Introduction To Managerial Accounting and Cost Concepts

 

Introduction to Managerial Accounting and Cost Concepts

 

Management Accounting What is Management Accounting? It is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating information that managers use to fulfill organizational objectives.

 

Differences Between Financial and Financial Managerial Accounting Accounting

Managerial Accounting

Ex te rna l pe rsons w ho make mak e fi finan nanci cial al dec decis isio ions ns

Ma na ge rs w ho pla n for   and co cont ntro roll an or organ ganizat izatio ion n

Historica l pe rspe ctive

Future e m pha sis

3. Ve rifi a bi lity   ve rsus re le va nce

Empha sis on ve rifi a bi lity

Empha sis on re l e va nce for pla nni ng a nd control

4. Pre c ciisi on ve rsus

Em pha s siis on

Empha s siis on

pre ci si on

time li ne ss

5. Subj e ct

Prima ry focus is on the w hole orga niz a ti on

Focuse s on se gme nts of a n orga niz a ti on

6. Re quire me nts

Must follow GAAP and an d pres esc crib ibed ed forma matts

Ne e d not follow GAAP or an any y pres esc cribed ibed forma matt

1. Use rs 2. Ti me focus

ti me line ss

 

Planning and Controlling What is decision making? It is the purposeful choice from among a set of alternative courses of action designed to achieve some objective.

This is the core of the management process.

 

Planning and Control Cycle Formulating Long-and Short-Term Plans (Planning) Begin

Comparing Actual to Planned Performance (Controlling)

Decision Making

Measuring Performance (Controlling)

Implementing  the Plans (Directing and Motivating)

 

Planning and Controlling The Management Process  Process Internal Accounting System   s   n   o   s    i   s   n    i   o   v   i   e   t    R  c    A    d    d   n   n   a   s   a   n   s   o   n    i   a    t    l   c   P   e   r   f   r   o   o    C

Planning •Increase  Productivity

Budgets, Special Reports Financial Accounting System

Controlling •Actions •Evaluations

Performance Reports

Customer surveys Competitor analysis Advertising impact New items report

 

Role of Budgets  A

budget is a quantitative expression expression of a plan of action and is an aid to coordinating and implementing the plan.  Budgets are the chief devices for compelling and disciplining management management planning.

 

Role of  Performance Reports Performance reports formalize controls and  provide feedback by comparing results results with  plans and by highlighting highlighting variances.

Variances are deviations from the plan.

 

Performance Report   Revenues Expenses Net Income

Budgeted Actual   Amount Amount 25,000 19,000 20,000 15,000 5,000 4,000

   

F = Favorable U = Unfavorable

Variance Amount 6,000 U 5,000 F 1,000 U

 

Cost and Cost Terminology Cost  is a resource sacrificed or forgone to achieve a specific objective.

An actual cost  is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object  is anything for which a separate measurement of costs is desired.

 

Cost and Cost Terminology Cost Object Cost Accumulation

Cost Assignment

Cost Object Cost Object Tracing Allocating

 

Direct Costs and Indirect Costs Direct costs 

Costs that can be easily and conveniently

Indirect costs 

traced to aobjective. unit of product or other cost 

Examples: direct material and direct labor 

Costs cannot be easily and conveniently traced to a unit of product or other cost object.



Example: manufacturing overhead

 

Direct and Indirect Costs

 

Direct Costs

Example: related with production volume Limestone raw material Indirect Costs Example: related with The Time-depreciation for   building

   COST COSTOBJECT OBJECT   Example: Example:to toproduction productio  Semi  Semimanufacturing manufacturingite ite  Like  Like–clinker  –clinker 

 

Direct and Indirect Costs Example Direct Costs: Maintenance Department

SR40,000

P nb nleyl D Aesrsseom Deeppaarrttm meenntt Finishing Department

S SR R2 70 5,,6 00 00 0 SR55,000

Assume that Maintenance Department costs  are allocated equally among a mong the production departments. How much is allocated to each department?

 

Direct and Indirect Costs Example Maintenance  SR40,000 Assembly Direct Costs SR75,000

Finishing Direct Costs SR55,000

SR20,000

SR20,000 Allocated

 

Manufacturing Activities Manufacturers . . .  

