Management

Accounting
Product Costing
  Managerial accounting is designed for internal users
 The goal of Managerial Accounting is to provide the
Managerial information managers need for
 Planning
Accounting  Control
 Decision making
  Unlike Financial Accounting, Managerial
Accounting:
 Is directed at internal users
Managerial vs  May deviate from GAAP
Financial  Presents more detailed information
Accounting  May present more nonmonetary information
 Places more emphasis on the future
 Direct and indirect costs
Direct costs are directly traceable to
a product, activity, or department,
indirect costs are not traceable
 Controllable and non-
controllable costs
A manager can influence
controllable costs but cannot
influence non- controllable costs
  Direct Materials
 Cost of materials directly traceable to items produced
 Materials not directly traceable are indirect materials

 Direct Labor
 Cost of labor directly traceable to items produced
 Labor costs not directly traceable are indirect labor

 Manufacturing Overhead
 Cost of manufacturing activities other than direct materials and
Manufacturing direct labor

Costs Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
Example: Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile

Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
Lubricants and cleaning supplies used
in the automobile assembly plant.

Maintenance workers, janitors and

The Product security guards.
Merchandising
and
Manufacturing
Firms
Common Manufacturing Overhead Costs
  Nonmanufacturing costs (also known as period costs)
are all costs that are not associated with the production
of goods
 Selling Costs
 Costs associated with securing and filling
customer orders e.g. advertising, sales salaries,
Nonmanufactu depreciation of sales equipment
ring Costs  General and Administrative Costs
 Costs associated with the firm’s general
management e.g. Human resources,
accounting, corporate headquarters and other
support costs
  Product Costs
 Costs assigned to goods produced (i.e. direct
materials, direct labor, and manufacturing
overhead)
 Included in inventory until goods sold
Product and
 Period Costs
Period Costs  Costs identified with accounting periods (i.e selling
and administrative expenses)
 Expensed in period incurred
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.
Relationships
Among Cost
Categories
 Balance Sheet Income
Costs Inventories Statement
Material Purchases Raw Materials Expenses

Direct Labor Work in

Manufacturing Process
Cost Flows Manufacturing
Overhead Finished Cost of
Goods Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
  Variable Costs
 Change in proportion to changes in volume or activity

Cost
Terminology
  Fixed Costs
 Do not change in response to changes in volume or activity

Cost
Terminology
  Opportunity Costs
 Values of benefits foregone when selecting one
alternative over another Example: If you were not attending
college, you could be earning Rs.
Cost 8,00,000 per year. Your opportunity
cost of attending college for one year
Terminology  Sunk Costs is Rs. 8,00,000
 Costs incurred in the past
 Not relevant to present decisions
Example: The company paid Rs. 5 million to
conduct market research for launching a new
product in 2018. The Rs. 5 million cost is
sunk because whether you launch the product
or not this cost cannot be reversed.
  Incremental analysis:
 Differences in revenues and costs between
alternatives are incremental
 Incremental revenue minus incremental cost
equals incremental profit
Example: You have a job paying $1,500 per month in your hometown. You
have a job offer in a neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Incremental
Analysis Differential revenue is:
$2,000 – $1,500 = $500
Differential cost is:
$300
Net Differential Benefit is:
$200
  Actual cost of Job 20123 is $21,547 + $10,258 + $3,219 =
$35,024
 Suppose the customer is only willing to pay $37,021.
Decision Should the sale be turned down? Probably not
Making /  Assuming 10% of overhead is variable and the
Incremental remainder is composed of fixed costs such as
depreciation, the incremental costs are $21,547 +
Analysis $10,258 + $321.90 = $32,126.90
  Overhead is made up of cost items indirectly related to
jobs produced
 Need to develop means of assigning overhead to jobs
Overhead  The rate is calculated as overhead cost divided by allocation
Allocation base
 A company had $50,000 of overhead cost and used 10,000
Rates labor hours
 Their rate is $50,000 / 10,000 = $5 per labor hour
  Choices of allocation bases include:
 Direct labor hours
 Direct labor cost
 Machine hours
Overhead  Direct material cost, among others
Allocation  Jobs with greater quantities of an allocation base will
Bases receive larger allocations of overhead
 The allocation base used should be strongly associated
with overhead cost
  Most firms use a single overhead rate
 Activity Based Costing (ABC) assigns overhead costs to
products using a number of allocation bases
Activity Based  The major activities which create overhead costs are
identified and grouped (pools)
Costing (ABC)  Multiple rates calculated by dividing each pool by its
corresponding activity (driver)
  Companies can develop rates using actual overhead
and quantities of the base
 Most do not do this because actual costs are not known until
Predetermined the end of the period

Overhead  Overhead rates are typically based on estimates of

overhead cost and the base
Rates  Overhead rates calculated this way are called predetermined
overhead rates
 Overapplied Overhead Underapplied Overhead
 If applied overhead is
 If actual overhead is greater
greater than actual
than applied overhead,
Overapplied overhead, overhead is
overapplied overhead is underapplied
 Underapplied overhead is
and  Overapplied overhead is
eliminated at the end of the
eliminated at the end of
Underapplied the period as follows: period as follows:
 If a small amount, debit
 If a small amount, debit
Overheads Manufacturing Overhead
Cost of Goods Sold and
credit Manufacturing
and credit Cost of Goods Overhead
Sold  If a relatively large
 If relatively large amount, amount, apportion and
apportion and close to close to Work in Process,
Work in Process, Finished Finished Goods and COGS
Goods and COGS