Lec 08: Managerial Accounting (Concepts & Principles)
Transcript of Lec 08: Managerial Accounting (Concepts & Principles)
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HUM 211: Financial & Managerial Accounting
Lecture 08: Managerial Accounting (Concepts & Principles)
Masud
Jahan
Department of Science and Humanities Military Institute of Science and Technology
2011
Chapter
20Chapter
20
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2/38HUM 211: Principles of Accounting
Cost is the amount of expenditure, i.e. sacrifice of resources (actual or notional) incurred on or attributable to acquisition of a specific objective
An Expense is a cost with expired benefits. Generally, costs are recognized as expenses on the income statement in the period that benefits from the costs
Cost Vs Expense
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3/38HUM 211: Principles of Accounting
A cost object is anything for which cost data are desired- including products, product line, customers, job etc
a cost unit is ‘a unit of product, service or time in relation to which costs may beascertained or expressed’. In other words cost unit is unit of measurement of cost
Cost Object Vs Cost Unit
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4/38HUM 211: Principles of Accounting
Classification Of Costs
By TraceabilityBy associationBy BehaviorBy FunctionBy controllabilityBy relevance
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5/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by traceability
with jobs, products, or services
LO1
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6/38HUM 211: Principles of Accounting
Direct costsCosts that can beeasily and conveniently traced to a unit of product or other cost objective.Would not be incurred if the product or activity were discontinued.Examples: direct material and direct labor
Indirect costsCosts cannot be easily and conveniently traced to a unit of product or other cost object. Would be incurred even if the product or activity were discontinued.Example: indirect material and indirect labor
Cost Classifications by traceability
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7/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by activity
to which they associate
LO2
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8/38HUM 211: Principles of Accounting
costs are classified into four categories.
i) Manufacturing Costs
ii) Administrative Costs
iii) Selling Costs
iv) Distribution Costs
costs are classified into four categories.
i) Manufacturing Costs
ii) Administrative Costs
iii) Selling Costs
iv) Distribution Costs
Cost Classifications by association
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9/38HUM 211: Principles of Accounting
Manufacturing Costs
Manufacturing costs are those costs related to factory operations which are essential to the completion of the product.
It includes direct material costs, direct labor costs and manufacturing overheads.
Manufacturing costs are those costs related to factory operations which are essential to the completion of the product.
It includes direct material costs, direct labor costs and manufacturing overheads.
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10/38HUM 211: Principles of Accounting
Administrative Costs
Administrative costs includes all those costs incurred on the general administration and control of the firm.
Examples of such costs are : salaries of the office staff, rent of the office building, depreciation and repairs of the office furniture etc.
Administrative costs includes all those costs incurred on the general administration and control of the firm.
Examples of such costs are : salaries of the office staff, rent of the office building, depreciation and repairs of the office furniture etc.
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11/38HUM 211: Principles of Accounting
Selling Costs
Selling costs are those costs which are incurred in connection with the sale of goods.
Some examples of such costs are : Cost of warehousing, advertising, salesmen salaries etc.
Selling costs are those costs which are incurred in connection with the sale of goods.
Some examples of such costs are : Cost of warehousing, advertising, salesmen salaries etc.
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12/38HUM 211: Principles of Accounting
Distribution Costs
Distribution costs are those costs which are incurred on dispatch of finished products to customer including transportation.
Examples of such costs are: packing, carriage, insurance, freight outwards, etc.
Distribution costs are those costs which are incurred on dispatch of finished products to customer including transportation.
Examples of such costs are: packing, carriage, insurance, freight outwards, etc.
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13/38HUM 211: Principles of Accounting
The cost to produce a unit of product
includes:
Direct materialDirect laborManufacturingoverhead
The cost to produce a unit of product
includes:
Direct materialDirect laborManufacturingoverhead
Components of Manufacturing Cost
Supplies
Lightbulbs
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14/38HUM 211: Principles of Accounting
Raw materials & component
parts that become an integral part of finished products.
Can be traced directly and conveniently to products.
If materials cannot be traced directly to products, the materials are considered indirect and are part
of manufacturing overhead.
If materials cannot be traced directly to products, the materials are considered indirect and are part
of manufacturing overhead.
Direct Materials
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15/38HUM 211: Principles of Accounting
Includes the payroll cost of direct workers.Includes the payroll cost of direct workers.
Those employees who work directly
on the goods being manufactured.
Those employees who work directly
on the goods being manufactured.
Direct labor hours × Wage
rate
The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.
The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.
Direct Labor
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16/38HUM 211: Principles of Accounting
All manufacturing costs other than direct materials and direct labor.
All manufacturing costs other than direct materials and direct labor.
Includes:Indirect materials.Indirect labor.Machinery and equipment costs.Cost of regulatory compliance.
Includes:Indirect materials.Indirect labor.Machinery and equipment costs.Cost of regulatory compliance.
Does not include selling or general and
administrative expenses.
Does not include selling or general and
administrative expenses.
