Basic Management Accounting Concepts

Management Accounting: The Cornerstone for

Business Decisions

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

1. Explain the meaning of cost and how costs are assigned to products and services.

2. Define the various costs of producing and services, as well as the costs of selling and administration.

3. Prepare income statements for manufacturing and service organizations.

Match Definitions

Cost

Assigning Costs

Expenses

Expired costs

Revenue per unit

The way a cost is linked to some cost object

Accumulating Costs

Price Amount of cash sacrificed for goods or services expected to bring future or current benefit

The way costs are measured and recorded

Discuss Costs

◙ One of the most important objectives of an organization to determine cost for a good or service

◙ Incurred to produce future benefits◙ Reducing costs demonstrates

improved efficiency◙ Expenses are expired costs that are

deducted from revenues on an income statement

◙ In order to stay in business revenues must be greater then expenses (expired costs) - this difference is called profit

◙ Consumed costs are charged to the income statement as expenses

◙ Managers need to know costs and cost trends

Discuss CostsContinued

What are cost objects?

Anything for which costs are measured

What is the difference between direct and

indirect costs?◙ Direct costs can be

easily and accurately traced to a cost object, usually meaning physically observed

◙ Indirect costs cannot be easily and accurately traced to a cost object. They are assigned to the cost object.

Illustrate Object Costing

Review Assigning Indirect Costs

◙ Assignment is done with allocation

◙ Done using a Reasonable and Convenient Method

◙ Necessary to determine the value of inventory and cost of goods sold

◙ Direct and indirect costs also occur in service businesses

Match Definitions

Variable Cost

Opportunity Cost

Fixed Cost

Benefits given up when one alternative is chosen over another

A cost that does not change as output increases or decreases

A cost that increases as output increases & decreases as output decreases

How do products and services differ?

Products◙ Tangible◙ Raw materials◙ Direct labor◙ Capital input◙ Inventoriable◙ Has value◙ Direct contact

with consumer◙ More consistency

in product

Services◙ Intangible ◙ Can’t be stored◙ Must have

contact with consumer

◙ Greater chance of variance or variation

Define the three components of producing

a product.◙ Raw Materials

◙ Materials directly traced to the final product

◙ Direct Labor

◙ Labor directly traced to the goods or services being produced

◙ Overhead

◙ All other product costs that are not direct materials and direct labor

Illustrate Product Costing

How to calculate product cost in total

and per unit.BlueDenim Company makes blue

jeans. Last week, direct materials costing $38,400 were put into production. Direct labor of $24,000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57,600. By the end of the week, the company had completed 24,000 pairs of jeans.

2-1

How to calculate product cost in total

and per unit.REQUIRED: Calculate the total product cost

for the last week. Calculate the cost of one pair of jeans that produced for the last week.

Calculation:

2-1

Direct materialsDirect laborOverhead Total product cost

$ 38,40024,000

57,600$120,000

Per-unit product cost = $120,000 / 24,000 = $5Therefore, one pair of jeans cost $5 to produce.

What costs make up prime costs and

conversion costs?Direct Materials

Direct Labor

Overhead

Prime Costs

Conversion Costs

How to calculate prime cost and conversion cost in total

and per unit.2-2

BlueDenim Company makes blue jeans. Last week, direct materials costing $38,400 were put into production. Direct labor of $24,000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57,600. By the end of the week, the company had completed 24,000 pairs of jeans.

How to calculate prime cost and conversion cost in total

and per unit.2-2

REQUIRED: Calculate the total prime cost last week. Calculate the per-unit prime cost. Calculate the total conversion cost for last week. Calculate the per-unit conversion cost. Calculation:

Direct materialsDirect labor Prime cost

$ 38,400 24,000$ 62,400

Per-unit prime cost = $62,400 / 24,000 = $2.60

How to calculate prime cost and conversion cost

in total and per unit.2-2

REQUIRED: Calculate the total prime cost last week. Calculate the per-unit prime cost. Calculate the total conversion cost for last week. Calculate the per-unit conversion cost. Calculation:

Direct laborOverhead Conversion Cost

$ 24,000 57,600$ 81,600

Per-unit conversion cost = $81,600 / 24,000 = $3.40

Define Period Costs

How to calculate the direct materials used in

production.2-3

BlueDenim Company makes blue jeans. On July 1, BlueDenim had $48,000 of materials in inventory. During the month of July, the company purchased $238,000 of materials. On July 31, materials inventory equaled $30,000.

