Chapter 1&2: An Introduction To Managerial Accounting And Cost Concepts

Chapter 1&2

An Introduction to Managerial Accounting and Cost Concepts

McGraw-Hill /Irwin

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

1-2

Work of Management

Planning Planning

Directing Directing and and Motivating Motivating

Controlling Controlling

1-3

Planning

Identify Identify alternatives. alternatives. Select Select alternative alternative that that does does the the best best job job of of furthering furthering organization’s organization’s objectives. objectives. Develop Develop budgets budgets to to guide guide progress progress toward toward the the selected selected alternative. alternative.

1-4

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

1-5

Controlling The The control control function function ensures ensures that that plans plans are are being being followed. followed. Feedback Feedback in in the the form form of of performance performance reports reports that that compare compare actual actual results results with with the the budget budget are are an an essential essential part part of of the the control control function. function.

1-6

Planning and Control Cycle Formulating Formulatinglonglongand andshort-term short-termplans plans (Planning) (Planning) Comparing Comparingactual actual to toplanned planned performance performance (Controlling) (Controlling)

Decision Making

Measuring Measuring performance performance (Controlling) (Controlling)

Begin

Implementing Implementing plans plans(Directing (Directing and andMotivating) Motivating)

1-7

Comparison of Financial and Managerial Accounting

1-8

Learning Objective 1

Identify and give examples of each of the three basic manufacturing cost categories.

1-9

Manufacturing Costs

Direct Direct Materials Materials

Direct Direct Labor Labor

The Product

Manufacturing Manufacturing Overhead Overhead

1-10

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

Example: Example: A A radio radio installed installed in in an an automobile automobile

1-11

Direct Labor

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

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

1-12

Manufacturing Overhead Manufacturing costs cannot be traced directly to specific units produced. Examples: Examples: Indirect Indirect materials materials and and indirect indirect labor labor Materials used to support the production process. Examples: Lubricants and cleaning supplies used in the automobile assembly plant.

Wages paid to employees who are not directly involved in production work. Examples: Maintenance workers, janitors and security guards.

1-13

Classifications of Nonmanufacturing Costs

Selling Costs

Administrative Costs

Costs necessary to get the order and deliver the product.

All executive, organizational, and clerical costs.

1-14

Learning Objective 2

Distinguish between product costs and period costs and give examples of each.

1-15

Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Cost of Goods Sold

Inventory

Period costs are not included in product costs. They are expensed on the income statement. Expense

Sale

Balance Sheet

Income Statement

Income Statement

1-16

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.

1-17

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.

1-18

Prime Cost and Conversion Cost Manufacturing costs are often classified as follows: Direct Direct Material Material

Direct Direct Labor Labor

Prime Cost

Manufacturing Manufacturing Overhead Overhead

Conversion Cost

1-19

Comparing Merchandising and Manufacturing Activities

Merchandisers . . . Buy finished goods.  Sell finished goods. 

MegaLoMart

Manufacturers . . . Buy raw materials.  Produce and sell finished goods. 

1-20

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. Finished Goods

1-21

Balance Sheet Merchandiser Current Assets    

Cash Receivables Prepaid Expenses Merchandise Partially complete Inventory products – some material, labor, or overhead has been added.

Manufacturer Current Assets ❖ Cash ❖ Receivables Materials waiting to ❖ be Prepaid Expenses processed. ❖ Inventories: 1. Raw Materials 2. Work in Process 3. Finished Goods

Completed products awaiting sale.

1-22

Learning Objective 5

Define and give examples of variable costs and fixed costs.

1-23

Cost Classifications for Predicting Cost Behavior

How How aa cost cost will will react react to to changes changes in in the the level level of of business business activity. activity.   Total Total variable variable costs costs

change change when when activity activity changes. changes.

  Total Total fixed fixed costs costs remain remain

unchanged unchanged when when activity activity changes. changes.

1-24

Total Variable Cost

Total Long Distance Telephone Bill

Your total long distance telephone bill is based on how many minutes you talk.

Minutes Talked

1-25

Variable Cost Per Unit

Per Minute Telephone Charge

The cost per long distance minute talked is constant. For example, 10 cents per minute.

Minutes Talked

1-26

Total Fixed Cost

Monthly Basic Telephone Bill

Your monthly basic telephone bill probably does not change when you make more local calls.

Number of Local Calls

1-27

Fixed Cost Per Unit

Monthly Basic Telephone Bill per Local Call

The average fixed cost per local call decreases as more local calls are made.

Number of Local Calls

1-28

Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost

In Total

Per Unit

Variable

Total variable cost changes as activity level changes.

Variable cost per unit remains the same over wide ranges of activity.

Fixed

Total fixed cost remains the same even when the activity level changes.

Average fixed cost per unit goes down as activity level goes up.

1-29

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.

1-30

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.

1-31

Learning Objective 6

Define and give examples of direct and indirect costs.

1-32

Assigning Costs to Cost Objects Direct costs

Indirect costs

 Costs that can be

 Costs that cannot be

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

 Examples: Direct

material and direct labor

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

 Example: Manufacturing

overhead

1-33

Learning Objective 7

Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.

1-34

Cost 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 to the decision. All other costs and benefits can and should be ignored.

1-35

Differential Costs and Revenues

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

Differential cost is: $300

Net Differential Benefit is: $200

1-36

Opportunity Costs

The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

1-37

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.

1-38

Quick Check  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.

1-39

Quick Check  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.

1-40

Quick Check  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.

1-41

Quick Check  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.

1-42

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.

1-43

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.

1-44

Summary of the Types of Cost Classifications Financial Reporting

Predicting Cost Behavior

Assigning Costs to Cost Objects

Decision Making

1-45

End of Chapter 1&2