Supplies
Lightbulbs
Manufacturing Overhead
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17/38HUM 211: Principles of Accounting
Direct Materials
Purchased
Direct Materials
Purchased
Direct Materials
Used
Direct Materials
Used
Direct Labor
Direct Labor
Manufacturing Overhead
Manufacturing Overhead
Finished Goods
Finished Goods
Goods Sold
Goods Sold
MegaLoMart
Flow of Physical Goods in Production
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18/38HUM 211: Principles of Accounting
The costs of converting the materials into finished products consists of direct labor and factory overhead. These two costs combined are often referred to as conversion costs.
The costs of converting the materials into finished products consists of direct labor and factory overhead. These two costs combined are often referred to as conversion costs.
Conversion Cost
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19/38HUM 211: Principles of Accounting
Direct Materials Direct
MaterialsDirect Labor Direct Labor
Prime Cost
Conversion Cost
Manufacturing costs are often combined as follows:
Manufacturing costs are often combined as follows:
Manufacturing Overhead
Manufacturing Overhead
Accounting for Manufacturing Operations
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20/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by behavior with activity
level
LO3
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21/38HUM 211: Principles of Accounting
Cost BehaviorHow a cost will react to
changes in the level of business activity.
Cost BehaviorHow a cost will react to
changes in the level of business activity.
Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.
Total variable costs changewhen the level of activity changes.Total fixed costs remain unchangedwhen the level of activity changes.
Cost Classifications by Behavior
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22/38HUM 211: Principles of Accounting
Typical variable costs• Raw materials• Direct labor• Factory utilities• Sales commissions• Shipping costs
Typical fixed costs• Real estate taxes• Factory rent• Supervisory salaries• Workers’ welfare cost • Depreciation
Typical Examples
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23/38HUM 211: Principles of Accounting
Total electricity bill is based on how many units you use.
Units Used
Tota
l Ele
ctric
ity B
illA variable cost is one that changes in total
in proportion to changes in the volume of activity.
Total Variable Cost
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24/38HUM 211: Principles of Accounting
Units Used
Per
Uni
tE
lect
ricity
Cha
rge
The cost per unit electricity used is constant. For example, Tk 10 per unit .
On a per unit basis, a variable cost remains constant over a wide range of activity.
Variable Cost Per Unit
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25/38HUM 211: Principles of Accounting
Total Fixed Cost
Monthly factory rent does not change when production level is more or less.
Units produced
Mon
thly
Fac
tory
Ren
t
A fixed cost is one that remains constant in total even when the volume of activity changes.
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26/38HUM 211: Principles of Accounting
Units produced
Per
uni
t fa
ctor
y re
nt
Fixed Cost Per Unit
Factory rent per unit produced declines as more units are produced .
On a per unit basis, a fixed cost changes as the volume of activity changes.
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27/38HUM 211: Principles of Accounting
A semi variable or mix cost has both fixed and variable
components.
Consider Land Phone Bill
example.
Semi variable Cost
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28/38HUM 211: Principles of Accounting
Fixed Monthly Utility Charge
Variable Utility Charge
Activity (Minutes Talked)
Tota
l Util
ity C
ost
X
Y
Total semi variable cost
Semi variable Cost
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29/38HUM 211: Principles of Accounting
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 goesthe same even when the down as activity level goes up. activity level changes.
Cost Classifications for Predicting Cost Behavior
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30/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by function
LO4
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31/38HUM 211: Principles of Accounting
Product CostsDirect materialsDirect laborOverhead
Period CostsSellingGeneral and administrative expenses
Cost Classifications by Function
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32/38HUM 211: Principles of Accounting
FactoryOverheadFactoryFactory
OverheadOverhead
DirectMaterials
DirectMaterials
DirectLaborDirectDirectLaborLabor
ProductCosts
ProductProductCostsCosts
Product Costs
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33/38HUM 211: Principles of Accounting
Distribution Costs
Distribution Distribution CostsCosts
Administrative Costs
Administrative Costs
Selling Costs
Selling Selling CostsCosts
Period Costs
Period Period CostsCosts
Period Costs
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34/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by controllability
LO5
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35/38HUM 211: Principles of Accounting
Controllable costs are
those costs which can be controlled by a
specified person or alevel of
management
Uncontrollable costs
are those costs which cannot be controlled or influenced by a specified
person of an enterprise
Example: Material costExample: Material cost Example: Factory rentExample: Factory rent
Cost Classifications by controllability
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36/38HUM 211: Principles of Accounting
Learning Objective
To classify costs by relevance to
decision-making
LO6
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37/38HUM 211: Principles of Accounting
Sunk costsCosts already incurred that can not be avoided or changed.Irrelevant to future decision making.Examples: Equipment previously purchased.
Out-of-pocket costsCosts require a future outlay of cash. Relevant for future decision making.Example: Future purchase of equipment
Cost Classifications by relevance
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End of Lecture 08 THANK YOU ALL…