Post on 20-Oct-2014
description
Introduction to Managerial Accounting
and Cost Concepts
Module
1
2
Management Accounting
It is the process of identifying, measuring,accumulating, analyzing, preparing,interpreting, and communicatinginformation that managers use tofulfill organizational objectives.
What is Management Accounting?
3
Differences Between Financial and Managerial Accounting
Financial ManagerialAccounting Accounting
1. Users External persons who Managers who plan formake 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 segments the whole organization of an organization
6. Requirements Must follow GAAP Need not follow GAAPand prescribed formats or any prescribed format
4
Planning and Controlling
It is the purposeful choice from amonga set of alternative courses of actiondesigned to achieve some objective.
What is decision making?
This is the core of the management process.
5
Work of Management
Planning
Controlling
Directing and Motivating
6
Planning and Control CycleFormulating Long-and
Short-Term Plans (Planning)
MeasuringPerformance (Controlling)
Comparing Actualto
Planned Performance (Controlling)
Implementing the Plans
(Directing and Motivating)
Begin
DecisionMaking
7
Planning and Controlling
The Management Process Internal Accounting System
Planning•Increase Productivity
Controlling•Actions•Evaluations
Cor
rect
ion
s an
d
Rev
isio
ns
of P
lan
s an
d A
ctio
ns
Budgets,Special Reports
FinancialAccountingSystem
PerformanceReports
Customersurveys
Competitoranalysis
Advertisingimpact
New itemsreport
8
Role of Budgets
A budget is a quantitative expression of a plan of action and is an aid to coordinating and implementing the plan.
Budgets are the chief devices for compelling and disciplining management planning.
9
Role ofPerformance Reports
Performance reports formalize controls andprovide feedback by comparing results withplans and by highlighting variances.
Variances are deviations from the plan.
10
Performance Report
Budgeted Actual Variance Amount Amount Amount
Revenues 25,000 19,000 6,000 UExpenses 20,000 15,000 5,000 FNet Income 5,000 4,000 1,000 U F = Favorable U = Unfavorable
11
Cost and Cost Terminology
Cost is a resource sacrificed or forgone to achievea specific objective.
An actual cost is the cost incurred (a historical cost)as distinguished from budgeted costs.
A cost object is anything for which a separatemeasurement of costs is desired.
12
Cost and Cost Terminology
CostAccumulation
Cost Object
Cost Object
Cost Object
CostAssignment
Tracing
Allocating
13
Direct Costs and Indirect Costs
Direct costsCosts that can be
easily and conveniently traced to a unit of product or other cost objective.
Examples: direct material and direct labor
Indirect costsCosts cannot be easily
and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
14
Direct and Indirect Costs
Direct CostsExample: Paper on whichSports Illustrated magazineis printed
Indirect CostsExample: Lease cost forTime-Warner buildinghousing the senior editorsof its magazine
COST OBJECT
Example: Sports Illustrated magazine
COST OBJECT
Example: Sports Illustrated magazine
15
Direct and Indirect CostsExample
Direct Costs:Maintenance Department $40,000Personnel Department $20,600Assembly Department $75,000Finishing Department $55,000
Assume that Maintenance Department costs areallocated equally among the production departments.
How much is allocated to each department?
16
Direct and Indirect Costs Example
Allocated$20,000
Maintenance$40,000
AssemblyDirect Costs
$75,000
FinishingDirect Costs
$55,000
$20,000
17
MegaLoMart
Comparing Merchandising and Manufacturing Activities
Merchandisers . . .Buy finished goods.Sell finished goods.
Manufacturers . . .Buy raw materials.Produce and sell
finished goods.
18
The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Manufacturing Costs
19
Direct Materials
Those materials that become an integral part of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobileExample: A radio installed in an automobile
20
Direct 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
21
Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials
Wages paid to employees who are not directly
involved in production work.
Examples: maintenance workers, janitors and
security guards.
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
22
Classifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
23
Nonmanufacturing Costs
Marketing and selling costs . . .Costs necessary to get the order and deliver the
product.
Administrative costs . . .All executive, organizational, and clerical costs.
24
Quick Check
Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
26
Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing
overhead.
Period costs are not included in product
costs. They are expensed on the
income statement.Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
27
Inventoriable Costs
Inventoriable costs (assets)…
become cost of goods sold…
after a sale takes place.
28
Period Costs
Period costs are all costs in the incomestatement other than cost of goods sold.
Period costs are recorded as expenses of theaccounting period in which they are incurred.
29
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.
31
Merchandiser Current assets
CashReceivablesPrepaid expensesMerchandise inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
32
Merchandiser Current assets
CashReceivablesPrepaid expensesMerchandise inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Partially complete products – some material, labor, or
overhead has been added.
Completed products awaiting sale.
Materials waiting to be processed.
