1-1
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Managerial Accounting Lecture 6 (Chapter 1 & 2)
Introduction to Managerial Accounting and Cost Concepts Job-order costing Bangor University Transfer Abroad Programme
1-2
Today’s Lecture • Users of accounting information can be divided into two
categories: (i) External parties outside the organization (financial accounting). (ii) Internal parties within the organization (management accounting).
1-3
Product Costs Versus Period Costs
Inventory Cost of
Goods Sold
Balance Sheet
Income Statement
Sale
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.
Expense
Income Statement
1-4
Prime Cost and Conversion Cost
Direct Material
Direct Labor
Manufacturing Overhead
Prime Cost
Conversion Cost
Manufacturing costs are often classified as follows:
1-5
Comparing Merchandising and Manufacturing Activities Merchandisers . . .
• Buy finished goods. • Sell finished goods.
Manufacturers . . . • Buy raw materials. • Produce and sell
finished goods.
MegaLoMart
1-6
Balance Sheet
Merchandiser Current Assets
v Cash v Receivables v Prepaid Expenses v Merchandise
Inventory
Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories:
1. Raw Materials 2. Work in Process 3. Finished Goods
1-2
1-7
Merchandiser Current Assets
v Cash v Receivables v Prepaid Expenses v Merchandise
Inventory
Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories:
1. Raw Materials 2. Work in Process 3. Finished Goods
Balance Sheet
Partially complete products – some material, labor, or
overhead has been added.
Completed products awaiting sale.
Materials waiting to be processed.
1-8
The Income Statement Cost of goods sold for manufacturers
differs only slightly from cost of goods sold for merchandisers.
Manufacturing CompanyCost of goods sold: Beg. finished goods inv. 14,200$ + Cost of goods manufactured 234,150 Goods available for sale 248,350$ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250$
Merchandising CompanyCost 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$
1-9
Inventory Flows
Beginning balance
Additions to inventory + = Ending
balance
Withdrawals from
inventory +
1-10
Schedule of Cost of Goods Manufactured
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.
1-11
Manufacturing WorkRaw Materials Costs In Process
Beginning raw 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 are called direct materials.
Schedule of Cost of Goods Manufactured
1-12
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.
As items are removed from raw materials inventory and placed into
the production process, they are called direct materials.
Schedule of Cost of Goods Manufactured
1-3
1-13
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.
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
Schedule of Cost of Goods Manufactured
1-14
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.
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Schedule of Cost of Goods Manufactured
1-15
WorkIn Process Finished Goods
Beginning work in Beginning finished process inventory goods inventory
+ Manufacturing costs + Cost of goods for the period manufactured
= Total work in process = Cost of goods for the period available for sale
– Ending work in - Ending finished process inventory goods inventory
= Cost of goods Cost of goods manufactured sold
Cost of Goods Sold
1-16
Manufacturing Cost Flows
Selling and Administrative
Period Costs
Finished Goods
Cost of Goods Sold
Selling and Administrative
Manufacturing Overhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income Statement Expenses Material Purchases Raw Materials
1-17
Cost Classifications for Predicting Cost Behavior
How a cost will react to changes in the level of
business activity. v Total variable costs
change when activity changes.
v Total fixed costs remain unchanged when activity changes.
1-18
Total Variable Cost
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Tota
l Lon
g D
ista
nce
Tele
phon
e B
ill
1-4
1-19
Variable Cost Per Unit
Minutes Talked
Per
Min
ute
Tele
phon
e C
harg
e
The cost per long distance minute talked is constant. For example, 10 cents per minute.
1-20
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
Tele
phon
e B
ill
1-21
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 fixed cost per local call decreases as more local calls are made.
1-22
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 Average fixed cost per unit goesthe same even when the down as activity level goes up.
activity level changes.
1-23
Assigning Costs to Cost Objects Direct costs • Costs that can be
easily and conveniently traced to a unit of product or other cost object.
• Examples: Direct material and direct labor
Indirect costs • Costs that cannot be
easily and conveniently traced to a unit of product or other cost object.
• Example: Manufacturing overhead
1-24
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.
1-5
1-25
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
1-26
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.
1-27
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.
1-28
Summary of the Types of Cost Classifications
Financial Reporting
Predicting Cost
Behavior
Assigning Costs to
Cost Objects
Decision Making
1-29
Types of Product Costing Systems
Process Costing
Job-order Costing
v A company produces many units of a single product.
v One unit of product is indistinguishable from other units of product. v The identical nature of each unit of product
enables assigning the same average cost per unit. 1-30
Types of Product Costing Systems
Process Costing
Job-order Costing
Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)
1-6
1-31
Types of Product Costing Systems
Process Costing
Job-order Costing
v Many different products are produced each period. v Products are manufactured to order. v The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
1-32
Types of Product Costing Systems
Process Costing
Job-order Costing
Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)
1-33
Comparing Process and Job-Order Costing
Job-Order ProcessNumber of jobs worked Many Single ProductCost accumulated by
Individual Job Department
Average cost computed by Job Department
1-34
Manufacturing Overhead
Job No. 1
Job No. 2
Job No. 3
Charge direct
material and direct labor
costs to each job as
work is performed.
Job-Order Costing—An Overview
Direct Materials
Direct Labor
1-35
Manufacturing Overhead, including indirect
materials and indirect labor,
are allocated to jobs rather than directly traced to each job.
Job-Order Costing—An Overview
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3 Manufacturing Overhead
1-36
Job Cost Sheet PearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
1-7
1-37
Materials Requisition Form PearCo Materials Requisition Form
Materials Requisition Number X7 - 6890 Date March 4Job Number to Be Charged A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
AuthorizedSignature Will$E .$D elite
1-38
Job Cost Sheet PearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
1-39
Employee Time Ticket PearCo Employee Time Ticket
Time Ticket No. 36 Date March 5
Employee I. M. Skilled Station 42
TimeStarted Ended Completed Rate Amount Job No.
8:00 12:00 4.0 11.00$ 44.00$ A-1431:00 5:00 4.0 11.00 44.00 A-143
Totals 8.00 88.00$
Supervisor C . M. W o rk m a n
1-40
Job Cost Sheet PearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
1-41
Application of Manufacturing Overhead Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as direct labor hours, direct labor dollars, or
machine hours, is used to assign manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
1-42
Tutorial n Review of today’s and last week’s lecture
n Complete Review Problems n 1-6 n 1-13