How to calculate the direct materials used in

production.2-3

REQUIRED: Calculate the direct materials used in production for the month of July. Calculation:

Materials inventory, July 1PurchasesMaterials inventory, July 31 Direct materials used in production

$ 48,000 238,000 (30,000)$ 256,000

How to calculate the cost of goods

manufactured.Recall that BlueDenim Company makes

blue jeans. During the month of July, the company purchased $238,000 of materials. On July 31, materials inventory equaled $30,000. During the month of July BlueDenim Company incurred direct labor of $115,000 and overhead of $150,000.

2-4

July 1

July 31

Materials $ 48,000 $ 30,000

Work in process 30,000 26,000

How to calculate cost of goods manufactured.2-4

REQUIRED: Calculate the cost of goods manufactured for the month of July. Calculate the cost of one pair of jeans assuming 105,000 pairs of jeans were completed during July. Calculation:

Direct materialsDirect laborOverhead Total manufacturing cost for JulyWork in process, July 1Work in process, July 31 Cost of goods manufactured

$ 256,000 115,000 150,000$ 521,000

30,000 (26,000)

$ 525,000

Per-unit cost of goods manufactured = $525,000 / 105,000 = $5

How to calculate cost of goods sold.2-5

BlueDenim Company makes blue jeans. During the month of July 105,000 pairs of jeans were completed at a cost of goods manufactured of $525,000. Suppose that on July 1 BlueDenim had 8,000 units in finished goods inventory costing $40,000, and on July 31 the company had 14,000 finished goods costing $70,000.

How to calculate cost of goods sold.2-6

REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation:

Cost of goods manufacturedFinished goods inventory July 1Finished goods inventory, July 31 Cost of goods sold

$ 525,000 40,000 (70,000)

$ 495,000

How to calculate cost of goods sold. Continued2-6

REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation:

Number of Units SoldFinished goods inventory July 1Units finished in JulyFinished goods inventory, July 31 Units sold in July

8,000 105,000 (14,000)

99,000

How to prepare an income statement for a

manufacturing company.2-6

Recall that BlueDenim sold 99,000 pairs of jeans during the month of July at a total cost of $495,000. Each pair sold at a price of $8. BlueDenim also incurred two types of selling costs: commissions equal to 10% of the sales price and other selling expenses of $120,000. Administrative expenses totaled $85,000.

How to prepare an income statement for a

manufacturing firm.2-6REQUIRED: Prepare an income statement for

BlueDenim for the month of July. Calculation:

Sales revenue (99,000 x $8)Cost of goods sold Gross MarginLess:Selling Expense: Commission (0.10 x $792,000) Fixed Selling ExpenseAdministrative ExpenseOperating Income

$ 792,000 495,000

$ 297,000

199,200 85,000

$ 12,800

BlueDenim CompanyIncome Statement

For the Month of July

$ 79,200 120,000

How to calculate the percentage of sales for each line of the income

statement.

2-7

Recall BlueDenim Company income statement for the month of July was completed and shown on Cornerstone 2-6.

REQUIRED: Prepare an income statement for BlueDenim for the month of July. Calculation: Income statement appears on the next slide. Every item is divided by Sales , i.e., Sales; 792,000 / 792,000 = 100.0%, Cost of goods sold; $495,000 / $795,000 = 62.5%

How to calculate the percentage of sales for each

line of the income statement.

2-7

$ 792,000 495,000

$ 297,000

199,200 85,000

$ 12,800

$ 79,200 120,000

Sales revenueCost of goods sold Gross MarginLess:Selling Expense: Commission Fixed Selling ExpenseAdministrative ExpenseOperating Income

Percent100.0% 62.5%

37.5%

25.2%10.7%

1.6%

How to prepare an income statement for a service

organization.Komala Information Systems designs and

installs human resources software for small companies. Last month, Komala had materials costs of $8,000, direct labor (computer technicians, software designers) of $50,000 and overhead of $65,000. Selling expenses of $7,000 and administrative expenses equaled $7,000. Sales totaled $165,000.

REQUIRED: Prepare an income statement for Komala Information Systems for the past month.

Calculation: Appears on the next slide

2-8

How to prepare an income statement for a service

organization.

SalesCost of services sold: Direct materials Direct labor OverheadGross marginLess: Selling expenses Administrative

expensesOperating income

2-8Komala Information Systems

Income StatementFor the Past Month

$ 165,000

123,000$ 42,000

7.000 7,000

$ 28,000

$ 8,00050,00065,000