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Managerial Accounting and Cost Concepts Chapter 2 Copyright © 2010 by The McGraw-Hill Companies, Inc. All
Managerial Accounting and Cost Concepts Chapter 2 Copyright © 2010 by The McGraw-Hill Companies, Inc. All

McGraw-Hill/Irwin

Managerial Accounting and Cost Concepts

Chapter 2

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Planning

Identify

alternatives.

Select alternative that does the best job of furthering organization’s objectives.

Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets

Develop budgets to guide progress toward the selected alternative.

Directing and Motivating

Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.

  • Employee work assignments.

  • Routine problem solving.

  • Conflict resolution.

  • Effective communications.

Directing and Motivating Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.

Controlling

The control function ensures that plans are being followed.

Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

Controlling The control function ensures that plans are being followed. Feedback in the form of performance

Planning and Control Cycle

Formulating long- and short-term plans (Planning)

Decision

Planning and Control Cycle Formulating long- and short-term plans (Planning) Decision Making Begin Comparing actual to

Making

Begin

Planning and Control Cycle Formulating long- and short-term plans (Planning) Decision Making Begin Comparing actual to
Planning and Control Cycle Formulating long- and short-term plans (Planning) Decision Making Begin Comparing actual to

Comparing actual to planned performance (Controlling)

Planning and Control Cycle Formulating long- and short-term plans (Planning) Decision Making Begin Comparing actual to

Implementing

plans (Directing and Motivating)

Planning and Control Cycle Formulating long- and short-term plans (Planning) Decision Making Begin Comparing actual to

Measuring

performance

(Controlling)

Comparison of Financial and Managerial Accounting Financial Accounting Managerial Accounting 1. Users External persons who make
Comparison of Financial and Managerial
Accounting
Financial Accounting
Managerial Accounting
1.
Users
External persons who
make financial decisions
Managers who plan for
and control an organization
2.
Time focus
Historical perspective
Future emphasis
3.
Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4.
Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5.
Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6.
GAAP
Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
7.
Requirement
Mandatory for
external reports
Not
Mandatory

Direct Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Direct Materials Raw materials that become an integral part of the product and that can be

Example: A radio installed in an automobile

Direct Labor

Those labor costs that can be easily traced to individual units of product.

Direct Labor Those labor costs that can be easily traced to individual units of product. Example:

Example: Wages paid to automobile assembly workers

Manufacturing Overhead

Manufacturing costs that cannot be traced directly to specific units produced.

Examples: Indirect materials and indirect labor
Examples: Indirect materials and indirect labor

Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Wages paid to employees who are not directly involved in production work.

Examples: maintenance workers, janitors and security guards.

Nonmanufacturing Costs

Selling Costs
Selling
Costs

Costs necessary to secure the order and deliver the product.

Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs
Administrative Costs
Administrative
Costs

All executive, organizational, and

clerical costs.

Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs

Product Costs Versus Period Costs

Product costs include direct materials, direct labor, and manufacturing overhead. Inventory Cost of Good Sold Sale
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Inventory
Cost of Good Sold
Sale
Balance
Income
Sheet
Statement
Period costs include all selling costs and administrative costs. Expense Income Statement
Period costs include all
selling costs and
administrative costs.
Expense
Income
Statement

Balance Sheet

Merchandiser

Current assets

Cash Receivables Merchandise Inventory

Manufacturer

Current Assets

Cash

Receivables

Inventories

Raw Materials Work in Process Finished Goods

Balance Sheet

Merchandiser Manufacturer Current assets Current Assets Cash Cash Materials waiting to Receivables  Merchandise Inventory Inventories
Merchandiser
Manufacturer
Current assets
Current Assets
Cash
Cash
Materials waiting to
Receivables
Merchandise Inventory
Inventories
Partially complete
products – some
material, labor, or
overhead has been
• Raw Materials
• Work in Process
• Finished Goods
added.
Completed products
awaiting sale.

The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

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

 

Manufacturing Company

Cost of goods sold:

Beg. finished goods inv.

$ 14,200

+ Cost of goods

manufactured

234,150

Goods available for sale - Ending

$ 248,350

finished goods inventory

(12,100)

= Cost of goods sold

$ 236,250

Basic Equation for Inventory Accounts

Withdrawals Beginning ++ balance Additions to inventory Ending == ++ from balance inventory
Withdrawals
Beginning
++
balance
Additions
to inventory
Ending
==
++
from
balance
inventory
Basic Equation for Inventory Accounts Withdrawals Beginning ++ balance Additions to inventory Ending == ++ from

Schedule of Cost of Goods Manufactured

Calculates the cost of raw material, direct labor, and manufacturing overhead used in production.

Calculates the manufacturing costs associated with goods that were finished during the period.

Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor, and manufacturing

Manufacturing Cost Flows

Income Balance Sheet Statement Costs Inventories Expenses Material Purchases Raw Materials Direct Labor Work in Process
Income
Balance Sheet
Statement
Costs
Inventories
Expenses
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Cost of
Finished
Goods
Goods
Sold
Selling and
Administrative
Period Costs
Selling and
Administrative

Cost Classifications for Predicting Cost Behavior

Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level
How a cost will react to changes in the level of activity within the relevant range.
How a cost will react to
changes in the level of
activity within the
relevant range.
Total variable costs
change when activity
changes.
Total fixed costs remain
unchanged when activity
changes.

Variable Cost

Your total texting bill is based on how many texts you send.

Total Texting Bill
Total Texting Bill

Number of Texts Sent

Variable Cost Your total texting bill is based on how many texts you send. Total Texting

Variable Cost Per Unit

The cost per text sent is constant at 5 cents per text.

Variable Cost Per Unit The cost per text sent is constant at 5 cents per text.
Cost Per Text Sent
Cost Per Text Sent

Number of Texts Sent

Monthly Cell Phone Contract Fee

Fixed Cost

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.

Monthly Cell Phone Contract Fee Fixed Cost Your monthly contract fee for your cell phone is
Monthly Cell Phone Contract Fee Fixed Cost Your monthly contract fee for your cell phone is

Number of Minutes Used

Within Monthly Plan

Monthly Cell Phone Contract Fee Fixed Cost Your monthly contract fee for your cell phone is

Monthly Cell Phone

Fixed Cost Per Unit

Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made.

Monthly Cell Phone Fixed Cost Per Unit Within the monthly contract allotment, the average fixed cost
Contract Fee
Contract Fee

Number of Minutes Used

Within Monthly Plan

Monthly Cell Phone Fixed Cost Per Unit Within the monthly contract allotment, the average fixed cost

Cost Classifications for Predicting Cost Behavior

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

End of Chapter 2

End of Chapter 2 2-24