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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
2-22
Work of ManagementWork of Management
PlanningPlanning
ControllingControlling
Directing and Motivating
Directing and Motivating
2-33
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.
2-44
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.
2-55
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.
2-66
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
2-77
Learning Objective 1Learning Objective 1
Identify the major differences and similarities
between financial and managerial accounting.
2-88
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
2-99
Learning Objective 2Learning Objective 2
Identify and give examples of each of the three basic
manufacturing cost categories.
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The ProductThe Product
DirectMaterials
DirectMaterials
DirectLaborDirectLabor
ManufacturingOverhead
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.
2-1515
Learning Objective 3Learning Objective 3
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
2-1717
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.
2-1818
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.
Quick Check Quick Check
2-1919
Classifications of CostsClassifications of Costs
Manufacturing costs are oftenclassified as follows:
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
2-2020
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
2-2121
Balance SheetBalance Sheet
Merchandiser
Current assetsCashReceivablesMerchandise
Inventory
Manufacturer Current Assets
Cash Receivables Inventories
• Raw Materials
• Work in Process
• Finished Goods
2-2222
Merchandiser
Current assetsCashReceivablesMerchandise
Inventory
Manufacturer Current Assets
Cash Receivables Inventories
• Raw Materials
• Work in Process
• Finished Goods
Balance SheetBalance Sheet
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Learning Objective 4Learning Objective 4
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$
2-2525
Basic Equation for Inventory AccountsBasic Equation for Inventory Accounts
Beginningbalance
Beginningbalance
Additionsto inventoryAdditions
to inventory++ == EndingbalanceEndingbalance
Withdrawalsfrom
inventory
Withdrawalsfrom
inventory++
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Quick Check Quick Check
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.
2-2727
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.
Quick Check Quick Check
$1,000 + $100 = $1,100$1,100 - $300 = $800
2-2828
Learning Objective 5Learning Objective 5
Prepare a schedule of cost of goods manufactured.
2-2929
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.
2-3030
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
2-3131
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 Cost FlowsProduct Cost Flows
2-3232
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 Cost FlowsProduct Cost Flows
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.
2-3333
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 – Ending work in inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Product Cost FlowsProduct Cost Flows
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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Product Cost FlowsProduct Cost Flows
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Manufacturing Cost FlowsManufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Period CostsSelling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
2-3636
Quick Check 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. $276,000b. $272,000c. $280,000d. $ 2,000
2-3737
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
Quick Check Quick Check
2-3838
Quick Check 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. $555,000b. $835,000c. $655,000d. Cannot be determined.
2-3939
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.
Quick Check Quick Check
2-4040
Quick Check 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.
2-4141
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.
Quick Check Quick Check
2-4242
Quick Check 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.
2-4343
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.
Quick Check Quick Check
$130,000 + $760,000 = $890,000$890,000 - $150,000 = $740,000
2-4444
Learning Objective 6Learning Objective 6
Understand the differences between variable costs and
fixed costs.
2-4545
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.
2-4646
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
2-4747
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
2-4848
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
2-4949
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
2-5050
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.
2-5151
Quick Check 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.
2-5252
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.
Quick Check Quick Check
2-5353
Learning Objective 7Learning Objective 7
Understand the differences between direct
and indirect costs.
2-5454
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
2-5555
Learning Objective 8Learning Objective 8
Define and give examples of cost classifications used in
making decisions: differential costs, opportunity costs, and
sunk costs.
2-5656
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.
2-5757
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
2-5858
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.
2-5959
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.
2-6060
Quick Check 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.
2-6161
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.
Quick Check Quick Check
2-6262
Quick Check 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.
2-6363
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.
Quick Check Quick Check
2-6464
Quick Check 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.
2-6565
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 Quick Check
2-6666
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
2-6767
End of Chapter 2
2-6868
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
2-6969
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