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Introduction to
Managerial Accounting
and Cost Concepts
Chapter
1
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 2
Managerial Accounting and
Financial Accounting
Managerial accountingprovides informationfor managers of an
organization whodirect and control
its operations.
Financial accountingprovides information
to stockholders,
creditors and otherswho are outsidethe organization.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 3
Work of Management
Planning
Controlling
Directing and
Motivating
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 4
Planning and Control Cycle
Formulating Long-andShort-Term Plans(Planning)
MeasuringPerformance(Controlling)
Comparing Actualto
Planned Performance(Controlling)
Implementingthe Plans
(Directing andMotivating)
Begin
DecisionMaking
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 5
Differences Between Financial and
Managerial Accounting
Financial Managerial
Accounting Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. Requirements Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 6
MegaLoMart
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . .
Buy finished goods.
Sell finished goods.
Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.
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The Product
DirectMaterials
DirectLabor
ManufacturingOverhead
Manufacturing Costs
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Direct Materials
Those materials that become an integral partof the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easily traced toindividual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing costs that cannot be traceddirectly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materials
Wages paid to employeeswho are not directly
involved in productionwork.
Examples: maintenanceworkers, janitors and
security guards.
Materials used to supportthe production process.
Examples: lubricants andcleaning supplies used in theautomobile assembly plant.
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Classifications of Costs
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
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Nonmanufacturing Costs
Marketing and selling costs . . .Costs necessary to get the order and deliver the
product.
Administrative costs . . .All executive, organizational, and clerical costs.
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Quick Check
Which of the following costs would beconsidered manufacturing overhead at Boeing?(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
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Product Costs Versus Period Costs
Product costs includedirect materials, direct
labor, andmanufacturing
overhead.
Period costs are notincluded in product
costs. They are
expensed on theincome statement.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
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Quick Check
Which of the following costs would beconsidered a period rather than a product costin a manufacturing company?
A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the productionfacility.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 18
Merchandiser
Current assets
Cash
ReceivablesPrepaid expenses
Merchandise inventory
Manufacturer
Current Assets
Cash
ReceivablesPrepaid Expenses
InventoriesRaw Materials
Work in ProcessFinished Goods
Balance Sheet
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 19
Merchandiser
Current assets
Cash
ReceivablesPrepaid expenses
Merchandise inventory
Manufacturer
Current Assets
Cash
ReceivablesPrepaid Expenses
InventoriesRaw Materials
Work in ProcessFinished Goods
Balance Sheet
Partially completeproducts some
material, labor, oroverhead has been
added.
Completed productsawaiting sale.
Materials waiting tobe processed.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 20
The Income Statement
Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.
Manufacturing Company
Cost of goods sold:Beg. finished
goods inv. 14,200$
+ Cost of goods
manufactured 234,150
Goods available
for sale 248,350$- Ending
finished goods
inventory (12,100)
= Cost of goods
sold 236,250$
Merchandising Company
Cost of goods sold:Beg. merchandise
inventory 14,200$
+ Purchases 234,150
Goods available
for sale 248,350$
- Endingmerchandise
inventory (12,100)
= Cost of goods
sold 236,250$
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 22
Quick Check
Which of the following transactions wouldimmediately result in an expense? (There maybe more than one correct answer.)
A. Work in process is completed.B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued andpaid.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 24
Inventory Flows
Beginningbalance
$$
Additions$$$+
Available$$$$$=
Endingbalance
$$=
Withdrawals$$$
_Available$$$$$
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 25
Quick Check
If your bank balance at the beginning of themonth was $1,000, you deposited $100 duringthe month, and withdrew $300 during the
month, what would be the balance at the end ofthe month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 27
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
Product Costs - A Closer Look
Beginning inventoryis the inventory
carried over from
the prior period.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 28
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory
+ Raw materialspurchased
= Raw materials
available for use
in production
Ending raw materials
inventory= Raw materials used
in production
As items are removed from rawmaterials inventory and placed into
the production process, they arecalled direct materials.