Buy raw materials. Produce and sell finished goods.

 

Manufacturing Costs Direct Direct Materials Materials

Direct Direct Labor  Labor 

Manufacturing Manufacturing Overhead Overhead

 

Direct Materials   Those materials that be become come an integral part of the product and that can be conveniently traced directly to it.

Direct Those laborLabor  costs that can be easily traced to individual units of product.

 

Manufacturing Overhead Manufacturing costs that cannot be cannot be traced directly to specific units produced. Examples:  Examples: Examples:  Indirect Indirect labor labor and and indirect indirect materials materials

Wages paid to employees who are not directly involved in production work.   work.

Materials used to support the production process.

 

Classifications of Costs Manufacturing costs are often classified as follows: Direct Direct Material Material

Direct Direct Labor  Labor 

Prime Cost

Manufacturing Manufacturing Overhead Overhead

Conversion Cost

 

 Nonmanufacturin  Nonmanufacturing g Costs Marketing and selling costs . . . 

Costs necessary to get the order and deliver the product.

 Administrative  Administrativ e costs . . . 

 All executive, organizational, and clerical costs. co sts.

 

Product Costs Versus Period Costs   Product costs include costs include direct materials, direct labor, and manufacturing overhead.

Cost of Good Sold

Inventory

costs are not Period costs are included in product costs. They are expensed on the income statement. Expense

Sale

Balance

Income

Income

Sheet

Statement

Statement

 

Inventoriable Costs

Inventorial costs (assets)…  become cost of goods sold…

after a sale takes place.

 

Period Costs Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred.

 

Balance Sheet  

Manufacturer 

  Current Assets        

Materials waiting to be processed.

Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods

Completed products awaiting sale.

 

The Income Statement   Cost of goods sold for manufacturers.

 

Manufacturing Cost Flows    

Costs

Balance Sheet Inventories

Material Purchases

Raw Materials

Direct Labor 

 Work in  Process

Income Statement Expenses

Manufacturing Overhead

Selling and Administrative

Finished Goods

Period Costs

Cost of Goods Sold Selling and Administrative

 

Manufacturing Company BALANCE SHEET

INCOME STATEMENT

Inventoriable

 Revenues

Costs

Materials Inventory

Finished Goods Inventory

when sales occur

deduct

Cost of  Goods Sold

Equals Gross Margin deduct

Work in Process Inventory

Period Costs Income Equals Operating

 

 Merchandising Company BALANCE SHEET

INCOME STATEMENT

Inventoriable

 Revenues

Costs

Merchandise Purchases

Inventory

when sales occur

deduct

Cost of  Goods Sold

Equals Gross Margin deduct

Period Costs Income Equals Operating

 

Many Meanings of Product Cost A product cost is the sum of the costs assigned to a product for a specific purpose. 1. Pricing and product emphasis decisions 2. Contracting with government agencies 3. Preparing financial statements for external   reporting under generally accepted   accounting principles

 

Quick Check    Which of the following transaction transactions s would immediately result in an expense? (There may be more than one correct answer.)

 A. Work in process is completed. B. Finished goods are sold. C. Raw materials are placed into production. D. Administrative salaries are accrued and paid.

 

Inventory Flows Beginning Beginning balance balance $$ $$

Available Available $$$$$ $$$$$

+

Additions Additions $$$ $$$

=

 _ Withdrawals Withdrawals $$$ $$$

=

Available Available $$$$$ $$$$$

Ending Ending balance balance $$ $$

 

Quick Check    If your bank balance at the beginning of the month was $1,000, you deposited $100 during the month, and withdrew $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.

 

Product Costs - A Closer Look  R aw Materials

Man u factu rin g C o sts

W o rk In P ro ces s

Beginning raw  

ma terials invento inventory ry

Beginning Beginning inventory inventory is is the the inventory inventory carried carried over over from from the the prior prior period. period.

 

Product Costs - A Closer Look  R aw Materials Beginning raw

Man u factu rin g C o sts

W o rk In P ro ces s

Direct materials

  ma terials invento inventory ry + Raw mat mater erial ials s   purchased = Raw mat mater erial ials s   ava ila ilable ble fo forr us use e   in production  – Endin Ending g rra a w m a teria te ria ls   inventory = Raw materials used   in production

As Asitems itemsare areremoved removedfrom fromraw raw materials materialsinventory inventoryand andplaced placedinto into the theproduction productionprocess, process,they theyare are called calleddirect directmaterials. materials.

