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1
Building Blocks of Management Accounting
Building Blocks of Management Accounting
Chapter 2
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Objective 1Objective 1
Distinguish among service, merchandising, and
manufacturing companies
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Service CompaniesService Companies
• Sell services
• No inventory or cost of goods sold accounts
• Labor costs – incurred to develop new services, advertise, provide customer service
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Merchandising CompaniesMerchandising Companies
• Purchase inventory from suppliers; resell to customers
• Retailers and wholesalers
• One inventory account – includes all costs to acquire and get inventory ready for sale
• Labor costs – identify new products and locations for stores, advertising, selling, customer service
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Manufacturing Companies Manufacturing Companies
• Use labor, plant, and equipment to convert raw materials into finished products
• Three inventory accounts– Raw Materials inventory– Work in process inventory– Finished goods inventory
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Objective 2Objective 2
Describe the value chain and its elements
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Value ChainValue Chain
• Activities that add value to products and services
R&D DesignProduction/Purchases
MarketingDistributionCustomer
Service
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E2-16E2-16Samsung Electronics
Cost Classification
Production
R & D DesignDirectMat.
DirectLabor MOH Market. Distrib.
Cust. Service
Salaries of telephone salespeople $ 5
Depreciation on P&E $65
Exterior case $ 6
Scientists’ salaries $12
Delivery expense $ 7
Transmitters 61
Rearrange process $ 2
Assembly-line workers’ wages $10
Tech support hotline $ 3
Toll free line for customer orders 1
Total costs $12 $ 2 $67 $10 $65 $ 6 $ 7 $ 3
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Objective 3Objective 3
Distinguish between direct and indirect costs and identify the inventoriable product costs and period costs of
merchandising and manufacturing firms
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Cost ObjectCost Object
• Anything for which managers want a separate measurement of cost– Direct cost – can be traced directly to cost
object– Indirect cost – can not be traced directly to
cost object
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Determining Total CostsDetermining Total Costs
Assign direct and indirect costs to
cost object
Trace direct costsAllocate
indirect costs
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Product CostsProduct Costs
Two definitions
1. Full product costs (internal decision making) - all resources used throughout value chain
2. Inventoriable product costs (external reporting) – costs incurred during production or purchases stage of value chain
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Inventoriable Product CostsInventoriable Product Costs
R&D Design
MarketingDistributionCustomer
Service
Production/Purchases
Inventoriable Product Costs
Period Costs
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2007 Product
costs
2007 Income
Statement
Operating expenses
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2007 Product
costs
2007 Income
Statement
Inventory sold in 2007
Cost of goods sold
Cost of goods sold
Inventory
2007 Balance
Sheet
2008 Income
Statement
Inventory sold in 2008
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Merchandising Company Product Costs
Merchandising Company Product Costs
• Purchase price plus cost of getting merchandise ready for sale
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Manufacturing CompanyProduct Costs
Manufacturing CompanyProduct Costs
• Direct materials
• Direct labor
• Manufacturing overhead
Direct Costs
Indirect Costs
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Manufacturing OverheadManufacturing Overhead
• Indirect costs related to manufacturing operations– Generally all manufacturing costs that are not
direct costs– Indirect materials– Indirect labor
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Prime and Conversion CostsPrime and Conversion Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Prime CostsConversion
Costs
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Direct & Indirect Labor Compensation
Direct & Indirect Labor Compensation
• Salaries & wages
• Fringe benefits
• Payroll taxes
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E2-19E2-19DM DL IM IL
Other MOH
Period
a. Airplane seats 250
b. Depr. on admin offices
60
c. Assembly workers’ wages
600
d. Plant utilities 120
e. Prod. supervisors’ salaries
100
f. Jet engines 1,000
g. Machine lubricants 15
h. Depreciation on forklifts
50
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E2-19E2-19
DM DL IM ILOther MOH
Period
i. Prop tax on corp marketing offices
25
j. Cost of warranty repairs
225
k. Factory janitors’ wages
30
l. Designing new plant layout
175
