Lecturer: Eric Chimpesa

Contact details: 0888 811811/ 0999 811811/0111 618811

echimpesa@poly.ac.mw

An Introduction to Managerial Accounting and Cost Concepts

Work of Management

PlanningPlanning

ControllingControlling

Directing and Motivating

Directing and Motivating

Planning

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.

Directing 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.

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.

Planning 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

Comparison of Financial and Managerial Accounting

Learning Objective 1

Identify and give examples of each of the three basic

manufacturing cost categories.

The ProductThe Product

DirectMaterials

DirectMaterials

DirectLabourDirectLabour

ManufacturingOverhead

ManufacturingOverhead

Manufacturing Costs

Direct 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 a carExample: A radio installed in a car

Direct Labour

Those labour costs that can be easily traced to individual units of

product.

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

Manufacturing Overhead

Manufacturing costs cannot be traced directly to specific units produced.

Examples: Indirect materials and indirect labourExamples: Indirect materials and indirect labour

Wages paid to employees who are not directly

involved in production work.

Examples: Maintenance workers and security guards.

Materials used to support the production process.

Examples: Lubricants and cleaning supplies used in the

car assembly plant.

Classifications of Nonmanufacturing Costs

Selling Costs

Costs necessary to get the order and deliver

the product.

Administrative Costs

All executive, organizational, and

clerical costs.

Learning Objective 2

Distinguish between product costs and period costs and give examples

of each.

Product Costs Versus Period Costs

InventoryCost of

Goods Sold

BalanceSheet

IncomeStatement

Sale

Product costs include direct materials, direct

labour, and manufacturing

overhead.

Period costs are not included in product

costs. They are expensed on the

income statement.

Expense

IncomeStatement

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.

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

Prime Cost and Conversion Cost

DirectMaterialDirect

MaterialDirectLabourDirectLabour

ManufacturingOverhead

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:

Learning Objective 3

Define and give examples of variable costs and fixed costs.

Cost Classifications for Predicting Cost Behaviour

How a cost will react to changes in the level of

business activity. Total variable costs

change when activity changes.

Total fixed costs remain unchanged when activity changes.

How a cost will react to changes in the level of

business activity. Total variable costs

change when activity changes.

Total fixed costs remain unchanged when activity changes.

Total Variable Cost

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

Minutes Talked

Tot

al

Tel

epho

ne B

ill

Variable Cost Per Unit

Minutes Talked

Per

Min

ute

Tel

epho

ne C

harg

e

The cost per minute talked is constant. For example, K10 per minute.

Total Fixed Cost

In relation to telephone bills, identify the fixed cost

Fixed Cost Per Unit

Number of Local Calls

Mon

thly

Bas

ic T

elep

hone

B

ill

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

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.

Quick Check

Which of the following costs would be variable with respect to the number of cones sold at an ice cream 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.

Which of the following costs would be variable with respect to the number of cones sold at an ice cream? (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

Learning Objective 4

Define and give examples of direct and

indirect costs.

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 labour

Indirect costs Costs that cannot be

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

Example: Manufacturing overhead

Learning Objective 5

Define and give examples of cost classifications used in

making decisions: differential costs, opportunity costs, and

sunk costs.

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.

Differential Costs and Revenues

Costs and revenues that differ among alternatives.

Example: You have a job paying K1,500 per week in your Limbe. You have a job offer in Blantyre that pays K2,000 per week. The commuting cost to the Blantyre is K300 per month.

Example: You have a job paying K1,500 per week in your Limbe. You have a job offer in Blantyre that pays K2,000 per week. The commuting cost to the Blantyre is K300 per month.

Differential revenue is: K2,000 – K1,500 = K500

Differential cost is: K300

Net Differential Benefit is: K200

Opportunity Costs

The potential benefit that is given up when one alternative is selected

over another.

Example: If you werenot attending college,you could be earningK25,000 per year. Your opportunity costof attending college for one year is K25,000.

Sunk Costs

Sunk costs cannot be changed by Sunk costs cannot be changed by any decision. They are not any decision. They are not

differential costs and should be differential costs and should be ignored when making decisions.ignored when making decisions.

Example: You bought a car that cost K1,000,000 two years ago. The K1,000,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the K1,000,000 cost.

Quick Check

Suppose you are trying to decide whether to drive or take a minibus to attend a conference in Mangochi. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the bus ticket relevant in this decision? In other words, should the cost of the bus ticket affect the decision of whether you drive or take the minibus to Mangochi?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the bus ticket is not

relevant.

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

Suppose you are trying to decide whether to drive or take the minibus to attend a conference. 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.

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

Suppose that your car could be sold now for K500,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

Suppose that your car could be sold now for K500,000. Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

Quick Check

End of Presentation