33
The 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$
34
Selling andAdministrative
Period Costs
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
35
Manufacturing Company
MaterialsInventory
FinishedGoods
Inventory
Revenues
Cost ofGoods Sold
INCOME STATEMENT
PeriodCosts
InventoriableCosts
BALANCE SHEET
Equals Operating Income
whensalesoccur
deduct
Equals Gross Margindeduct
Work inProcess
Inventory
36
Merchandising Company
INCOME STATEMENTBALANCE SHEET
whensalesoccur
InventoriableCosts
MerchandisePurchases Inventory
Revenuesdeduct
Cost ofGoods Sold
Equals Gross Margindeduct
PeriodCosts
Equals Operating Income
37
Many Meanings of Product Cost
A product cost is the sum of the costsassigned to a product for a specific purpose.
1. Pricing and product emphasis decisions
2. Contracting with government agencies
3. Preparing financial statements for external reporting under generally accepted accounting principles
38
Quick Check
Which of the following transactions would immediately result in an expense? (There may be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and paid.
40
Inventory Flows
Beginningbalance
$$
Beginningbalance
$$
Additions$$$
Additions$$$+ Available
$$$$$
Available$$$$$=
Endingbalance
$$
Endingbalance
$$=Withdrawals
$$$
Withdrawals$$$
_Available$$$$$
Available$$$$$
41
Quick Check
If your bank balance at the beginning of the month was $1,000, you deposited $100 during the month, and withdrew $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.
43
Manufacturing WorkRaw Materials Costs In Process
Beginning raw materials inventory
Product Costs - A Closer Look
Beginning inventory is the inventory
carried over from the prior period.
Beginning inventory is the inventory
carried over from the prior period.
44
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 Costs - A Closer Look
45
Quick Check
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. $276,000
B. $272,000
C. $280,000D. $ 2,000
47
Manufacturing WorkRaw Materials Costs In Process
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 materials inventory
= Raw materials used
in production
Product Costs - A Closer Look
48
Manufacturing WorkRaw Materials Costs In Process
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 materials inventory
= Raw materials used
in production
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Product Costs - A Closer Look
49
Quick Check
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. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
51
Manufacturing WorkRaw Materials Costs In Process
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 inventory
= Raw materials used
in production
Product Costs - A Closer Look
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.
52
Manufacturing WorkRaw Materials Costs In Process
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 work in process inventory
= Cost of goods
manufactured.
Product Costs - A Closer Look
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.
53
Quick Check
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.
55
Product Costs - A Closer Look
56
Quick Check
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.
58
Cost Drivers
Output measures of resources and
activities are called cost drivers.
What are cost drivers?
59
Cost Behavior
It is how costs are related to, and affectedby, the activities of an organization.
What is cost behavior?
60
Production Example
Example costs:Labor wagesSupervisory salariesMaintenance wagesDepreciation Energy
Example cost drivers:Labor hoursNo. of people supervisedNo. of mechanic hoursNo. of machine hoursKilowatt hours
Cost Drivers
61
Cost Drivers
How well the accountant does at identifying
the most appropriate cost drivers determines
how well managers understand cost behavior
and how well costs are controlled.
62
Cost Classifications for Predicting Cost Behavior
How a cost will react to changes in the level of
business activity.Total variable costs
change when activity changes.
Total fixed costs remain unchanged when activity changes.
How a cost will react to changes in the level of
business activity.Total variable costs
change when activity changes.
Total fixed costs remain unchanged when activity changes.
63
Comparison of Variable and Fixed Costs
A variable cost is a cost that changes in directproportion to changes in the cost driver.
A fixed cost is not immediately affectedby changes in the cost driver.
64
Rules of Thumb
Total fixed costs remain unchangedregardless of changes in cost-driver activity.
Think of fixed costs as a total.
65
Rules of Thumb
The per-unit variable cost remainsunchanged regardless of changesin the cost-driver activity.
Think of variable costs on a per-unit basis.
66
Relevant Range
This rule of thumb holds true only within reasonable limits.
The relevant range is the limit of cost-driver activity within which a specific relationship between costs and the cost driver is valid.
67
Fix
ed
Cos
ts
Volume in Units
$16,000 –
$12,000 –
$8,000 –
$4,000
0 500 1,000 1,500 2,000 2,500
– – –
Relevant Range
Relevant Range
68
Total Variable Cost
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Tot
al L
ong
Dis
tanc
eT
elep
hone
Bill
69
Variable Cost Per Unit
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
The cost per long distance minute talked is constant. For example, 10 cents per minute.
70
Total Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local
calls.
Number of Local Calls
Mon
thly
Bas
ic
Tel
epho
ne B
ill
71
Fixed Cost Per Unit
Number of Local Calls
Mon
thly
Bas
ic T
elep
hone
B
ill p
er L
ocal
Cal
l
The average cost per local call decreases as more local calls are made.
72
Cost Classifications for Predicting Cost Behavior
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 Fixed cost per unit goesthe same even when the down as activity level goes up. activity level changes.