m. Machine operators health insurance
40
TOTAL 1,250 640 15 130 170 485
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E2-19E2-19
2) Total manufacturing overhead costs = IM +IL + Other MOH=
$15 + 130 + 170 = $315
3) Total inventoriable product costs =
DM + DL +MOH =
$1,250 + 640 +315 = $2,205
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E2-19E2-19
4) Total prime costs = DM + DL =
$1,250 + 640 = $1,890
5) Total conversion costs = DL + MOH = $640 + 315 = $955
6) Total period costs = $485
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Objective 4Objective 4
Prepare the financial statements for service,
merchandising, and manufacturing companies
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Service CompanyService Company
• All costs are period costs
• Operating income = Service revenue – operating expenses
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Merchandising Company – Income Statement
Merchandising Company – Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income
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Merchandising Company – .Income Statement
Merchandising Company – .Income Statement
Cost of goods sold:
Beginning inventory
+ Purchases
+ Freight-in
Cost of goods available for sale
- Ending inventory
Cost of goods sold
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Manufacturing Companies – Income Statement
Manufacturing Companies – Income Statement
Sales
- Cost of goods sold
Gross profit
- Operating expenses
Operating income
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Manufacturing Company – Income Statement
Manufacturing Company – Income Statement
Cost of goods sold:
Beginning finished goods inventory
+ Cost of goods manufactured
Cost of goods available for sale
- Ending finished goods inventory
Cost of goods sold
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Manufacturing Company – Income Statement
Manufacturing Company – Income Statement
Cost of goods manufactured: Beginning work in process inventory
+ Direct materials used+ Direct labor+ Manufacturing overheadTotal manufacturing costs to account for- Ending work in process inventory
Cost of goods manufactured
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Manufacturing Company – Income Statement
Manufacturing Company – Income Statement
Direct materials used:
Beginning materials inventory
+ Purchases of direct materials
+ Freight in
Materials available for use
- Ending materials inventory
Direct materials used
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Manufacturing CompaniesProduct & Period Costs
Manufacturing CompaniesProduct & Period Costs
MaterialsInventory
FinishedGoods
Inventory
Sales
Cost ofGoods Sold
INCOME STATEMENT
Operating Expenses
Inventoriable Product Costs
BALANCE SHEET
=Operating Income
whensalesoccur -
-Work inProcessInventory
PeriodCosts
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Manufacturing CompaniesInventory Accounts
Manufacturing CompaniesInventory Accounts
Materials InventoryBeginning inventory
Purchases & freight
Ending inventory
Materials used
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Manufacturing CompaniesInventory Accounts
Manufacturing CompaniesInventory Accounts
Work in Process Inventory
Materials used
Direct labor
Manufacturing overhead
Beginning inventory
Ending inventory
Cost of goodsmanufactured
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Manufacturing CompaniesInventory Accounts
Manufacturing CompaniesInventory Accounts
Finished Goods Inventory
Beginning inventory
Ending inventory
Cost of goodssoldCost of goods
manufactured
Income Statement
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E2-21E2-21Strike Company
Statement of Cost of Goods ManufacturedFor Year Ended December 31, 2007
Beginning work in process inventory $50,000
Direct materials used:
Beginning materials inventory $25,000
Purchases of direct materials 78,000
Materials available for use $103,000
Ending materials inventory (28,000) 75,000
Direct labor 82,000
Manufacturing overhead (see schedule) 41,000
Total manufacturing costs to account for $248,000
Ending work in process inventory (35,000)
Cost of goods manufactured $213,000
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E2-21E2-21Cost of goods sold: Finished goods inventory, January 1
$18,000 Cost of goods manufactured
213,000
Goods available for sale$231,000
Finished goods inventory, December 31(25,000)
Cost of goods sold$206,000
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E2-22E2-22Strike Marine Company
Income StatementFor Year Ended December 31, 2007
Sales $384,000Cost of goods sold 206,000Gross profit $178,000Operating expenses:Marketing expenses $77,000General and administrative expenses 29,000 106,000Income before income tax $72,000Income tax expense 23,000 Net income $49,000
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E2-19E2-19
a. __________ can be traced to cost objects.
b. ____________ are expensed when incurred.
c. _____ are the combination of direct materials and direct labor.
d. Compensation includes wages, salaries, and _________________.
