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LECTURE NOTE

ACCTBA3- Fundamentals of Accounting 3


Chapter 2: Management Accounting and Cost Concept
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WORK OF MANAGEMENT
1. Planning
 Identify alternatives
 Select alternative that does best job of furthering organization’s objectives
 Develop budgets to guide progress toward the selected alternative.

2. Directing and Motivating


 Involves managing day-to-day activities to keep the organization running
smoothly
- Employee work assignment
- Routine problem solving
- Conflict solution
- Effective communication

3. Controlling
 Ensures that the plans are being followed
 Feedback in the form of performance reports that compare actual results with
the budget are an essential part of the Control function

COMPARISON OF FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING


Financial Accounting Managerial Accounting
1. Users External persons who makes Managers who plan and control
financial decisons an organization
2. Time Focus Historical perspective Future emphasis
3. Verifiability VS Emphasis on Verifiability Emphasis on relevance for
Relevance planning and control
4. Precision VS Emphasis on Precision Emphasis on Timeliness
Timeliness
5. Subject Primary focus on the whole Focus on segments of
organization organization
6. GAAP Must follow GAAP and Need not follow GAAP
prescribed format
7. Requirement Mandatory for external Not mandatory
reports
LEARNING OBJECTIVE 2: Identify and give example of the three basic manufacturing
cost categories

MANUFACTURING COSTS

1. Direct Materials
 Raw materials that become an integral part of the product and that can be
conveniently traced directly to it
Example: the radio installed in an automobile

2. Direct Labor
 Those labor cost that can be easily traced to individual unit of product
Example: Wages of the automobile assembly worker

3. Manufacturing Overhead
 The manufacturing cost that cannot be traced directly to a specific unit
produced
Example: Other raw materials used in the production of the product like
Cleaning supplies, oil and lubricants of factory machines

NON-MANUFACTURING COSTS

1. Selling Costs
 Costs necessary to secure the order and deliver the products
Example: Salaries of sales personnel, depreciation expense Delivery Van

2. Administrative Costs
 All executive , organizational and clerical cost. All cost incurred by the
Administrative group
Example: Salaries of Administrative Personnel, Depreciation Expense of Office
quipment
LEARNING OBJECTIVE 3: Distinguish between Product Costs and Period Costs and
give example of each.

PRODUCT COSTS VS PERIOD COSTS

1. Product Cost
 Include Direct Materials, Direct Labor and Manufacturing Overhead
 Become part of the Inventory (Asset) shown on the Statement of Financial
Position if remain unsold at the end of the period
 Become part of Cost of Goods Sold shown in Income Statement if the items
were sold during the period.

2. Period Cost
 Include all selling cost and administrative costs incurred during the period
 We apply the Accrual Principle in recognizing period costs

Quick Check #1
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.

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LEARNING OBJECTIVE 4 : Identify Prime Costs and Conversion Cost

MANUFACTURING COSTS ARE OFTEN CLASSIFIED AS FOLLOWS


1. Prime Cost
 Include Direct Materials and Direct Labor

2. Conversion Cost
 Include Direct Labor and Manufacturing Overhead

LEARNING OBJECTIVE 5: Comparing Merchandising and Manufacturing Companies

MERCHANDISING VS MANUFACTURING

1. Merchandising
 Buy Finished Goods (merchandise) and sell them as is
 Have only one kind of inventory, the Merchandise Inventory

2. Manufacturing
 Buy raw materials, process them and sell finished goods
 There three kinds of inventory shown on the current asset portion of the
Statement of Financial Position
- Raw Materials Inventory
- Work in Process Inventory
- Finished Goods Inventory
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3 KINDS OF INVENTORY UNDER MANUFACTURING CONCERN OF BUSINESS

1. Raw Materials Inventory


 These are materials waiting to be processed

2. Work in Process Inventory


 These are partially completed products – some direct materials, direct labor
and manufacturing overhead has been added.