Product Costs - A Closer Look
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 29
Quick Check
Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the month
revealed that $28,000 of raw material was stillpresent. What is the cost of direct materialused?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 31
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overheadpurchased = Total manufacturing
= Raw materials costs
available for use
in production
Ending raw materials
inventory= Raw materials used
in production
Product Costs - A Closer Look
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 32
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overheadpurchased = Total manufacturing
= Raw materials costs
available for use
in production
Ending raw materials
inventory= Raw materials used
in production
Conversioncosts are costs
incurred toconvert the
direct materialinto a finished
product.
Product Costs - A Closer Look
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Quick Check
Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were
total manufacturing costs incurred for themonth?
A. $555,000
B. $835,000C. $655,000
D. Cannot be determined.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 35
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturingpurchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending raw materials
inventory= Raw materials used
in production
Product Costs - A Closer Look
All manufacturing costs incurredduring the period are added to thebeginning balance of work in
process.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 36
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturingpurchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending work in
process inventory= Cost of goods
manufactured.
Product Costs - A Closer Look
Costs associated with the goods thatare completed during the period are
transferred to finished goodsinventory.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 37
Quick Check
Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 ofpartially finished goods remaining in work in
process inventory at the end of the month.What was the cost of goods manufacturedduring the month?
A. $1,160,000
B. $ 910,000C. $ 760,000D. Cannot be determined.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 39
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goodsfor the period available for sale
Ending work in - Ending finished
process inventory goods inventory= Cost of goods Cost of goods
manufactured sold
Product Costs - A Closer Look
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 40
Quick Check
Beginning finished goods inventory was$130,000. The cost of goods manufactured forthe month was $760,000. And the ending
finished goods inventory was $150,000. Whatwas the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
C Cl ifi i f P di i
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Cost Classifications for Predicting
Cost Behavior
How a cost will react tochanges in the level of
business activity.
Total variable costschange when activitychanges.
Total fixed costsremain unchangedwhen activity changes.
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Total Variable Cost
Yourtotal long distance telephone bill isbased on how many minutes you talk.
Minutes Talked
TotalL
ongDistance
TelephoneBill
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Variable Cost Per Unit
Minutes Talked
Pe
rMinute
Teleph
oneCharge
The cost per long distance minute talked isconstant. For example, 10 cents per minute.
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Total Fixed Cost
Your monthly basic telephone bill probablydoes not change when you make more local
calls.
Number of Local Calls
Mon
thlyBasic
Tele
phoneBill
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Fixed Cost Per Unit
Number of Local Calls
Monthly
BasicTelephone
Billp
erLocalCall
The average cost per local call decreases asmore local calls are made.
C t Cl ifi ti f P di ti
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Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 48
Quick Check
Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & 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 variablewith respect to the number of people who buy aticket for a show at a movie theater? (There
may be more than one correct answer.)A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theateremployees.
D. The cost of cleaning up after the show.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 52
Direct Costs and Indirect Costs
Direct costs
Costs that can beeasily and convenientlytraced to a unit ofproduct or other costobjective.
Examples: directmaterial and direct labor
Indirect costs
Costs cannot be easilyand conveniently tracedto a unit of product orother cost object.
Example:manufacturingoverhead
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 53
Differential Costs and Revenues
Costs and revenues that differ amongalternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.
Differential revenue is:
$2,000
$1,500 = $500
Differential cost is:$300
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 54
Quick Check
Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but
you dont want to waste money needlessly. Isthe cost of the pizza you ate last night relevantin this decision? In other words, should the costof the pizza affect the decision of whether you
drive or take the train to Portland?A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 56
Quick Check
Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but
you dont want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain 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.
Note
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Note
Every decision involves a choice fromamong at least two alternatives.
Only those costs and benefits that differbetween alternatives (i.E., Differentialcosts and benefits) are relevant in adecision. All other costs and benefits can
and should be ignored.
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Quick Check
Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but
you dont want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis 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 todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but
you dont want to waste money needlessly. Isthe depreciation on your car relevant in thisdecision?
A. Yes, the depreciation is relevant.
B. No, the depreciation is not relevant.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 63
Opportunity Costs
The potential benefit that isgiven up when one alternativeis selected over another.
Example: If you werenot attending college,you could be earning
$15,000 per year.Your opportunity costof attending college forone year is $15,000.
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The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 64
Sunk Costs
Sunk costs cannot be changed by any decision.They are not differential costs and should beignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost issunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $10,000 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.