 = $740,000

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Understand the differences between variable costs and

fixed costs.

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Cost Classifications for Predicting Cost Cost Classifications for Predicting Cost BehaviorBehavior

How a cost will react to changes in the level of

activity within the relevant range.

◦ Total variable costs change when activity changes.

◦ Total fixed costs remain unchanged when activity changes.

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Variable CostVariable Cost

Your total texting bill is based on how many texts you send.

Number of Texts Sent

To

tal T

exti

ng

Bill

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Variable Cost Per UnitVariable Cost Per Unit

The cost per text sent is constant at

5 cents per text.

Number of Texts Sent

Co

st P

er T

ext

Sen

t

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Fixed CostFixed Cost

Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in

your contract. The monthly contract fee

does not change based on the number of calls

you make.

Number of Minutes UsedWithin Monthly Plan

Mo

nth

ly C

ell P

ho

ne

Co

ntr

act

Fee

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Fixed Cost Per UnitFixed Cost Per UnitWithin the monthly contract allotment, the

average fixed cost per cell phone call made decreases as more calls are made.

Number of Minutes UsedWithin Monthly Plan

Mo

nth

ly C

ell P

ho

ne

Co

ntr

act

Fee

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Cost Classifications for Predicting Cost Cost Classifications for Predicting Cost BehaviorBehavior

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

activity level changes.

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Which of the following costs would be variable with respect to the number of cones sold at a Baskins & 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 variable with respect to the number of cones sold at a Baskins & 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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Understand the differences between direct

and indirect costs.

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Assigning Costs to Cost ObjectsAssigning Costs to Cost Objects

Indirect costsCosts that cannot

be easily and conveniently traced to a unit of product or other cost object.

Example: manufacturing overhead

Direct costsCosts that can be

easily and conveniently traced to a unit of product or other cost object.

Examples: direct material and direct labor

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Define and give examples of cost classifications used in

making decisions: differential costs, opportunity costs, and

sunk costs.

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Cost Classifications for Decision MakingCost Classifications for Decision Making

Every decision involves a choice between at least two alternatives.

Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored.

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Differential Cost and RevenueDifferential Cost and Revenue

Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

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

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

Differential cost is: $300

Differential cost is: $300

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Opportunity CostOpportunity Cost

The potential benefit that is given up when one alternative is selected over another.

Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.

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Sunk CostsSunk Costs Sunk costs have already been incurred and

cannot be changed now or in the future. These costs should be ignored when making decisions.

Example: You bought an automobile that cost $25,000 two years ago. The $25,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $25,000 cost.

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Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train 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 not relevant.

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Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train 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 not

relevant.


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Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?a. Yes, the licensing cost is relevant.b. No, the licensing cost is not relevant.

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Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?

a. Yes, the licensing cost is relevant.

b. No, the licensing cost is not relevant.


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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.

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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.


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Summary of the Types of Cost Summary of the Types of Cost ClassificationsClassifications

Financial Reporting

Predicting Cost Behavior

Assigning Costs to Cost

Objects

Making Business Decisions

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End of Chapter 2

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Homework

Exercise 2-4 (15 minutes)

CyberGames Income Statement

Sales.................................................... $1,450,000 Cost of goods sold:

Beginning merchandise inventory ......... $ 240,000 Add: Purchases................................... 950,000 Goods available for sale....................... 1,190,000 Deduct: Ending merchandise inventory.. 170,000 1,020,000

Gross margin ........................................ 430,000 Selling and administrative expenses:

Selling expense................................... 210,000 Administrative expense........................ 180,000 390,000

Net operating income ............................ $ 40,000

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Homework

Exercise 2-5 (15 minutes)

Lompac Products Schedule of Cost of Goods Manufactured

Direct materials: Beginning raw materials inventory .......... $ 60,000 Add: Purchases of raw materials............. 690,000 Raw materials available for use .............. 750,000 Deduct: Ending raw materials inventory .. 45,000 Raw materials used in production ........... $ 705,000

Direct labor............................................. 135,000 Manufacturing overhead........................... 370,000 Total manufacturing costs ........................ 1,210,000 Add: Beginning work in process inventory.. 120,000 1,330,000 Deduct: Ending work in process inventory.. 130,000 Cost of goods manufactured..................... $1,200,000

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MANAGERIAL ACCOUNTING AND COST CONCEPTS Chapter 2 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker,