Introduction to Cost & Managerial

Accounting

LECTURE 1

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 1
DISTINGUISH MANAGERIAL ACCOUNTING
FROM FINANCIAL ACCOUNTING

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Financial Accounting versus Managerial Accounting

Financial accounting is for external reporting

◦ Responsible to:
◦ Owners and creditors for their investment decisions
◦ Regulatory agencies, such as the Securities Exchange Commission, the Federal Trade Commission, and
the Internal Revenue Service
◦ Customers and society to ensure that the company acts responsibly

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Financial Accounting versus Managerial Accounting

Managerial accounting is for internal planning and controlling

◦ Responsible to:

◦ Customers for safe and defect-free products and services

◦ Creditors for repaying principal and interest
◦ Employees for a safe and productive work environment
◦ Suppliers and vendors for timely payments
◦ Owners for providing a return on the owners’ investment
◦ Others: governments and communities

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 Planning and Controlling
Planning—choosing goals and deciding how to achieve them
◦ Common goal—to increase operating income (profits)
◦ Achieved by raising prices or advertising more

Budget—a mathematical expression of the plan

◦ Used to coordinate the business’s activities
◦ Shows the expected financial impact of decisions
◦ Helps identify the resources needed to achieve goals

Controlling—implementing the plans and evaluating operations

◦ By comparing actual results to the budget
◦ Cost data helps managers make decisions

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Management versus Financial Accounting

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QUICK QUIZ
Managerial and financial accounting differ in many aspects.
1. For each of the following, indicate whether the statement relates to
managerial accounting (MA) or financial accounting (FA):

FA
_____a. Helps investors make investment decisions.
MA
_____ b. Provides detailed reports on parts of the company.
MA
_____ c. Helps in planning and controlling operations.
FA
_____ d. Reports must follow generally accepted accounting principles
(GAAP).
FA
_____ e. Reports audited annually by independent certified public
accountants.
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 2
CLASSIFY COSTS AND PREPARE AN
INCOME STATEMENT FOR A SERVICE
COMPANY

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 Service Company
Service companies sell their time, skills, and knowledge
Seek to provide services with:
◦ High quality
◦ Reasonable prices
◦ Timely delivery

Simplest accounting
◦ No inventory or products for sale

All costs are period costs

◦ Incurred and expensed in same accounting period

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Income Statement of a Service Company

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Income Statement of a Service Company

Cost per service

◦ Helps to set the price of each service provided

Consider all operating expenses (period costs)

Unit cost per service

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QUICK QUIZ:

Duncan and Oates provides hair cutting services in the local community. In
February, the business incurred the following operating costs to cut the hair
of 230 clients:
Hair supplies expense............................ $ 805
Building rent expense ............................ 1,150
Utilities.................................................. 184
Depreciation on equipment ................... 46

Duncan and Oates earned $5,200 in revenues from haircuts for the month of
February.
$3,015
1. What is the net operating income for the month?

$ 9.50
2. What is the cost of one haircut?
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 3
CLASSIFY COSTS AND PREPARE AN INCOME
STATEMENT FOR A MERCHANDISING COMPANY

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 Merchandising Company

Resell products purchased from suppliers

Keep an inventory of products
Cost of goods sold is a major expense
◦ Product costs flow through the inventory
◦ GAAP requires companies to record inventoriable product costs as an asset until
sold

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 Product Costs
Includes cost to purchase goods plus freight-in

Beginning Inventory
+ Net Purchases
+ Freight In
– Ending Inventory
= Cost of Goods Sold

Managerial accounting distinguishes inventoriable product costs from period

costs

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Product versus Period Costs
Product costs Period costs

• Part of • Not part of

inventory inventory
• Expensed • Expensed
when sold when incurred

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Merchandising Company: Income Statement

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 Unit Cost Per Product

Unit cost per product—helps managers set appropriate selling prices

Formula:

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 S16-6 : COMPUTING COST OF GOODS SOLD

The Tinted View, a retail merchandiser of auto windshields, has the following
information:

Web site maintenance . . . . . . . $ 7,100

Delivery expense . . . . . . . . . . 900
Freight in . . . . . . . . . . . . . . . . 2, 900
Purchases . . . . . . . . . . . . . . . . 39,000
Ending inventory . . . . . . . . . . 4,900
Revenues . . . . . . . . . . . . . . . . 57,000
Marketing expenses . . . . . . . . 9,900
Beginning inventory . . . . . . . . 7,900

Compute The Tinted View’s cost of goods sold.

