[PDF] Managerial Accounting and Cost Concepts

1869_2CH01_S.pdf

1-1Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter 1Managerial Accounting and Cost Concepts

1-2Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.—Managerial accounting is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.Needs of Management

1-3Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.1.Assigning coststo cost objects2.Accounting for costs in manufacturing companies3.Preparing financial statements4.Predicting cost behavior in response to changes in activity5.Making decisionsPurposes of Cost Classification

1-4Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Commercial vs manufacturing companiesCommercial:◦Buy finished goods.◦Sell finished goods. Manufacturing:◦Buy raw materials◦Produce and sell finished goods.MegaLoMart

1-5Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

1-6Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 1Understand cost classifications used for assigning costs to cost objects: direct costsand indirect costs.

1-7Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Assigning Costs to Cost Objects—Direct costs◦Costs that can be easilyand convenientlytraced to a unit of product or other cost object.◦Examples: direct materials and direct labor—Indirect costs◦Costs that cannotbe easily and conveniently traced to a unit of product or other cost object. ◦Example: manufacturing overhead—Common costs◦Indirect costsincurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

1-8Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 2Identify and give examples of each of the three basic manufacturing cost categories.

1-9Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Cost classifications for manufacturing companiesManufacturing CostsNonManufacturingCosts

1-10Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—Direct materials—Direct labor—Manufacturing overheadClassifications of Manufacturing Costs(direct and indirect)

1-11Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Direct Materials(direct)—Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it.—Example:A radio installed in an automobile

1-12Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Direct Labor(direct)—Direct labor consists of labor costs that can be easily traced to individual units of product.—Example: Wages paid to automobile assembly workers

1-13Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Manufacturing Overhead(indirect)—Manufacturing overhead includes all manufacturing costs except direct material and direct labor.—These costs cannot be readily tracedto finished products.◦Includes indirect materials that cannot be easily or conveniently traced to specific units of product◦(lubricants and cleaning supplies used in the automobile assembly plant)◦Includes indirect labor that cannot be easily or conveniently traced to specific units of product◦(maintenance workers and security guards.)

1-14Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Manufacturing Overhead -Examples—Examples of manufacturing overhead: ◦Depreciation of manufacturing equipment◦Utility costs◦Property taxes ◦Insurance premiums incurred to operate a manufacturing facility—Only thoseindirectcosts associated with operating the factoryare included in manufacturing overhead.

1-15Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Nonmanufacturing Costs—Selling costs◦The costs incurred to secure customer orders and get the finished product to the customer. Selling costs can be either direct or indirect costs.—Administrative costs◦The costs associated with the general management of an organization rather than with manufacturing or selling. Administrative costs can be either direct or indirect costs.

1-16Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 3Understand cost classifications used to prepare financial statements: product costs and period costs.

1-17Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Product Costs—Product costs include all the costs involved in acquiring or making a product.—Product costs "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.—-> inventoriablecosts

1-18Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Manufacturing Product Costs For manufacturing companies, product costs include:—Raw materials include any materials that go into the final product. —Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. —Finished goods consist of completed units of product that have not yet been sold to customers.

1-19Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Transfer of Product Costs—When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. —Direct labor and manufacturing overhead costs are added to Work in Processto convert direct materials into finished goods. —Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. —When a manufacturer sellsits finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

1-20Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Cost Classifications for Preparing Financial Statements (1 of 2)Product costs include direct materials, direct labor, and manufacturing overhead.

1-21Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Cost Classifications for Preparing Financial Statements (2 of 2)Period costs include all selling costs and administrative costs (sales commissions, advertising, executive salaries, public relations, rental costs of administrative offices, etc). ExpensedintheIncomeStatementintheperiodinwhichtheyareincurred(usingtheruleofaccrualaccounting)

1-22Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

1-23Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Concept Check 1Whichof the following costs would be considered a period rather than a product cost in a manufacturing company?A.Manufacturing equipment depreciationB.Property taxes on corporate headquartersC.Direct materials costsD.Electrical costs to light the production facilityE.Sales commissions

1-24Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Concept Check 1aWhich of the following costs would be considered a period rather than a product cost in a manufacturing company?A.Manufacturing equipment depreciationB.Property taxes on corporate headquartersC.Direct materials costsD.Electrical costs to light the production facilityE.Sales commissionsAnswer: B, E

1-25Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 4Understand cost classifications used to predict cost behavior: variable costs, fixed costs, and mixed costs.

1-26Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—Cost behavior refers to how a cost will react to changes in the level of activity. —The most common classifications are:◦Variable costs.◦Fixed costs.◦Mixed costs.Cost Classifications for Predicting Cost Behavior

1-27Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—A variable cost varies, in total, in direct proportion to changes in the level of activity.—A variable cost per unit is constant.Variable Cost

1-28Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—An activity base is a measure of what causes the incurrence of a variable cost.◦Units produced◦Machine hours◦Miles driven◦Labor hoursAn Activity Base (Cost Driver)

1-29Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—A fixed cost is a cost that remains constant, in total, regardless of changes in the level of the activity.—If expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity.Fixed Cost

1-30Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Types of Fixed Costs—Committed◦Long term, cannot be significantly reduced in the short term—Discretionary◦May be altered in the short term by current managerial decisions

1-31Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.—Managementaccountantsordinarilyassumethatcostsarestrictlylinear:therelationbetweencostandactivitycanberepresentedbyastraightlinewithinanarrowbandofactivityknownasarelevantrange(therangeofactivitywithinwhichtheassumptionthatcostbehaviorisstrictlylinearisreasonablyvalid).—Therelevantrangeofactivitypertainstofixedcostaswellasvariablecosts.—Forexample,assumeofficespaceisavailableatarentalrateof$30,000peryearinincrementsof1,000squarefeet.—Fixedcostswouldincreaseinastepfashionatarateof$30,000foreachadditional1,000squarefeet.The Linearity Assumption and the Relevant Range

1-32Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Relevant Range: GraphicThe relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.

1-33Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Comparison of Cost Classifications for Predicting Cost BehaviorBehavior of Cost (within the relevant range)CostIn TotalPer UnitVariable costTotal variable cost increases and decreases in proportion to changes in the activity level.Variablecostper unit remains constant.Fixed costTotal fixed cost is not affected by changes in the activity level within the relevant range.Fixed cost per unit decreases as the activity level rises and increases as the activity level falls.

1-34Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Which of the following costs would be variable with respect to the number of ice cream cones sold at a Baskin & Robbins? (There may be more than one correct answer.)A.The cost of lighting the storeB.The wages of the store managerC.The cost of ice creamD.The cost of napkins for customersConcept Check 2

1-35Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Which of the following costs would be variable with respect to the number of ice cream cones sold at a Baskin & Robbins? (There may be more than one correct answer.)A.The cost of lighting the storeB.The wages of the store managerC.The cost of ice creamD.The cost of napkins for customersAnswer: C, DConcept Check 2a

1-36Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.A mixed cost contains both variable and fixed elements. Consider the example of utility cost. Mixed Costs (1 of 2)

1-37Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.The total mixed cost line can be expressed as an equation: Y =a +bXWhere: Y= The total mixed costa= The total fixed cost (the vertical intercept of the line)b= The variable cost per unit of activity (the slope of the line)X= The level of activityMixed Costs (2 of 2)

1-38Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

1-39Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?Y = a + bXY= $40 + ($0.03 ×2,000)Y= $100Mixed Costs -An Example