Managerial Accounting and Cost Concepts: Mgt. Functions

Managerial Accounting
and Cost Concepts

Chapter 2
Mgt.
functions
2012 McGraw-Hill Education (Asia)
Works of Management
Planning
Planning
Directing
Directing and
and
Motivating
Motivating
Controlling
Controlling
planning
McGraw-Hill Education (Asia)
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 2
Learning Objective:
Identify and give examples

of each of the three basic
manufacturing cost
categories.
Mfg.
costs
Slide 3
Manufacturing Costs
Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
The Product
DM
Slide 4
Learning Objective:
Distinguish between
product costs and period
costs and give examples
of each.
Product
vs period
Slide 5
Product Costs Versus Period Costs

Product costs
include direct
materials, direct
labor, and
manufacturing
overhead.
Inventory
Period costs include

all selling costs and
administrative
costs.
Cost of Good Sold
Expense
Sale
Balance
Sheet
Quick
check
Income
Statement
Income
Statement
Slide 6
Classifications of Costs
Manufacturing costs are often

classified as follows:
Direct
Material
Direct
Labor
Prime
Cost
Manufacturing
Overhead
Conversion
Cost
Merchan
dising vs
mnfg.
Slide 7
COST ACCORDING TO BEHAVIOR
1)
Fixed
2)
Variable
3)
Mixed or semi-variable
Cost
flows
Slide 8
DIRECT VS. INDIRECT COSTS
Direct = can be conveniently

and economically traced to
the cost object
Indirect = common costs,
cannot be conveniently and
economically traced to the
cost object
Cost
flows
Slide 9
COSTS FOR DECISION MAKING

1)
Sunk
2)
Differential
3)
Incremental
4)
Average or unit cost
5)
Opportunity
Cost
flows
Slide 10
Learning Objective:
Prepare an income
statement including
calculation of the cost of
goods sold.
Cont.
Slide 11
The Income Statement

Comparison:
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
$ 14,200
+ Purchases
234,150
Goods available
for sale
$ 248,350
- Ending
merchandise
inventory
(12,100)
= Cost of goods
sold
$ 236,250
Quick
check
Slide 12
Schedule of Cost of Goods Manufactured
Calculates the manufacturing

costs associated with goods
that were finished during the
period.
Cost
flows
Slide 13
Product Cost Flows

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
Cont.
Manufacturing
Costs
Work
In Process
Direct materials
As
Asitems
itemsare
areremoved
removed from
from raw
raw
materials
materialsinventory
inventoryand
and placed
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
called direct
direct materials.
materials.
Slide 14
Product Cost Flows

Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
inventory
Raw materials used
in production
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Cont.
Slide 15
Product Cost Flows

Raw Materials
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All
All manufacturing
manufacturing costs
costsincurred
incurred
during
during the
theperiod
period are
areadded
addedto
tothe
the
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
Cont.
Slide 16
Product Cost Flows

Raw Materials
Manufacturing
Costs
Beginning raw
Direct materials
materials inventory
+ Direct labor
+ Raw materials
+ Mfg. overhead
purchased
= Raw materials
costs
available for use
in production
inventory
Costs
associated
with
associated
with the
thegoods
goodsthat
that
=Costs
Raw materials
used
are
areincompleted
completed
duringthe
the period
period are
are
production during
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
Work
In Process
+
=
Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured
end
Cost
cont.
Slide 17
Product Cost Flows
Cost
flows
Slide 18
Manufacturing Cost Flows

Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Finished
Goods
Period Costs
Selling and
Administrative
Quick
check
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Slide 19
Learning Objective 6
Understand the
differences between
variable costs and fixed
costs.
Cont.
Slide 20
Cost Classifications for Predicting Cost

Behavior
How
How aa cost
cost will
will react
react
to
to changes
changes in
in the
the
level
level of
of activity
activity within
within
the
the relevant
relevant range.
range.
Total variable costs
Total variable costs
change
change when
when activity
activity
changes.
changes.
Total fixed costs
Total fixed costs
remain
remain unchanged
unchanged
when
when activity
activity changes.
changes.
Var. costs
Slide 21
Variable Cost
Total Texting Bill
Your total texting bill is based on how

many texts you send.
Number of Texts Sent

Var. cost
per unit
Slide 22
Variable Cost Per Unit
Cost Per Text Sent
The cost per text sent is constant at

