Cost and Managerial Accounting

Syllabus
The nature, source and purpose of management information
Accounting for management
Sources of data
Cost classification
Cost behaviour
Presenting information

Cost accounting techniques

Accounting for materials
Accounting for labour
Accounting for overheads
Absorption and marginal costing
Job, batch and service costing
Process costing
Process costing, joint products and by-products
Alternative costing principles
Syllabus
Budgeting
Forecasting
Budgeting
The budgetary process
Making budgets work
Capital expenditure budgeting
Methods of project appraisal

Standard costing
Standard costing
Cost variances
Sales variances and operating statements

Performance measurement
Performance measurement
Applications of performance measurement
Syllabus
DECENTRALISATION AND EVALUATION OF BUSINESS
UNITS
· Decentralisation
· Reasons for decentralisation
· organisation of business units
· Performance measures for business units
· Return on investment (ROI)
· Residual Income (RI)

TRANSFER PRICING AND CONTROL IN MULTINATIONAL

OPERATIONS
· Transfer pricing
· Objectives
· Alternative methods
· Control in multinational operations
· Multinational transfer pricing and tax considerations
· Performance measurement issues

INCENTIVE AND COMPENSATION SYSTEMS

· Expectancy theory
· Tying rewards to performance
· Types of incentive and compensation systems
Syllabus
CONTEMPORARY ISSUES IN MANAGEMENT ACCOUNTING
· Management accounting and knowledge management
The nature, source and purpose
of management information
 AGENDA

1. DEFINITION OF MANAGEMENT ACCOUNTING

2. OBJECTIVES OF MANAGEMENT ACCOUNTING

3. HOW MANAGERIAL ACCOUNTING ADDS VALUE TO THE ORGANIZATION

4. FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

5. MAJOR THEMES IN MANAGERIAL ACCOUNTING

6. REFERENCES

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 DEFINITION OF MANAGEMENT ACCOUNTING

Managerial accounting is the process of

 Identifying

 Measuring

 Analyzing

 Interpreting

 Communicating information

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 OBJECTIVES OF MANAGEMENT ACCOUNTING

Planning Reporting
Facilitates organizing

Controlling

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 OBJECTIVES OF MANAGEMENT ACCOUNTING

Formulating Long-and Begin

Short-Term Plans (Planning)

Comparing Actual Implementing

to Decision the Plans
Planned Performance Making (Directing and Motivating)
(Controlling)

Measuring
Performance (Controlling)
 HOW MANAGERIAL ACCOUNTING ADDS
VALUE TO THE ORGANIZATION

Providing information for decision making and planning.

Assisting managers in directing and controlling activities.
Motivating managers and other employees towards
organization’s goals.
Measuring performance of subunits, activities, managers, and
other employees.
Assessing the organization’s competitive position.

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The Differences Between Managerial and Financial Accounting

13
 FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

Managerial accounting Financial accounting

provides information provides information

for managers of an to stockholders,

organization who creditors and others

direct and control who are outside

its operations. the organization.

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 FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

Financial Accounting Managerial Accounting

Users of Accounting Information

Shareholders Management
Creditors
Government
General Public
Management
 FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

Financial
Statements
Financial Accounting

Users: External Users and

Management
Characteristics: Objective

Prepared according to
GAAP

Prepared periodically

Business entity
 Management
Reports
Managerial Accounting

Users: Management
Characteristics: Objective and subjective

Prepared according to management

needs

Prepared periodically
or as needed

Business entity or segment

 MAJOR THEMES IN MANAGERIAL ACCOUNTING

Behavioral
Issues Costs and
Benefits

Information Evolution and

and Incentives Adaptation

Managerial
Accounting
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 EVOLUTION AND ADAPTATION IN MANAGERIAL ACCOUNTING

E-Business Product Life Cycles

Service vs. Time-Based
Manufacturing Firms Competition

Change Information and

Emergence of New Communication
Industries Technology

Global Competition Just-in-Time Inventory

Focus on the Customer Total Quality Management

Cross-Functional Teams Continuous Improvement

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COST TERMS, CONCEPTS AND CLASSIFICATIONS- 1ST PART
 TABLE OF CONTENTS

1. OVERVIEW OF COST TERMS

2. COST CLASSIFICATIONS IN MANUFACTURING COMPANIES

3. COMPARING PRODUCT AND PERIOD COSTS

4. COST CLASSIFICATIONS ON FINANCIAL STATEMENTS

5. REFERENCES
 OVERVIEW OF COST TERMS

The work of managers focuses on:

Planning- which includes setting objectives and outlining how

to attain these objectives

Controlling– which includes the steps to take to ensure that

objectives are realized.

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 OVERVIEW OF COST TERMS

Preparing an income statement and balance sheet

Predicting changes in cost due to changes in activity
Assigning costs
Making decisions

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 Comparing Merchandising and Manufacturing
Activities

Merchandisers . . . Manufacturers . . .
• Buy finished goods. • Buy raw materials.
• Sell finished goods. • Produce and sell finished goods.