Prime
Direct costs
Period costs
fringe benefits
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E2-18E2-18
e. ________________________ are treated as _______until sold.
f. ________________________ include costs from only the production or purchases element of the value chain.
g. _____________are allocated to cost objects.
h. Both direct and indirect costs are ______ to ________________.
Inventoriable product costsassets
Inventoriable product costs
Indirect costs
assignedcost objects
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E2-18E2-18
i. __________________ include costs from every element of the value chain.
j. __________________ are the combination of direct labor and manufacturing overhead.
k. _________________________ are expensed as __________________when sold.
Full product costs
Conversion costs
Inventoriable product costs
cost of goods sold
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E2-18E2-18
l. Manufacturing overhead includes all ______________ of production.indirect costs
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Objective 5Objective 5
Describe costs that are relevant and irrelevant for
decision making
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Controllable vs Uncontrollable Costs
Controllable vs Uncontrollable Costs
• Controllable – management can influence or change cost
• Uncontrollable – management cannot change or influence cost in the short-run
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Relevant and Irrelevant CostsRelevant and Irrelevant Costs
• Relevant – costs that differ between alternatives – differential costs
• Irrelevant – costs that do not differ– Sunk costs
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Objective 6Objective 6
Classify costs as fixed or variable and calculate total and
average costs at different volumes
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Cost BehaviorCost Behavior
• Variable costs
• Fixed costs
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Total Variable CostsTotal Variable Costs
Assume we pay 5% sales commissions on all sales. The cost of sales commissions increase proportionately with increases in sales.
$0
$500
$1,000
$1,500
$2,000
$2,500
$0 $10,000 $20,000 $30,000 $40,000
Total Sales
To
tal
Sa
les
Co
mm
iss
ion
s
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Total Fixed CostsTotal Fixed Costs
$0
$500
$1,000
$1,500
$2,000
$2,500
$0 $10,000 $20,000 $30,000 $40,000
Total Sales
To
tal
Sa
les
Sa
lari
es
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Total CostTotal Cost
Total fixed costs
+ Variable cost per unit x number of units
Total Cost
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Average CostAverage Cost
Total cost ÷ number of units
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Marginal CostMarginal Cost
• Cost of making one more unit
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E2-24E2-24
a.Managers cannot influence __________ _____ in the short-run.
b.Total _____________ decrease when production volume decreases.
c. For decision-making purposes, costs that do not differ between alternatives are ________________.
d.Costs that have already been incurred are called ____________.
uncontrollable costs
variable costs
irrelevant costs
sunk costs
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E2-24E2-24
e. Total ___________ stay constant over a wide range of production volume.
f. The _______________ is the difference in cost between two alternative courses of action.
g. The product’s ____________ is the cost of making one more unit.
fixed costs
differential cost
marginal cost
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E2-24E2-24
h. A product’s ____________ and ____________, not the product’s ___________, should used to forecast total costs at different production volumes.
fixed costsvariable costsaverage cost
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E2-25E2-25
a. Total product cost =
$1 x 20,000,000 $20,000,000
5,000,000
$25,000,000
b. Average cost =
$25,000,000/20,000,000 = $1.25
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E2-25E2-25
c. Fixed cost per unit =
$5,000,000 ÷ 20,000,000 = $.25
d. Forecasted product cost =
$1 x 25,000,000 $25,000,000
5,000,000
$30,000,000
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E2-25E2-25
e. Forecasted average product cost =
$30,000,000 ÷ 25,000,000$1.20
f. Forecasted fixed cost
$5,000,000 ÷ 25,000,000$.20
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E2-25E2-25
g. The average product cost decreases as production volume increases because the company is spreading its fixed costs over 5 million more units. The company will be operating more efficiently, so the average cost of making each unit decreases.
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End of Chapter 2End of Chapter 2
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