 

Quick Check    Beginning raw materials inventory was SR32,000. During the month, SR276,000 of raw material was purchased. A count at the end of the month revealed that SR28,000 of raw material was still present. What is the cost of direct material used?

 A.

SR276,000

B. C. D.

SR272,000 SR280,000 SR 2,000 

 

Product Costs - A Closer Look  Raw Materials Be ginning ra w   ma te ria ls i nve ntory + Ra w m a te ri a l s   pu purcha se d = Raw mat mater erials ials    

ava availa ila ble for us use e in production

 – Ending ra w ma materi teria a ls   inventory = Raw mat materials erials us used ed  

in production

Manufacturing Costs Dire ct m a te ria ls + Direct labor  + Mf Mfg. g. overhead overhea d = Total manufacturing   costs

Work In Process

 

Product Costs - A Closer Look  Raw M at erials Beginning r aw   mat er ials inventory + Raw mat er ials   pu pur chased = Ra Raw wm mate ateri ria als   available for use   in product production ion  – Endi Ending ng raw material materials s   inventory = Ra Raw wm mate ateria rials ls used used   in product production ion

M anuf act uring Co s t s Dir ect mat er ials + Direct labor  + Mfg. overhead = Total manufacturing   costs

W or k In Process

Conversion Conversion costsare arecosts costs costs incurred incurredto to convert convertthe the direct directmaterial material into intoaafinished finished product. product.

 

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. C. D.

$835,000 $655,000 Cannot be determined.

 

Product Costs - A Closer Look  R a w Mate rials Be gi nn i ng ra w   m a te ri a l s i nve ntory + Ra w m a te ri a l s   pu purcha se d = Raw mat mater eria ials ls   a va i l a bl e for use in p rod ucti on  – Ending Endi ng ra raw w m a te teri ria a ls   inventory = Raw mater materials ials us used ed   in production

Man u fa c tu rin g C o s ts Di re ct m a te ri a l s + Di re ct l a b o r + M Mffg. o ve rhe a d = To ta l m a nu nu fa ct cturi ng   costs

W o rk In P ro c es s Be gi n n in g w o rk i n p ro ce ss i n ve ntory + Total manufacturing costs = To Tottal wor work k in p ro ce ss fo r the p e ri o d

All Allmanufacturing manufacturingcosts costsincurred incurred during duringthe theperiod periodare areadded addedto tothe the beginning beginningbalance balanceof ofwork workin in process. process.

 

Product Costs - A Closer Look  R aw Materials Be gi nni ng ra w   m a te ri a l s i n ve ntory + Ra w m a te ri a l s   p urcha se d = Ra w m a te ri a l s   a va i l a b l e for u se i n p ro d ucti o n

Man u factu rin g C o sts Di re ct m a te ri a l s + Di re ct l a b o r + M fg. ove rh e a d = T ota l m a n u fa cturi ng costs

Costs Costsassociated associatedwith withthe thegoods goodsthat that are arecompleted completedduring duringthe theperiod periodare are transferred transferredto tofinished finishedgoods goods inventory. inventory.

Wo rk In P ro cess Be g i n n i n g w o rk i n p ro ce ss i nve ntory + T ota l m a n ufa cturi ng costs = T ota l w o rk i n p ro ce ss for the p e ri o d  – Ending Endi ng w ork in   proce proces ss inve ntory = Cost of goods  

manufactured.

 

Quick Check    Beginning work in process was SR125,000. Manufacturing costs incurred for the month were SR835,000. There were SR200,000 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. B. C. D.

SR1,160,000 SR 910,000 SR 760,000 Cannot be determined.

 

Product Costs - A Closer Look 

 

Quick Check    Beginning finished goods inventory was SR130,000. The cost of goods manufactured for the month was SR760,000. And the ending finished goods inventory was SR150,000. What was the cost of goods sold for the month?

