Chapter 1 Managerial Accounting and Cost Concepts PowerPoint Authors:

Chapter 1 Managerial Accounting and Cost Concepts PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All

1-2 Work of Management Planning Planning Directing Directing and and Motivating Motivating Controlling Controlling

1-3 Planning Identify Identify alternatives. alternatives. Select Select alternative alternative that that does does the the best best job job of of furthering furthering organization’s organization’s objectives. objectives. Develop Develop budgets budgets to to guide guide progress progress toward toward the the selected selected alternative. alternative.

1-4 Directing and Motivating Directing and motivating involves managing dayto-day activities to keep the organization running smoothly. Employee work assignments. Routine problem solving. Conflict resolution. Effective communications.

1-5 Controlling The The control control function function ensures ensures that that plans plans are are being being followed. followed. Feedback Feedback in in the the form form of of 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.

1-6 Planning and Control Cycle Formulating Formulatinglonglongand andshort-term short-termplans plans (Planning) (Planning) Comparing Comparingactual actual to toplanned planned performance performance (Controlling) (Controlling) Decision Making Measuring Measuring performance performance (Controlling) (Controlling) Begin Implementing Implementing plans plans(Directing (Directing and andMotivating) Motivating)

1-7 Learning Objective 1 Identify the major differences and similarities between financial and managerial accounting.

1-8 Comparison of Financial and Managerial Accounting

1-9 Learning Objective 2 Identify and give examples of each of the three basic manufacturing cost categories.

1-10 Manufacturing Costs Direct Direct Materials Materials Direct Direct Labor Labor The Product Manufacturing Manufacturing Overhead Overhead

1-11 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

1-12 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

1-13 Manufacturing Overhead Manufacturing costs cannot be traced directly to specific units produced. Examples: Examples: Indirect Indirect materials materials and and indirect indirect labor labor Materials used to support the production process. Examples: Lubricants and cleaning supplies used in the automobile assembly plant. Wages paid to employees who are not directly involved in production work. Examples: Maintenance workers, janitors and security guards.

1-14 Classifications of Nonmanufacturing Costs Selling Costs Administrative Costs Costs necessary to get the order and deliver the product. All executive, organizational, and clerical costs.

1-15 Learning Objective 3 Distinguish between product costs and period costs and give examples of each.

1-16 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Cost of Goods Sold Inventory Period costs are not included in product costs. They are expensed on the income statement. Expense Sale Balance Sheet Income Statement Income Statement

1-17 Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? (There may be more than one correct answer.) 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.

1-18 Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? (There may be more than one correct answer.) 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.

1-19 Prime Cost and Conversion Cost Manufacturing costs are often classified as follows: Direct Direct Material Material Direct Direct Labor Labor Prime Cost Manufacturing Manufacturing Overhead Overhead Conversion Cost

1-20 Comparing Merchandising and Manufacturing Activities Merchandisers . . . Purchase finished goods from suppliers for resale to customers. MegaLoMart Manufacturers . . . Purchases raw materials from suppliers. Produce and sell finished goods to customers.

1-21 Balance Sheet Merchandiser Current Assets Cash Receivables Prepaid Expenses Merchandise Inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories: 1. Raw Materials 2. Work in Process 3. Finished Goods

1-22 Balance Sheet Merchandiser Current Assets Cash Receivables Prepaid Expenses Merchandise Inventory Partially complete products – some material, labor, or overhead has been added. Manufacturer Current Assets Cash Receivables Materials waiting to Prepaid Expenses be processed. Inventories: 1. Raw Materials 2. Work in Process 3. Finished Goods Completed products awaiting sale.

1-23 Learning Objective 4 Prepare an income statement including calculation of the cost of goods sold.

1-24 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 Purchases Goods available for sale - Ending merchandise inventory Cost of goods sold 14,200 234,150 248,350 (12,100) 236,250

1-25 Inventory Flows Beginning Beginning balance balance Additions Additions to to inventory inventory Ending Ending balance balance Withdrawals Withdrawals from from inventory inventory

1-26 Quick Check 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. D. 200.

1-27 Quick Check 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? 1,000 100 1,100 A. 1,000. 1,100 - 300 800 B. 800. C. 1,200. D. 200.

1-28 Learning Objective 5 Prepare a schedule of cost of goods manufactured.

1-29 Schedule of Cost of Goods Manufactured Calculates the cost of raw materials, direct labor and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.

1-30 Schedule of Cost of Goods Manufactured Raw Materials – Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Work As items are removed from AsCosts items are removed from In Process raw raw materials materials inventory inventory and and placed placed into into the the production production process, process, they they are are called called direct direct materials. materials.