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 3

CLASSIFY COSTS AND PREPARE AN INCOME

STATEMENT AND STATEMENT OF COST OF
GOODS MANUFACTURED FOR A
MANUFACTURING COMPANY

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 Manufacturing Companies
Use labor, plant, supplies, and facilities to convert raw materials into finished
products
Three kinds of inventory Finished goods
inventory
Work in process
inventory
Materials
inventory

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 Types of Cost
Cost object:
◦ Anything for which managers want a separate measurement of cost
◦ Examples:
◦ A product, department, or activity

Direct costs Indirect costs

Can be directly traced to a cost object Needed to finish products
Direct materials
Cannot be directly traced to a
Direct labor
cost object
Manufacturing overhead

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 Inventoriable Product Costs

Direct materials
◦ Become a physical part of the finished product
Conversion
Direct labor Cost
◦ Wages of employees who convert
materials into the company’s products

Manufacturing overhead
◦ All other costs other than direct materials and labor

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 Manufacturing Overhead
Includes only indirect costs related to manufacturing
◦ Does NOT include costs for selling, general, or administrative functions

Examples:
◦ Indirect materials
◦ Become part of finished product, but cannot be conveniently or cost-effectively traced
◦ Indirect labor
◦ Manufacturing wages that are not easily traced to products
◦ Plant managers & maintenance

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Manufacturer’s Inventoriable Product Costs

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 Comparison of Product and Period Costs
Type Inventoriable product costs
Service None
company
Merchandising Purchases plus freight in
company
Manufacturing Direct materials, direct
company labor, and manufacturing
overhead (including indirect
materials; indirect labor;
depreciation on the
manufacturing plant and
equipment; plant insurance,
utilities, and property taxes
Period costs (Expenses)
Salaries, depreciation, utilities,
insurance, property taxes,
advertising expenses
Salaries, depreciation, utilities,
insurance, property taxes on
storage building, advertising,
delivery expenses
Delivery expense; depreciation
expense, utilities, insurance,
and property taxes on
executive headquarters
(separate from the
manufacturing plant);
advertising;
CEO’s salary
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Manufacturing Company: Income Statement

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Inventoriable Product Costs and Period Costs
Purchases of
materials
Materials
Inventory INCOME STATEMENT

Sales
Direct labor & Work in
manufacturing Process -
overhead
Inventory When
sales Cost of
occur Goods Sold
Finished -
Goods Operating
Period
Inventory Costs Expenses
=
Operating Income
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Cost of Goods Manufactured

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 Flow of Costs Through a Manufacturer’s Inventory Account
Direct materials inventory Work in process Finished goods
inventory inventory

Beginning inventory Beginning inventory Beginning inventory

+ Purchases and freight-in + Direct materials used + Cost of goods

manufactured

= Direct materials available + Direct labor = Cost of goods available

for use for sale
+ Manuf. overhead

- Ending inventory - Ending inventory - Ending inventory

= Direct materials used = Cost of goods = Cost of goods sold

manufactured

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 QUICK QUIZ

You are a new accounting intern at Cookie Messages. Your

boss gives you the following information:

Purchases of direct materials . . . . . . . . . . . . . $ 6,400

Freight in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . 900
Ending inventory of direct materials . . . . . . . 1,500
Beginning inventory of direct materials . . . . . 4,000

Compute direct materials used.

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 S16-12 : COMPUTE COST OF GOODS MANUFACTURED

All Pro Golf Company had the following inventory data for the year
ended January 31, 2012:

Direct materials used . . . . . . . . $ 12,000

Manufacturing overhead . . . . . 20,000
Work in process inventory:
Beginning . . . . . . . . . . . . 7,000
Ending . . . . . . . . . . . . . . 5,000

Direct labor . . . . . . . . . . . . . . . 11,000

Finished goods inventory . . . . . 9,000

Compute All Pro’s cost of goods manufactured for 2012.

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 Summary

Managerial accounting focuses on the information

needs of internal users. Generally, managerial
accounting reports provide more details so that
managers have the information they need to plan and
control costs. The benefits of the managerial
accounting system must outweigh its cost.

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 Summary

Service companies sell their time, skills, or knowledge. All of their

operating expenses are normally considered period costs and are
considered part of the cost of providing each service unit. In larger,
more advanced service companies, the operating expenses (period
costs) may be split between service costs (part of the cost per unit
of service) and non-service costs (expenses unrelated to the
service).
Merchandising companies resell products they buy from suppliers.
Merchandisers keep an inventory of products, and managers are
accountable for the purchase, storage, and sale of the products.
Inventory is an asset until it is sold. Cost of goods sold is the total
cost of merchandise inventory sold during the period, and includes
the freight to get the goods into the warehouse. COGS divided by
total units sold equals the cost per unit for the merchandiser.
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 Summary
The manufacturer creates a product from raw materials by adding
direct labor and manufacturing overhead. Because at any point in
time products are at various stages of completion, manufacturers
have three inventory accounts: Raw materials, Work in process, and
Finished goods. The schedule of cost of goods manufactured
captures these production costs to determine the cost of goods
manufactured for a period. Product cost per unit is calculated by
dividing cost of goods manufactured by the total number of units
produced.

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