Chap 002 Managerial Accounting

8/12/2019 Chap 002 Managerial Accounting

1/52

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Basic CostManagement Conceptsand Accounting for MassCustomization Operations

Chapter 2


2/52


LearningObjective

1


3/52

2-3

Process of Management

DecisionMaking

DirectingControl

PlanningStrategyFormulation

Managers need cost information toperform each of these functions.


4/52

2-4

What Do We Mean By a Cost?

A cost

is the measure ofresources givenup to achieve a

particular purpose.


5/52


LearningObjective

2


6/52

2-6

Product Costs, Period Costs and Expenses

Product costs are costs associated with goods forsale until the time period during which the productsare sold, at which time the costs become expenses.

Period costs are costs that are expensed during thetime period in which they are incurred.

Expenses are the consumption of assets for thepurpose of generating revenue.


7/52Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LearningObjective

3


8/52

2-8

Product Costs

Cost of goods sold

Period Costs

Operating expenses

Cost Classifications on FinancialStatements Income Statement


9/522-9

Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses

MerchandiseInventory

Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses

InventoriesRaw Materials

Work in Process

Finished Goods

Cost Classifications on FinancialStatements Balance Sheet


10/522-10

Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Those materialswaiting to beprocessed.


11/522-11

Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Partially complete

products

material towhich some labor

and/or overhead hasbeen added.


12/522-12

Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses


Manufacturer

Current Assets

Cash

Receivables

Prepaid Expenses


Work in Process

Finished Goods


Completed productsawaiting sale.



LearningObjective

4


14/522-14

Types of Production Processes

Type of Production Description of Example of

Process Process Manufacturer

Job Shop Low volume Disney

Little standardization

Unique products

Batch Multiple products Caterpillar

Low volume

Assembly Line A few major products Ford

Higher volume

Mass Customization High volume Dell

Many standardized components

Customized combination of components

Continuous Flow High volume Exxon

Highly standardized commodity products



LearningObjective

5


16/522-16

Manufacturing Costs

TheProduct

DirectLabor

ManufacturingOverhead

DirectMaterial


17/522-17

Direct Material

Example:Steel used tomanufacture

the automobile.

Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.


18/522-18

Cost of salaries, wages, and fringebenefits for personnel who work

directly on manufactured products.

Direct Labor

Example:Wages paid to an

automobile assemblyworker.


19/522-19

All other manufacturing costs

Manufacturing Overhead

Materials used to support

the production process.Examples: lubricants andcleaning supplies used in anautomobile assembly plant.

IndirectLabor

IndirectMaterial

OtherCosts


20/522-20



Cost of personnel who

do not work directly onthe product. Examples:maintenance workers,janitors and security

guards.

IndirectLabor

IndirectMaterial

OtherCosts


21/522-21



Examples: depreciation

on plant and equipment,property taxes,insurance, utilities,

overtime premium, andunavoidable idle time.

IndirectLabor

IndirectMaterial

OtherCosts


22/522-22

Classifications of Costs inManufacturing Companies

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:

DirectMaterial

DirectLabor



23/522-23

Manufacturing Cost Flows


Direct Material

Direct Labor

Work inProcess

Inventory


24/522-24



Direct Material

Direct Labor

FinishedGoods

Inventory

Work inProcess

Inventory


25/522-25



Direct Material

Direct Labor

FinishedGoods

Inventory

Cost ofGoods

Sold

Work inProcess

Inventory


26/52


Learning

Objective6


27/522-27

Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Raw material used 134,980$

Direct labor 50,000

Total manufacturing overhead 230,000

Total manufacturing costs 414,980$

Add: Work-in-process inventory, January 1 120

Subtotal 415,100$

Deduct: Work-in-process inventory, December 31 100

Cost of goods manufactured 415,000$

Schedule of Cost of GoodsManufactured


28/52

2-28




Direct labor 50,000




Subtotal 415,100$




Computation of Cost of Raw Material Used

Raw-material inventory, January 1 6,000$

Add: Purchases of raw materials 134,000

Raw material available for use 140,000

Deduct: Raw material inventory, December 31 5,020



29/52

2-29




Direct labor 50,000




Subtotal 415,100$




Include all direct laborcosts incurred during the

current period.


30/52

2-30




Direct labor 50,000




Subtotal 415,100$



Computation of Total Manufacturing Overhead

Indirect material 10,000$

Indirect labor 40,000Depreciation on factory 90,000

Depreciation on equipment 70,000

Utilities 15,000

Insurance 5,000

Total manufacturing overhead 230,000$

S h d l f C t f G d


31/52

2-31




Direct labor 50,000




Subtotal 415,100$




Beginning work-in-process inventory iscarried over from the

prior period.