1-31 Schedule of Cost of Goods Manufactured Raw Materials – Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials Direct labor Mfg. overhead Total manufacturing costs Work Conversion Conversion In Process costs costsare arecosts costs incurred incurredto to convert convert the the direct directmaterials materials into intoaafinished finished product. product. As Asitems itemsare areremoved removedfrom from raw raw materials materialsinventory inventoryand andplaced placedinto into the the production production process, process, they theyare are called calleddirect direct materials. materials.

1-32 Schedule of Cost of Goods Manufactured Raw Materials – Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Work In Process Direct materials Direct labor Mfg. overhead Total manufacturing costs Beginning work in process inventory Total manufacturing costs Total work in process for the period – Ending work in All manufacturing incurred All manufacturingcosts costs incurred process inventory during added to are Cost of goods duringthe theperiod periodare added tothe the manufactured. beginning balance of work in beginning balance of work in process. process.

1-33 Schedule of Cost of Goods Manufactured Raw Materials Manufacturing Costs Beginning raw Direct materials materials inventory Direct labor Raw materials Mfg. overhead purchased Total manufacturing Raw materials costs available for use in production – Ending raw materials inventory Costs associated with Costs associated withthe the goods goods that that Raw materials used are completed arein completed duringthe theperiod periodare are production during transferred transferredto tofinished finished goods goods inventory. inventory. Work In Process – Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured.

1-34 Cost of Goods Sold

1-35 Manufacturing Cost Flows Costs Balance Sheet Inventories Material Purchases Raw Materials Direct Labor Work in Process Manufacturing Overhead Selling and Administrative Finished Goods Period Costs Income Statement Expenses Cost of Goods Sold Selling and Administrative

1-36 Quick Check 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

1-37 Quick Check 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

1-38 Quick Check 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.

1-39 Quick Check 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.

1-40 Quick Check 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.

1-41 Quick Check 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.

1-42 Quick Check Beginning finished goods inventory was 130,000. The cost of goods manufactured for the month was 760,000. 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.

1-43 Quick Check Beginning finished goods inventory was 130,000. The cost of goods manufactured for the month was 760,000. The ending finished goods inventory was 150,000. What was the cost of goods sold for the month? A. 20,000. 130,000 760,000 890,000 B. 740,000. 890,000 - 150,000 740,000 C. 780,000. D. 760,000.

1-44 Learning Objective 6 Understand the differences between variable costs and fixed costs.

1-45 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 of of business business activity. activity. Total Total variable variable costs costs change change when when activity activity changes. changes. Total Total fixed fixed costs costs remain remain unchanged unchanged when when activity activity changes. changes.

1-46 Variable Cost Total Texting Bill Your total texting bill is based on how many texts you send. Number of Texts Sent

1-47 Variable Cost Per Unit Cost Per Text Sent The cost per text sent is constant at 5 cents per text. Number of Texts Sent

1-48 Fixed Cost Monthly Cell Phone Contract Fee 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. Number of Minutes Used Within Monthly Plan

1-49 Fixed Cost Per Unit Monthly Cell Phone Contract Fee Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan

1-50 Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost changes as activity level changes. Variable cost per unit remains the same over wide ranges of activity. Fixed Total fixed cost remains the same even when the activity level changes. Average fixed cost per unit goes down as activity level goes up.

1-51 Quick Check Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

1-52 Quick Check Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

1-53 Learning Objective 7 Understand the differences between direct and indirect costs.

1-54 Assigning Costs to Cost Objects Direct costs Indirect costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Examples: Direct material and direct labor Example: Manufacturing overhead

1-55 Learning Objective 8 Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.

1-56 Cost Classifications for Decision Making Every decision involves a choice between at least two alternatives. Only those costs and benefits that differ between alternatives are relevant to the decision. All other costs and benefits can and should be ignored.

1-57 Differential Costs and Revenues Costs and revenues that differ among alternatives. 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. Differential revenue is: 2,000 – 1,500 500 Differential cost is: 300 Net Differential Benefit is: 200

1-58 Opportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning 15,000 per year. Your opportunity cost of attending college for one year is 15,000.

1-59 Sunk Costs Cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost 10,000 two years ago. The 10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the 10,000 cost.

1-60 Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

1-61 Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

1-62 Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

1-63 Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

1-64 Quick Check Suppose that your car could be sold now for 5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

1-65 Quick Check Suppose that your car could be sold now for 5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

1-66 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Decision Making

1-67 End of Chapter 1