 A. SR 20,000. B. SR740,000. C. SR780,000. D. SR760,000.

 

Cost Drivers

What are cost drivers? Output measures of resources and activities are called cost drivers.

 

Cost Behavior 

What is cost behavior? It is how costs are related to, and affected a ffected  by, the activities of an organization. organization.

 

Cost Drivers Production Example  Example costs: Labor wages Supervisory salaries

 Example cost drivers: Labor hours  No. of people supervised

Maintenance wages Depreciation Energy

 No. of mechanic hours  No. of machine hours Kilowatt hours

 

Cost Drivers

How well the accountant acc ountant does at identifying the most appropriate cost drivers determines how well managers understand cost behavior  and how well costs are controlled.

 

Cost Classifications for Predicting Cost Behavior     How Howaacost cost will will react react to to changes changesin inthe thelevel levelof of  

 

business activity. activity. business

Total Totalvariable variablecosts costs   change changewhen whenactivity activity changes. changes. fixedcosts costs activity Total remain Totalfixed  remain unchanged when unchanged when activity changes. changes.

 

Comparison of Variable and Fixed Costs cost  A variable to  is a es  is cost changes in direct  proportion chang changes in that the cost driver.

 fixed cost    fixed A  is the notcost immediately  by changes in driver. affected

 

Rules of Thumb

Think of fixed costs as a total. Total fixed costs remain unchanged regardless of changes in cost-driver activity.

 

Rules of Thumb

Think of variable costs on a per-unit basis. The per-unit variable cost remains unchanged regardless of changes in the cost-driver activity.

 

Relevant Range 



This rule of thumb holds true only within reasonable limits. relevant range is the limit of cost-driver The activity within which a specific relationship between costs and the cost driver is valid.

 

Relevant Range

   t   s SR16,000 –    o    C SR12,000 –     d   e   x SR8,000 –     i

Relevant Range

   F SR4,000

  –

0

500

–

1,000 1,500 2,000 Volume in Units

–

2,500

 

Total Variable Cost   Your total long distance telephone bill is based on how many minutes you talk.   e   c   n   l    l    i   a    t    B   s    i   e    D  n   g   o   n   p   o   h   e    L    l      l   e   a   T    t   o    T

Minutes Talked

 

Variable Cost Per Unit   The cost per long distance minute talked is constant. For example, 10 c cents ents per minute.   e   g   r   a   e   h    t   u   C   n    i   e    M  n   r   o   e   h    P  p   e    l   e    T

Minutes Talked

Minutes Talked

 

Fixed Cost Per Unit The average cost per local call decreases as more local calls are made.   e   n   o    l    h   l   p   a   e   C    l   e   l     T  a   c   c    i   o   s   r   a   L    B  e   p     y   l    l    l    i    h    t    B   n   o    M

Number of Local Calls  

Cost Classifications for Predicting Cost Behavior  Behavior of Cost (within the relevant range) Cost

In Total

Per Unit

Variable

Total variable cost ch changes as activity level changes.

Variable cost pe per un unit re remains the same over wide ranges of activity.

Fixed

Total fixed cost remains the th e same even when th the e activity level changes.

Fixed cost per unit goes down as acti tiv vity level goes up.

 

Cost Behavior  Examples of normally variable costs Merchandisers Cost of Goods Sold

Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead

Service Organizations  Supplies and travel Merchandisers and Manufacturers Sales commissions and shipping costs

Examples of normally fixed costs Merchandisers, manufacturers, and service organizations Real estate taxes, Insurance, Sales salaries

Depreciation, Advertising  

The Activity Base Units produced

Machine hours

 A measure of the event  causing the incurrence of a  variable cost – a cost driver 

Miles

Labor 

driven

hours

driven

hours

 

Types of Fixed Costs Fixed Costs Committed

Discretionary

Long-term, cannot be reduced in the short term.

May be altered in the short-term by current managerial decisions

Examples

Examples

Depreciation on

Advertising and

Buildings and

Research and

Equipment

Development

 

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.

 

Quick Check    Which of the following costs would be variable with respect to the number of people who buy a ticket formore a show atone a movie theater? (There may be than correct answer.)

 A. The cost of renting renting the film. B. Royalties on ticket sales. C. Wage and salary costs of theater employees.

D. The cost of cleaning up after the show.  

Fixed Costs and Relevant Range   Example: Office Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost.