Ending work-in-process

inventory contains the cost ofunfinished goods, and isreported in the current assetssection of the balance sheet.


32/52

2-32

Income Statement for aManufacturer


Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$


33/52

2-33


Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$


Schedule of Cost of Goods Sold

For the Year Ended December 31, 20X2

Finished-goods inventory, Jan. 1 200$

Add: Cost of goods manufactured 415,000

Cost of goods available for sale 415,200

Deduct Finished-goods inventory, Dec. 31 190

Cost of goods sold 415,010$


34/52


Learning

Objective7


35/52

2-35

Activities that cause costs to beincurred are called COST DRIVERS:

Cost Driver Examples

Activity Cost Driver

Machining operations Machine hoursSetup Setup hours

Production scheduling Manufacturing orders

Inspection Pieces inspected

Purchasing Purchase ordersShop order handling Shop orders

Valve assembly support Customer requisitions


36/52


Learning

Objective8


37/52

2-37

Cost Classifications

Cost behavior meanshow a cost will reactto changes in the

level of businessactivity.

Totalvariable costschange when activitychanges.

Totalfixed costsremainunchanged whenactivity changes.


38/52

2-38

Total Variable Cost Example

Your total cable pay-per-view bill is based onhow many movies you watch.

Pay-Per-View

Movies Watched

TotalP

ay-Per-View

Bill


39/52

2-39

Variable Cost Per Unit Example

Movies Watched

PerM

ovieCharge

The cost per movie watched is constant. Forexample, $4.00 per movie.


40/52

2-40

Total Fixed Cost ExampleYour monthly cable bill probably does not change

when you watch movies on channels that youhave elected to be paid on a monthly basis (HBO).

Numberof HBO Movies

Watched

Month

lyChargefor

H

BOBill


41/52

2-41

Fixed Cost Per Unit Example

Number of HBO

Movies Watched

MonthlyH

BOBillp

erM

ovie

Watched

The average cost per HBO movie decreasesas more HBO movies are watched.


42/52

2-42

Cost Classifications

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Total variable cost changes Variable cost per unit

Variable as activity level changes. remains the same over

wide ranges of activity.

Total fixed cost remains Fixed cost per unit

Fixed the same even when the goes down as activity

activity level changes. level goes up.


43/52


Learning

Objective9


44/52

2-44

Direct and Indirect Costs

Direct costs Costs that can be

easily andconveniently traced to

a product ordepartment.

Example: cost ofpaint in the paint

department of anautomobile assemblyplant.

Indirect costs Costs that must be

allocated in order tobe assigned to a

product ordepartment.

Example: cost ofnational advertising

for an airline isindirect to a particularflight.

Controllable and


45/52

2-45

A cost that can be significantly influencedby a manager is a controllable cost.

Controllable andUncontrollable Costs

Cost item Manager Classificaton

Cost of food used Restaurant Controllable

in a restaurant manager

Cost of national Restaurant Uncontrollable

advertising by a manager

restaurant chain


46/52


Learning

Objective10


47/52

2-47

Opportunity Cost

The potential benefit that isgiven up when onealternative is selected

over another. Example: If you were

not attending college,you could be earning

$20,000 per year.Your opportunity costof attending college for oneyear is $20,000.


48/52

2-48

Sunk Costs

All costs incurred in the past that cannot bechanged by any decision made now or in thefuture are sunk costs. Sunk costs should not be

considered in decisions. Example: You bought an automobile that cost

$12,000 two years ago. The $12,000 cost issunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $12,000cost.


49/52

2-49

Differential Costs

Costs that differ between alternatives.

Example:You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.

Your commuting costs are $50 per month in yourhometown and $300 per month to the city.

What is your differential cost?$300 - $50 = $250

Marginal Costs and Average


50/52

2-50

Marginal Costs and AverageCosts

The extra costincurred to produceone additional unit.

The total cost toproduce a quantity

divided by thequantity produced.

Marginal and average costs arelargely a function of cost behavior

-- variable and fixed costs.


51/52

2-51

Costs and Benefits of Information

Costs Benefits

More information does not mean morebenefits if information overload results.


52/52

End of Chapter 2

Chap 002 Managerial Accounting

Documents

Transcript of Chap 002 Managerial Accounting