Professional Documents
Culture Documents
MANAGERIAL ACCOUNTING
Eighth Canadian Edition
GARRISON, CHESLEY, CARROLL, WEBB
Prepared by: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance
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Learning Objective 1
Identify and give examples of each of the three basic cost elements involved in the manufacture of a product.
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Manufacturing Costs
Direct Materials
Direct Labour
Manufacturing Overhead
The Product
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Direct Materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it.
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Direct Labour
Those labour costs that can be easily traced to individual units of product.
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Manufacturing Overhead
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Classifications of Costs
Prime Cost
Conversion Cost
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Idle Time
Machine Breakdowns Power Failures Material Shortages
The labour costs incurred during idle time are ordinarily treated as manufacturing overhead. Product specific idle time is treated as direct labour.
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Overtime
The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead. Product specific overtime premiums are part of direct labour.
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Employee Benefits
Employee benefits include employment taxes, medical plans, and pension costs.
Other companies treat employee benefit expenses of direct labourers as additional direct labour costs.
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Non-manufacturing Costs
Selling Costs
Administrative Costs
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Learning Objective 2
Distinguish between product costs and period costs and give examples of each.
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Product costs include direct materials, direct labour, and manufacturing overhead.
Inventory Sale
Cost of Good Sold
Expense
Balance Sheet
Income Statement
Income Statement
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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.
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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.
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Merchandisers . . .
Buy finished goods. Sell finished goods.
MegaLoMart
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Balance Sheet
Merchandiser Manufacturer
Current Assets
u u u u
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Balance Sheet
Merchandiser Manufacturer
Current Assets
u Cash u Receivables Materials Expenses u Prepaid waiting to be processed. u Inventories u Raw Materials u Work in Process u Finished Goods
Current assets u Cash u Receivables u Prepaid Expenses u Merchandise Partially complete products Inventory some
material, labour, or overhead has been added.
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Learning Objective 3
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Manufacturing Company
Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold
(12,100) $ 236,250
(12,100) $236,250
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Beginning balance
Additions to inventory
Ending balance
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Quick Check
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
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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Learning Objective 4
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Calculates the cost of raw material, direct labour and manufacturing overhead used in production.
Calculates the manufacturing costs associated with goods that were finished during the period.
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As items are removed from raw materials inventory and placed into the production process, they are called direct materials.
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Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials 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.
Work In Process
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Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production
Work In Process
Beginning work in process inventory + Total manufacturing costs = Total work in process for the period
+ =
All manufacturing costs incurred during the period are added to the beginning balance of work in process.
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Raw Materials
Beginning raw Direct materials materials inventory + Direct labour + Raw materials + Mfg. overhead purchased = Total manufacturing = Raw materials costs available for use in production Ending raw materials inventory Costs associated with the goods that = Raw materials used arein production during the period are completed
+ =
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F in is h ed G o o d s
+ = =
Be g in n in g w o rk in Be g in n in g fin ish e d p ro ce ss in ve n to ry g o o d s in ve n to ry M a n u fa ctu rin g co sts + Co st o f g o o d s fo r th e p e rio d m a n u fa ctu re d T o ta l w o rk in p ro ce ss = Co st o f g o o d s fo r th e p e rio d a va ila b le fo r sa le En d in g w o rk in - En d in g fin ish e d p ro ce ss in ve n to ry g o o d s in ve n to ry Co st o f g o o d s Co st o f g o o d s m a n u fa ctu re d so ld
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Costs
Material Purchases Direct Labour Manufacturing Overhead
Period Costs
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Quick Check
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?
2,000
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Quick Check
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 =
Beg. raw m aterials Raw m aterials purchased Raw m aterials available for use in production Ending raw m aterials inventory Raw m aterials used in production
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Quick Check
Direct materials used in production totaled $280,000. Direct labour was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?
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Quick Check
Direct materials used in production totaled $280,000. Direct labour was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred aterials month?80,000 D irec Mfor the t $2
35 0 7 ,0 0 10 0 8 ,0 0 $85 0 3 ,0 0
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Quick Check
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?
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Quick Check
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 Bduring the month? eginning w ork in
process inventory M costs incurred fg. for the period Total w ork in process during the period Ending w ork in process inventory C ost of goods m anufactured
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Quick Check
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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Quick Check
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. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000 C. $780,000. D. $760,000.
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Learning Objective 5
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Variable Cost
Your total long distance telephone bill is based on how many minutes you talk.
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The cost per long distance minute talked is constant. For example, 10 cents per minute.
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Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls
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The average fixed cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
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Fixed
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Quick Check
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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Quick Check
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 6
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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
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Learning Objective 7
Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
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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.
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Differential revenue is: $2,000 $1,500 = $500 Differential cost is: $300
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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.
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Sunk Costs
Sunk costs have already been incurred and cannot be changed now or in the future. They 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.
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Quick Check
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 dont 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.
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Quick Check
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 dont 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.
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Quick Check
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 dont 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
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 dont 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
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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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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Financial reporting Predicting cost behaviour Assigning costs to cost objects Decision making
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End of Chapter 2