Ch 1%262 Intro to Management Acct

8/14/2019 Ch 1%262 Intro to Management Acct

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

Chapter 1&2

An Introduction to ManagerialAccounting and Cost Concepts


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Work of Management

Planning

Planning

Controlling

Controlling

Directing and

Motivating

Directing and

Motivating


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Planning

Identifyalternatives.

Identifyalternatives.

Select alternative that doesthe best job of furtheringorganizations objectives.

Select alternative that doesthe best job of furtheringorganizations objectives.

Develop budgets to guideprogress toward theselected alternative.

Develop budgets to guideprogress toward theselected alternative.


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Directing and Motivating

Directing and motivating involves managing day-to-day activities to keep the organization runningsmoothly.

Employee work assignments. Routine problem solving.

Conflict resolution.

Effective communications.


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Controlling

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.


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Planning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Formulating long-and short-term plans

(Planning)

Measuringperformance(Controlling)

Measuringperformance(Controlling)

Implementingplans (Directingand Motivating)

Implementingplans (Directingand Motivating)

Comparing actualto planned

performance(Controlling)

Comparing actualto planned

performance(Controlling)

Begin


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Comparison of Financial andManagerial Accounting


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Learning Objective 1

Identify and give examples ofeach of the three basic

manufacturing costcategories.


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The ProductThe Product

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead


Manufacturing Costs


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Direct Materials

Raw materials that become an integral part ofthe product and that can be conveniently traced

directly to it.

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


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Direct Labor

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

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


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Manufacturing Overhead

Manufacturing costs cannot be traced directly tospecific units produced.

Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor

Wages paid to employeeswho are not directly

involved in productionwork.

Examples: Maintenanceworkers, janitors and

security guards.

Materials used to supportthe production process.

Examples: Lubricants andcleaning supplies used in theautomobile assembly plant.


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Classifications of Nonmanufacturing Costs

Selling Costs

Costs necessary to get

the order and deliverthe product.

AdministrativeCosts

All executive,

organizational, andclerical costs.


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Distinguish between

product costs and periodcosts and give examples

of each.


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Product Costs Versus Period Costs

Inventory

Cost ofGoods Sold

BalanceSheet

IncomeStatement

Sale

Product costsincludedirect materials, direct

labor, andmanufacturing

overhead.

Period costsare notincluded in product

costs. They areexpensed on the

income statement.

Expense

IncomeStatement


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Quick Check

Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.


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Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.

Quick Check


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Prime Cost and Conversion Cost

DirectMaterialDirect

MaterialDirectLaborDirectLabor



PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:


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Comparing Merchandising andManufacturing Activities

Merchandisers . . . Buy finished goods.

Sell finished goods.

Manufacturers . . . Buy raw materials.

Produce and sellfinished goods.

MegaLoMart


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Balance Sheet

Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assetsy Cash

y Receivables

y Prepaid Expenses

y Inventories:

1. Raw Materials

2. Work in Process

3. Finished Goods


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Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assetsy Cash

y Receivables

y Prepaid Expenses

y Inventories:

1. Raw Materials

2. Work in Process

3. Finished Goods

Balance Sheet

Partially complete

products somematerial, labor, oroverhead has been

added.

Completed products

awaiting sale.

Materials waiting tobe processed.

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Define and giveexamples of variablecosts and fixed costs.

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Cost Classifications for Predicting CostBehavior

How a cost will react tochanges in the level of

business activity.

Total variable costschange when activitychanges.

Total fixed costs remainunchanged when activitychanges.

How a cost will react tochanges in the level of

business activity.

Totalvariable costschange when activitychanges.

Totalfixed costsremainunchanged when activitychanges.

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Total Variable Cost

Yourtotal long distance telephone bill isbased on how many minutes you talk.

Minutes Talked

TotalL

ongD

istan c

e

Teleph

oneBill

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Variable Cost Per Unit

Minutes Talked

Pe

rM

inute

Teleph

oneC

harge

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

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Total Fixed Cost

Your monthly basic telephone billprobably does not change when you

make more local calls.

Number of Local Calls

Mon

thlyBasic

Tele

ph

oneB

ill

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Fixed Cost Per Unit

Number of Local Calls

Month

lyBasicTel e

phon

e

Billp

erLoca

lCall

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

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Cost Classifications for Predicting CostBehavior

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 goes

the same even when the down as activity level goes up.

activity level changes.

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Quick Check

Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & 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.

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Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & 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

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Define and giveexamples of direct andindirect costs.

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Assigning Costs to Cost Objects

Direct costs

Costs that can beeasily and conveniently

traced to a unit ofproduct or other costobject.

Examples: Directmaterial and direct labor

Indirect costs

Costs that cannot beeasily and conveniently

traced to a unit ofproduct or other costobject.

Example: Manufacturingoverhead

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Define and give examples of

cost classifications used inmaking decisions: differentialcosts, opportunity costs, and

sunk costs.

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Cost Classifications for Decision Making

Every decision involves a choicebetween at least two alternatives.

Only those costs andbenefits that differ

between alternatives

are relevant to thedecision. All other

costs and benefits canand should be ignored.

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Differential Costs and Revenues

Costs and revenues that differamong alternatives.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in aneighboring city that pays $2,000 per month. Thecommuting cost to the city is $300 per month.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in aneighboring city that pays $2,000 per month. Thecommuting 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

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Opportunity Costs

The potential benefit that is given upwhen 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 forone year is $15,000.

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Sunk Costs

Sunk costs cannot be changed bySunk costs cannot be changed byany decision. They are notany decision. They are not

differential costs and should bedifferential costs and should be

ignored when making decisions.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, tradeit, or sell it, you cannot change the $10,000 cost.

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Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain 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 notrelevant.

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Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain 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 notrelevant.

Quick Check

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Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either,but you dont want to waste moneyneedlessly. Is the annual cost of licensing yourcar relevant in this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

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Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either,but you dont want to waste moneyneedlessly. Is the annual cost of licensing yourcar relevant in this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

Quick Check

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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.

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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

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Summary of the Types of Cost


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Summary of the Types of CostClassifications

FinancialReporting

PredictingCost

Behavior

AssigningCosts to

Cost Objects

DecisionMaking

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End of Chapter 1&2

Ch 1%262 Intro to Management Acct

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