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Managerial Accounting

and Cost Concepts


Chapter 2

McGrawHill/Irwin Copyright2010byTheMcGrawHillCompanies,Inc.Allrightsreserved.
Work of Management
Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organizations
organizations objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
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
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

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

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

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

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)

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Comparison of Financial and Managerial
Accounting

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1:General Cost Classification

1: Direct Material
2: Direct Labor
3: Manufacturing overhead (includes indirect labor and
Material)
Manufacturing Cost = 1+2+3
Non Manufacturing Cost: Selling and Administrative
cost.
Indirect Labor: Production supervisor, Materials handling
staff, Quality control staff.
Indirect Material: Cleaning supplies, Disposable safety
equipment, Disposable tools, Fittings and fasteners,
Glue, Tape, Oil
Direct Materials

Raw materials that become an integral


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

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile

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Direct Labor

Those labor costs that can be easily


traced to individual units of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers

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Manufacturing Overhead

Manufacturing costs that cannot be traced


directly to specific units produced.

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

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Nonmanufacturing Costs

Administrative
Costs

All executive,
organizational, and
clerical costs.

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2: Product Costs Versus Period Costs

Product costs or Period costs include


inventoriable all selling costs and
include direct administrative
materials, direct costs.
labor, and
manufacturing
Inventory Cost of Good Sold Expense
overhead.
Sale

Balance Income Income


Sheet Statement Statement

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Balance Sheet

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

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Balance Sheet

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

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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
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

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3: Prime Vs Conversation Cost
Prime cost = Direct material + Direct Labor
Conversion Cost = Direct Labor + Direct
Manufacturing overhead
Basic Equation for Inventory Accounts

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

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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.

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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
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4: Cost Classifications for Predicting Cost
Behavior

How
How aa cost
cost will
will react
react
to
to changes
changes in in the
the
level
level ofof activity
activity within
within
the
the relevant
relevant range.
range.
Total variable costs
Total variable costs
change
change when
when activity
activity
changes.
changes.
Total fixed costs
Total fixed costs
remain
remain unchanged
unchanged
when
when activity
activity changes.
changes.

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Variable Cost

Your total texting bill is based on how


many texts you send.
Total Texting Bill

Number of Texts Sent

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Variable Cost Per Unit

The cost per text sent is constant at


5 cents per text.

Cost Per Text Sent


Number of Texts Sent

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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
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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
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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.

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5: Cost classification for assigning cost to
cost object
Direct cost = is the cost that can be easily and
conveniently traced to a specified cost object
Indirect Cost = is the cost that can not be
traced to specified cost object.
End of Chapter 2

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