5 cents per text.
Number of Texts Sent
Fixed
costs
Slide 23
Fixed Cost
Monthly Cell Phone

Contract Fee
Your monthly contract fee for your cell phone is fixed for the
number of monthly minutes in your contract. The monthly
contract fee does not change based on the number of calls
you make.
Number of Minutes Used

Within Monthly Plan
Fixed
cost per
unit
Slide 24
Fixed Cost Per Unit
Monthly Cell Phone

Contract Fee
Within the monthly contract allotment, the average fixed cost per
cell phone call made decreases as more calls are made.
Cont.
Number of Minutes Used

Within Monthly Plan
Slide 25
Cost Classifications for Predicting Cost

Behavior
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable
Total variable cost changes

as activity level changes.
Variable cost per unit remains

the same over wide ranges
of activity.
Fixed
Total fixed cost remains

the same even when the
activity level changes.
Average fixed cost per unit goes

down as activity level goes up.
Quick
check
Slide 26
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.
cont
Slide 27
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.
LO 7
Slide 28
Understand the
differences between direct
and indirect costs.
Assigning
costs
Slide 29
Assigning Costs to Cost Objects

Indirect costs
Direct costs
Costs that can be

easily and
conveniently
traced to a unit
of product or
other cost object.
Costs that cannot

be easily and
conveniently
traced to a unit
of product or
other cost object.
Examples: direct
material and
direct labor
Example:
manufacturing
overhead
LO 8

McGraw-Hill/Irwin
Define and give examples

of cost classifications used
in making decisions:
differential costs,
opportunity costs, and
sunk costs.
Cont.
Slide 31
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.
Differential
cost
Slide 32
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.
Differential revenue is:

$2,000 $1,500 = $500
Differential cost is:

$300
opport..
costs
Slide 33
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.
Sunk
costs
Slide 34
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
Slide 35
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.
Cont.
Slide 36
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.
Labor
costs
Slide 37
Properly account for labor

costs associated with idle
time, overtime, and fringe
benefits.
Idle time
Slide 38
Idle Time
Machine
Breakdowns
Material
Shortages
Power
Failures
The labor costs incurred

during idle time are ordinarily
treated as manufacturing
overhead.
overtime
Slide 39
Overtime
The overtime premiums for all factory workers are
usually considered to be part of manufacturing
overhead.
What if a company consistently has overtime ?

Can the overtime costs be part of labor expenses?
Fringe
benefits
Slide 40
Labor Fringe Benefits

Fringe benefits include employer paid
costs for insurance programs, retirement
plans, Social Security, Philhealth, HDMF,
etc.
Some companies
include all of these
costs in
manufacturing
overhead.
Other companies treat

fringe benefit
expenses of direct
laborers as additional
direct labor costs.
LO 10
Slide 41
End of Chapter 2
Slide 42

Managerial Accounting and Cost Concepts: Mgt. Functions

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Managerial Accounting

and Cost Concepts

2012 McGraw-Hill Education (Asia)

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Identify and give examples

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Product Costs Versus Period Costs

Period costs include

Cost of Good Sold

McGraw-Hill Education (Asia)

Manufacturing costs are often

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

COST ACCORDING TO BEHAVIOR

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

DIRECT VS. INDIRECT COSTS

Direct = can be conveniently

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

COSTS FOR DECISION MAKING

Average or unit cost

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

The Income Statement

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Schedule of Cost of Goods Manufactured

Calculates the manufacturing

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Product Cost Flows

McGraw-Hill Education (Asia)

Product Cost Flows

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Product Cost Flows

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Product Cost Flows

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Product Cost Flows

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Manufacturing Cost Flows

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Cost Classifications for Predicting Cost

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Total Texting Bill

Your total texting bill is based on how

Number of Texts Sent