73
Cost Behavior
MerchandisersCost of Goods Sold
ManufacturersDirect Material, Direct Labor, and Variable
Manufacturing Overhead
Merchandisers and Manufacturers
Sales commissions and shipping costs
Service Organizations Supplies and travel
Examples of normally variable costs
Examples of normally fixed costs
Merchandisers, manufacturers, and service organizations
Real estate taxes, Insurance, Sales salariesDepreciation, Advertising
74
The Activity Base
Machinehours
Laborhours
Milesdriven
A measure of the event causing the incurrence of a variable cost – a cost driver
Unitsproduced
75
ExamplesAdvertising and Research and Development
ExamplesDepreciation on Buildings and
Equipment
Types of Fixed Costs
Fixed Costs
DiscretionaryMay be altered in the short-term by current managerial decisions
CommittedLong-term, cannot be reduced in the short
term.
76
Quick Check
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.
78
Quick Check
Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.
80
Example: Office space is available at a rental
rate of $30,000 per year in increments of 1,000 square feet. As
the business grows more space is rented,
increasing the total cost.
Fixed Costs and Relevant Range
Continue
81
Ren
t C
ost
in
T
ho
usa
nd
s o
f D
oll
ars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and Relevant Range
90
Relevant
Range
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
82
Quick Check Which of the following statements about cost
behavior are true?
a. Fixed costs per unit vary with the level of activity.
b. Variable costs per unit are constant within the relevant range.
c. Total fixed costs are constant within the relevant range.
d. Total variable costs are constant within the relevant range.
84
Cost Behavior Patterns Example
Bicycles by the Sea buys a handlebarat $52 for each of its bicycles.
What is the total handlebar cost when1,000 bicycles are assembled?
85
Cost Behavior Patterns Example
1,000 units × $52 = $52,000
What is the total handlebar costwhen 3,500 bicycles are assembled?
3,500 units × $52 = $182,000
86
Cost Behavior Patterns Example
Bicycles by the Sea incurred $94,500 ina given year for the leasing of its plant.
This is an example of fixed costs withrespect to the number of bicycles assembled.
87
Cost Behavior Patterns Example
What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 1,000 bicycles?
$94,500 ÷ 1,000 = $94.50
What is the leasing (fixed) cost per bicyclewhen Bicycles assembles 3,500 bicycles?
$94,500 ÷ 3,500 = $27
88
Cost Drivers
The cost driver of variable costs is the levelof activity or volume whose change causes
the (variable) costs to change proportionately.
The number of bicycles assembled is acost driver of the cost of handlebars.
89
Relevant Range Example
Assume that fixed (leasing) costs are $94,500for a year and that they remain the same for a
certain volume range (1,000 to 5,000 bicycles).
1,000 to 5,000 bicycles is the relevant range.
90
Relevant Range Example
020000400006000080000
100000120000
0 1000 2000 3000 4000 5000 6000
Volume
Fix
ed C
osts
$94,500
91
Relationships of Types of Costs
Direct
Indirect
Variable Fixed
92
Interpret unit costs cautiously.
93
Total Costs and Unit Costs Example
What is the unit cost (leasing and handlebars)when Bicycles assembles 1,000 bicycles?
Total fixed cost $94,500+ Total variable cost $52,000 = $146,500
$146,500 ÷ 1,000 = $146.50
94
Total Costs and Unit CostsExample
0
50000
100000
150000
200000
0 500 1000 1500
Volume
Tot
al C
osts
$94,500
$94,500 + $52x
$146,500
95
Use Unit Costs Cautiously
Assume that Bicycles management uses aunit cost of $146.50 (leasing and wheels).
Management is budgeting costs fordifferent levels of production.
What is their budgeted cost for anestimated production of 600 bicycles?
600 × $146.50 = $87,900
96
Use Unit Costs Cautiously
What is their budgeted cost for an estimatedproduction of 3,500 bicycles?
3,500 × $146.50 = $512,750
What should the budgeted cost be for anestimated production of 600 bicycles?
97
Use Unit Costs Cautiously
Total fixed cost $ 94,500Total variable cost ($52 × 600) 31,200Total $125,700
$125,700 ÷ 600 = $209.50
Using a cost of $146.50 per unit wouldunderestimate actual total costs if output
is below 1,000 units.
98
Use Unit Costs Cautiously
What should the budgeted cost be for anestimated production of 3,500 bicycles?
Total fixed cost $ 94,500Total variable cost (52 × 3,500) 182,000Total $276,500
$276,500 ÷ 3,500 = $79.00
99
Prime Costs
DirectMaterials
DirectLabor
PrimeCosts+ =
100
Conversion Costs
DirectLabor
ManufacturingOverhead+ =
ConversionCosts
IndirectLabor
IndirectMaterials Other
101
Sunk Costs Sunk costs cannot be changed by any decision. They are not
differential costs and should be ignored when making decisions.
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.
102
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.