MegaLoMart
 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION

Direct Direct Manufacturing

Labor Material Overhead

PRODUCT

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 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION

Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and
manufacturing overhead. These costs are incurred to make a product.
 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION

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

Example: Wages paid to automobile assembly workers

 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION

Direct Materials

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

Example: A radio installed in an automobile

 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION

Manufacturing Overhead

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

Examples: Indirect labor and indirect materials

Wages paid to employees who are Materials used to support the

not directly involved in production production process.
work.
Examples: maintenance workers, Examples: lubricants and cleaning
janitors and security guards. supplies used in the automobile
assembly plant.
 NON-MANUFACTURING COSTS

Marketing or Selling
Administrative Cost
Cost

Costs necessary to get the All executive, organizational,

order and deliver the product. and clerical costs.
 Product Costs Versus Period Costs

Product costs include direct materials, Period costs include all marketing or
direct labor, and manufacturing selling costs and administrative
overhead. costs.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
 Quick Quiz 1

Which of the following costs would be considered a period rather than a

product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
 Quick Quiz 1

Which of the following costs would be considered a period rather than a

product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
 COST CLASSIFICATIONS ON FINANCIAL STATEMENTS

Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses Prepaid Expenses
Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods
COST CLASSIFICATIONS ON FINANCIAL STATEMENTS
MANUFACTURER’S INCOME STATEMENT

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 COST CLASSIFICATIONS ON FINANCIAL STATEMENTS
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
COST CLASSIFICATIONS ON FINANCIAL STATEMENTS

Beginning Inventory Flows

Additions Available
balance + $$$ = $$$$$
$$

_ Ending
Available Withdrawals
$$$$$ $$$ = balance
$$
 Quick Quiz 2

If your inventory balance at the beginning of the month was $1,000, you
bought $100 during the month, and sold $300 during the month, what would
be the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200. $1,000 + $100 = $1,100
D. $ 200. $1,100 - $300 = $800
 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.
 PRODUCT COST FLOWS

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used As items are removed from raw materials
in production inventory and placed into the production
process, they are
called direct materials.
 PRODUCT COST FLOWS

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

Conversion costs are
materials inventory + Direct labor
+ Raw materials + Mfg. overhead costs incurred to
purchased = Total manufacturing convert the direct
= Raw materials costs
material into a
available for use
in production finished product.
– Ending raw materials
inventory
= Raw materials used
in production
 PRODUCT COST FLOWS

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 manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs incurred during the period
= Raw materials used are added to the beginning balance of work in
in production
process.
 PRODUCT COST FLOWS

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 manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending work in
Costs associated with the goods that are process inventory
= Cost of goods
completed during the period are transferred to manufactured
finished goods inventory.
 PRODUCT COST FLOWS

Work
In Process Finished Goods

Beginning w ork in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total w ork in process = Cost of goods
for the period available for sale
– Ending w ork in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
 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
 Quick Quiz 3

Beginning raw materials inventory was $32,000. During the month, $276,000
of raw material was purchased. A count at the end of the month revealed
that $28,000 of raw material was still present. What is the cost of direct
material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
 Quick Quiz 3

Beginning raw materials inventory was $32,000. During the month, $276,000
of raw material was purchased. A count at the end of the month revealed
that $28,000 of raw material was still present. What is the cost of direct
material used?
A. $276,000
B. $272,000
Beg. raw materials $ 32,000
C. $280,000 + Raw materials
D. $ 2,000 purchased 276,000
= Raw materials available
for use in production $ 308,000
– Ending raw materials
inventory 28,000
= Raw materials used
in production $ 280,000
 Quick Quiz 4

Direct materials used in production totaled $280,000. Direct labor was

$375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
 Quick Quiz 4

Direct materials used in production totaled $280,000. Direct labor was

$375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000 Direct Materials $ 280,000
C. $655,000 + Direct Labor 375,000
+ Mfg. Overhead 180,000
D. Cannot be determined.
= Mfg. Costs Incurred
for the Month $ 835,000
 Quick Quiz 5

Beginning work in process was $125,000. Manufacturing costs incurred

for the month were $835,000. There were $200,000 of partially
finished goods remaining in work in process inventory at the end of the
month. What was the cost of goods manufactured during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
 Quick Quiz 5

Beginning work in process was $125,000. Manufacturing costs

incurred for the month were $835,000. There were $200,000 of
partially finished goods remaining in work in process inventory at the
end of the month. What was the cost of goods manufactured during
the month?
A. $1,160,000
B. $ 910,000 Beginning work in
C. $ 760,000 process inventory $ 125,000
+ Mfg. costs incurred
D. Cannot be determined. for the period 835,000
= Total work in process
during the period $ 960,000
– Ending work in
process inventory 200,000
= Cost of goods
manufactured $ 760,000
 Quick Quiz 6

Beginning finished goods inventory was $130,000. The cost of goods

manufactured for the month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
 Quick Quiz 6

Beginning finished goods inventory was $130,000. The cost of goods

manufactured for the month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000. $130,000 + $760,000 = $890,000
D. $760,000. $890,000 - $150,000 = $740,000
QUESTIONS???

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