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Building Blocks of

Managerial
Accounting
CHAPTER 2

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Distinguish among service,


merchandising, and manufacturing
companies

OBJECTIVE 1

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Service Companies
Provide an intangible service only
Largest sector in Canada
Examples
Accountants
Banks
Doctors
Insurance companies

No inventory for sale to clients


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Merchandising
Companies
Resell products purchased from
suppliers
Retailers vs. Wholesalers
Examples
Rona
Loblaws
Le Chteau

One inventory account


merchandise
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Manufacturing
Companies
Use labour and other inputs to
convert raw materials into finished
products
Examples
Bombardier
Clodhoppers
McCain Foods Ltd
Rocky Mountain Bicycles

3 inventory accounts
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Manufacturing Companies
(contd)
Three inventory accounts
Raw materials
Work in process
Finished goods
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Describe the value chain and its elements

OBJECTIVE 2

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Value Chain
Activities that add value to products
and services and cost money
R&D

Design

Customer
Service

Distribution

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Production/
Purchases

Marketing

Distinguish between direct and indirect


costs

OBJECTIVE 3

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Cost Object
Anything for which managers
want a separate measurement
of cost
Direct cost
Can easily be traced to the cost
object

Indirect cost
Relates to the cost object but
cant
betraced
directly
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2015 Pearson Canada
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Identify the inventoriable product costs


and period costs of merchandising and
manufacturing firms

OBJECTIVE 4

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Two Definitions of
Product Cost
Total costs used internally only
(may include all resources used
throughout the value chain)
Inventoriable product costs used
for external reporting (defined by IFRS
and ASPE)
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Total Costs, Inventoriable Product Costs, and


Period Costs

Inve
ntori
a
Prod
uct C ble
osts
R&D

Customer
Service

Design

Distribution

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Production/
Purchases

Marketing

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Period Costs: All Costs Incurred in


the Other Stages of the Value Chain

R&D

Distribution

Marketing

Per
io
d
C
o
s
t
s

Customer
Service

Design

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Inventoriable Product Costs:


Merchandiser
Purchase price from
suppliers
+ Freight-in
+ Import duties or tariffs

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Inventoriable Product
Costs: Manufacturer
Direct materials
Direct Costs
Direct labour
Manufacturing overhead Indirect Costs

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Manufacturing Overhead
Indirect costs related to manufacturing that
are not direct materials or direct labour
Indirect materials
Indirect labour
Other indirect manufacturing
overhead

Depreciation
Utilities
Repairs and maintenance
Etc.
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Prime and Conversion


Costs
Direct
labour

Direct Materials

Prime Costs

Manufacturing
Overhead

Conversion
Costs

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Prepare financial statements for service,


merchandising, and manufacturing
companies

OBJECTIVE 5

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Income Statement for a


Service Company

Simplest income statement


All costs are period costs

Service revenues
Operating expenses
Operating income

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Income Statement of a
Merchandiser
Separates product costs from period
costs
Sales revenue
- Cost of goods sold (product costs)
= Gross profit
- Operating expenses (period costs)
= Operating income
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Cost of Goods Sold Calculation:


Merchandiser
Beginning inventory
+ Purchases
+ Import duties or tariffs
+ Freight-in
=Cost of goods available for sale
- Ending inventory
= Cost of goods sold
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Income Statement for a


Manufacturer
Looks the same as a merchandiser
Calculation of cost of goods sold more
complicated

Sales Revenue
- Cost of goods sold (product
costs)
= Gross profit
- Operating expenses (period
costs)
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Cost of Goods Sold Calculation:


Manufacturer
Beginning finished goods
inventory
+ Cost of goods manufactured
= Cost of goods available for sale
- Ending finished goods inventory
= Cost of goods sold

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Cost of Goods Manufactured


Calculation: Manufacturer

Beginning work in process


inventory
+ Direct materials used
+ Direct labour
+ Manufacturing overhead
= Total manufacturing costs to
account for
- Ending work in process
inventory
= Cost of goods manufactured
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Direct Materials Used


Calculation:
Manufacturer
Beginning raw materials
inventory
+ Purchases of direct materials
including freight-in and any
import duties
= Materials available for use
- Ending raw materials
inventory
= Direct materials used
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Product and Period Costs


Type of
Company

Inventoriable
Product Costs

Period
Costs

Service Company

None

All costs along the


value chain

Merchandiser

Purchases plus cost of


All costs except total
freight, import duties,
purchases
etc.

Manufacturer

DM, DL, MOH

All costs except DM,


DL, MOH

Accounting
Treatment

Inventory on balance
sheet until sold

Immediately
expense

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Manufacturing Companies
Inventory Accounts
Raw Materials Inventory
Materials used
Beginning inventory
In work in
Purchases & freight
process
Ending inventory

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Manufacturing Companies
Inventory Accounts
Work in Process
Inventory
Beginning inventory
Cost of goods
Materials used
Manufactured
from raw
and sent to
materials
finished goods
Direct labour
Manufacturing
overhead
Ending inventory
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Manufacturing Companies
Inventory Accounts
Finished Goods
Inventory
Income Statement
Beginning inventory Cost of goods
sold
Cost of goods
manufactured
Ending inventory

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Balance Sheet
Differences
Type of Company

Inventory Accounts

Service Company

None

Merchandiser

Merchandise Inventory
Raw materials, work in process,

Manufacturer
and finished goods inventory

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Describe costs that are relevant and


irrelevant to decision making

OBJECTIVE 6

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Controllable and
Uncontrollable Costs
Controllable management can
influence or change cost (e.g. local
advertising)
Uncontrollable management cannot
change or influence cost in the shortrun (e.g. property taxes)

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Relevant and Irrelevant


Costs
Relevant: costs that differ between
alternatives
Differential costs
Changes in cost between competing
alternatives

Irrelevant: costs that do not differ


Sunk costs
Costs that dont change between
alternatives
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Classify costs as fixed or variable, and


calculate total and average costs at
different volumes

OBJECTIVE 7

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Cost behaviour
Fixed costs stay constant in total
over a wide range of activity levels

Changes per unit as activity levels


change

Variable costs change in total in


direct proportion to changes in volume
Stays constant per unit as activity
levels change
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Fixed Costs: Stay constant in total


over a wide range of activity levels

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Variable Costs: Change in total


in direct proportion to changes in
volume
Assume we pay 5% sales commissions on all sales. The
cost of sales commissions increase proportionately with
increases in sales.

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Total Cost
Total cost = Fixed costs + (Variable
cost per unit x number of units)
Example:
Fixed costs = $20,000
Variable cost per unit = $50 per unit
Number of units = 100
Total Cost = $20,000 + ($50 x 100)
= $25,000
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Average Cost
Total cost number of units = Average
cost
Example:
$25,000 = $250 per unit
100 units
The average cost per unit is NOT appropriate for predicting
total costs at different levels of output.
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