Continue

 

Fixed Costs and Relevant Range   s   r   a    l

  n   l   o    i    t    D   s   f   o   o    C  s    t    d   n   n   e   a   s    R   u   o    h    T

90  Relevant

60

 Range

30 0

0

1,000

2,000

Total cost doesn’t change for a wide a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. 3,000

Rented Area (Square Feet)  

Quick Check    Which of the following statements about cost behavior are true?

a. Fixed costs per unit vary with the level of activity. b. Variable costs per unit are constant within the relevant range. c. Total fixed costs are constant within the relevant range. d. Total variable costs are constant within the relevant range.

 

Cost Behavior Patterns Example

Bicycles Seaofbuys a handlebar  at $52by forthe each its bicycles. What is the total handlebar cost when 1,000 bicycles are assembled?

 

Cost Behavior Patterns Example

1,000 units × $52 = $52,000 What is the total handlebar cost when 3,500 bicycles are assembled? 3,500 units × $52 = $182,000

 

Cost Behavior Patterns Example

Bicycles by the in a given year forSea the incurred leasing of$94,500 its plant. This is an example of fixed costs with respect to the number of bicycles assembled.

 

Cost Behavior Patterns Example

What the leasing (fixed)1,000 cost per bicycle when is Bicycles assembles bicycles? SR94,500 ÷ 1,000 = SR94.50 What is the leasing (fixed) cost per bicycle when Bicycles assembles 3,500 bicycles? SR94,500 ÷ 3,500 = SR27

 

Cost Drivers

The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately. The number of bicycles assembled is a cost driver of the cost of handlebars.

 

Relevant Range Example

Assume costs $94,500 for a yearthat andfixed that (leasing) they remain theare same for a certain volume range (1,000 to 5,000 bicycles). 1,000 to 5,000 bicycles is the relevant range.

 

Relevant Range Example 120000    t   s   s 100000   o 80000    C 60000    d   e   x 40000    i    F

SR94,500

20000 0 0

1000

2000

3000

4000

5000

6000

Volume  

Relationships of Types of Costs Direct

Variable

Fixed

Indirect

 

cautiously. Interpret unit costs cautiously.

 

Total Costs and Unit Costs Example What is the unit cost (leasing and handlebars) when Bicycles assembles 1,000 bicycles? Total fixed cost SR94,500 + Total variable cost SR52,000 = SR146,500 SR146,500 ÷ 1,000 = SR146.50

 

Total Costs and Unit Costs Example SR146,500 200000

 5 2 x  R   9 4  4, 5 , 5 0 0  0  +   + S  S  S R 

  s 150000    t   s   o    C    l 100000   a    t

$94,500

   T   o 50000 0 0

500

1000

1500

Volume

 

Use Unit Costs Cautiously Assume that Bicycles management uses a unit cost of SR146.50 (leasing and wheels). Management is budgeting costs for  different levels of production. What is their budgeted cost for an estimated production of 600 bicycles?

600 × SR146.50 = SR87,900  

Use Unit Costs Cautiously What is their budgeted cost for an estimated  production of 3,500 3,500 bicycles? 3,500 × SR146.50 = SR512,750 What should the budgeted cost be for an estimated production of 600 bicycles?

 

Use Unit Costs Cautiously Total fixed cost

SR 94,500

Total variable cost (SR52 × 600) 31,200 Total SR125,700 SR125,700 ÷ 600 = SR209.50 Using a cost of SR146.50 per unit would underestimate actual total costs if output

is below 1,000 units.  

Use Unit Costs Cautiously What should the budgeted cost be for an estimated production of 3,500 bicycles? Total fixed cost SR 94,500 Total variable cost (52 × 3,500) 182,000 Total SR276,500 SR276,500 ÷ 3,500 = SR79.00

 

Prime Costs

Direct Materials

+

Direct Labor 

=

Prime Costs

 

Conversion Costs

Direct Labor 

+

Manufacturing Overhead

=

Conversion Costs

 Indirect   Labor 

 Indirect   Materials

Other 

 

Sunk Costs  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 SR10,000 two years ago. The SR10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the SR10,000 cost.