3. Finished Goods Inventory


 Completed products awaiting sales
LEARNING OBJECTIVE 6: Comparing Merchandising and Manufacturing Companies’
Financial Statements

1. Merchandising

Sales Revenue P P 1,000,000


Less: Cost of Goods Sold ( Schedule 1) 236,250
Gross Profit P 763,750
Less: Operating Expenses 500,000
Net Income P 263,750

Schedule 1: Cost of Goods Sold


Merchandise Inventory ( Beg) P 400,500
Add: Net Cost of Purchases 250,000
Total Goods Available for Sale P 650,500
Less: Merchandise Inventory (End) 414,250
Cost of Goods Sold P 236,250

2. Manufacturing

Sales Revenue P P 800,000


Less: Cost of Goods Sold (Schedule 1) 336,250
Gross Profit P 463,750
Less: Operating Expenses 100,000
Net Income P 363,750

Schedule 1: Cost of Goods Sold


Finished Goods Inventory ( Beg) P 400,500
Add: Cost of Goods Manufactured (Schedule2) 250,000
Total Goods Available for Sale P 650,500
Less: Finished Goods Inventory (End) 314,250
Cost of Goods Sold P 336,250
Schedule 2: Cost of Goods Manufactured
Direct Materials Used (Schedule 3) P 90,000
Direct labor 100,000
Manufacturing Overhead P 50,500
Total Manufacturing Costs 240,500
Add: Work in Process (Beg) P 236,250
Total Work Placed In Process 476,750
Less: Work in Process (End) 226,750
Cost of Goods Manufactured 250,000

Schedule 3: Direct Materials Used


Raw Materials Inventory ( Beg) P 100,000
Add: Raw Materials Purchases 150,000
Total Goods Raw Materials Available for Sale P 250,000
Less: Raw Materials Inventory (End) 160,000
Direct Materials Used P 90,000
Quick Check #2:
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.

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Quick Check #3:


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. $276,000
B. $272,000
C. $280,000
D. $ 2,000
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Quick Check #4
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. $555,000
B. $835,000
C. $655,000
D. Cannot be determined

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Quick Check #5

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. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

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Quick Check #6

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.

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LEARNING OBJECTIVE 6: To understand the difference between Fixed and Variable Costs

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.

Level of Activity – Number of Units Produced/ Number of Units Sold

Example: The cost of a text message is P1.00 per Text

Number of Text Cost Per Text Total Cost of Text Messages


Message Sent
1 P1.00 P 1.00
2 P1.00 2.00
3 P1.00 3.00
4 P1.00 4.00
5 P1.00 5.00
 The Total Cost increases as number of text messages increases

Example: If the cost of text message is P10.00 unlimited…

Number of Text Cost Per Text Total Cost of Text Messages


Message Sent
1 P10.00 P 10.00
2 P 5.00 10.00
3 P3.33 10.00
4 P2.50 10.00
5 P2.00 10.00

AS A SUMMARY

Type of Costs PER UNIT IN TOTAL


VARIABLE Fixed per Unit Variable in Total
FIXED Variable per Unit Fixed in Total
Relevant Range
 Is the level of activity where your assumption about Fixed and Variable cost is
valid

Quick Check #7:


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

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LEARNING OBJECTIVE 7 : Understand the differences between direct and indirect costs

DIRECT COST VS INDIRECT COST

1. 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

2. Indirect costs
 Costs that cannot be easily and conveniently traced to a unit of product or
other cost object.
Example: manufacturing overhead
LEARNING OBJECTIVE 8: 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 in
a decision. All other costs and benefits can and should be ignored.

1. Differential 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.

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2. Opportunity Cost
 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

3. Sunk 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 $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
Quick Check : 7
Suppose you are trying to decide whether to drive or take the train to Kuala Lumpur 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 Kuala Lumpur?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
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Quick Check : 8
Suppose you are trying to decide whether to drive or take the train to Kuala Lumpur 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.

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Quick Check : 9
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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