Managerial Accounting

and Cost Concepts

Chapter 2

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Objectives
 Distinguish between managerial and financial
accounting
 Identify the three basic categories of manufacturing
costs
 Prepare an income statement including calculation of
the cost of goods sold
 Prepare a schedule of cost of goods manufactured
 Understand cost classifications
What are the activities of a
manager?
 Three major activities of a
manager
 Planning
 Directing and motivating
 Controlling
Planning

Identify
alternatives.

Select alternative that does

the best job of furthering
organization’s objectives.

Develop budgets to guide

progress toward the
selected alternative.

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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.

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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.

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Define the three major activities of
a manager?
Planning and Control Cycle
Formulating plans
Begin

Decision
?
Making ?

Measuring
performance
(Controlling)

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Planning and Control Cycle
Formulating long-
Begin
and short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
(Controlling)

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What are the four steps in the
planning and control cycle?
 What are the differences between
financial and managerial accounting?
 Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users ……….. who Managers who plan for
make financial decisions and control an organization

2. Time focus Historical perspective …….emphasis

3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness ? ?

5. Subject Primary focus is on Focuses on segments

the whole organization of an organization

6. Accounting ? ?
Standards
7. Requirement Mandatory for Not
external reports Mandatory

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Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial 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. Accouting Must follow Need not follow

Standards
7. Requirement Mandatory for Not
external reports Mandatory

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 What are the major differences
between financial and managerial
accounting?
Exercise 2-1
List costs incurred by a
manufacturing company
What are the three major elements of
product costs in a manufacturing
company?
Direct Materials

Raw materials that become an integral

part of the product and that can be
conveniently traced directly to it.

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Direct Labor

Those labor costs that can be easily

traced to individual units of product.

2-20
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.

Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
work.

2-21
Define:
- Direct material
- Direct labor
- Indirect material
- Indirect labor
- Manufacturing overhead
Exercise 2-2
Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.

2-24
Product Costs Versus Period Costs

Product include all the Period costs are all the

costs that are involved in costs that are not
acquiring or making a product costs.
product

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement

2-25
Explain the difference between a
product cost and a period cost
Prime Cost Versus Conversion Cost

Prime cost is the sum Conversion cost is

of direct materials the sum of direct
cost and direct labor labor cost and
cost. manufacturing
overhead cost.

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Exercise 2-3
Balance Sheet

Merchandiser Manufacturer
Current assets Current Assets
 Cash  Cash
 Receivables  Receivables
 Merchandise Inventory  Inventories
• Raw Materials
• Work in Process
• Finished Goods

2-29
Describe how the inventory account of
a manufacturing company differ from
the inventory account of merchandising
company.
Balance Sheet

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

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The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $ 248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $ 236,250

2-32
Basic Equation for Inventory Accounts

Withdrawals
Beginning Additions Ending
balance + to inventory = balance + from
inventory

2-33
 Please rewrite the equation used to
determined COGS for a merchandising
company?
 Please rewrite the equation used to
determined COGS for a manufacturing
company?
The Income Statement

2-36
The Income Statement

2-37
Exercise 2-4
Schedule of Cost of Goods Manufactured

2-39
The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $ 248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $ 236,250

2-40
Describe the schedule of cost of goods
manufactured. How does it tie into the
income statement??
Exercise 2-5
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
2-43
Why are product costs sometimes called
inventoriable costs? Describe the flow of
such costs in a manufacturing company
from the point of incurrence until they finally
become expenses on the income statement.
Cost Classifications for Predicting Cost
Behavior

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.

2-45
Variable Cost

Your total texting bill is based on how

many texts you send.
Total Texting Bill

Number of Texts Sent

2-46
Variable Cost Per Unit

The cost per text sent is constant at

5 cents per text.

Cost Per Text Sent

Number of Texts Sent

2-47
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

Number of Minutes Used

Within Monthly Plan
2-48
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

Contract Fee
Number of Minutes Used
Within Monthly Plan
2-49
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 remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

2-50
“The variable cost per unit varies with
output, whereas the fixed cost per unit
is constant.” Do you agree? Explain.
Exercise 2-6
Cost Classifications for Assigning Costs to
Objects

A cost object is anything for

which cost data are desired.
 A direct cost is a cost that
can be easily and
conveniently traced to a
specified cost object.
 An indirect cost is a cost
that cannot be easily and
conveniently traced to a
specified cost object.

2-53
Exercise 2-7
Cost Classifications for Decision Making

Decisions involve choosing between alternatives.

 A difference in costs between any two
alternatives is known as a differential cost.

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Cost Classifications for Decision Making

2-56
Cost Classifications for Decision Making

2-57
Cost Classifications for Decision Making

Decisions involve choosing between alternatives.

 A difference in costs between any two
alternatives is known as a differential cost.
 Opportunity cost is the potential benefit that
is given up when one alternative is selected over
another.

2-58
Cost Classifications for Decision Making

Vicki has a part-time job that pays $200

per week while attending college. She
would like to spend a week at the beach
during spring break, and her employer
has agreed to give her the time off, but
without pay. What would be the
opportunity cost of taking the week off to
be at the beach?

2-59
Cost Classifications for Decision Making

Decisions involve choosing between alternatives.

 A difference in costs between any two
alternatives is known as a differential cost.
 Opportunity cost is the potential benefit that
is given up when one alternative is selected over
another.
 A sunk cost is a cost that has already been
incurred and that cannot be changed by any
decision made now or in the future

2-60
Cost Classifications for Decision Making

Assume that a company paid $50,000 several years

ago for a special-purpose machine. The machine was
used to make a product that is now obsolete and is no
longer being sold. The company plans to purchase a
new machine of $100,000. Should the $50,000 affect
the decision on the new machine purchase?

2-61
Exercise 2-8
Is it possible for costs such as salaries or
depreciation to end up as assets on the
balance sheet? Explain.
Only variable costs can be differential costs.
Do you agree? Explain.
End of Chapter 2

2-65