1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Managerial Accounting and Cost Concepts Chapter 1

2. 1-2 Managerial Accounting and Financial Accounting Managerial inside Managerial accounting provides information for managers inside an organization who direct and control its operations. Financial outside Financial accounting provides information to stockholders, creditors and others who are outside the organization.

3. 1-3 Financial and Managerial Accounting: Seven Key Differences

4. 1-4 Goal of The Course The primary purpose of this course is to teach measurement skills that managers use to support planning, controlling, and decision making activities.

5. 1-5 Work of Management Planning Decision Making Decision Making Controlling

6. 1-6 Planning Establish Goals. Specify How Goals Will Be Achieved. Specify How Goals Will Be Achieved. Develop Budgets.

7. 1-7 Controlling The control function gathers feedback to ensure that plans are being followed. The control function gathers feedback to ensure that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

8. 1-8 Decision Making Decision making involves making a selection among competing alternatives. Decision making involves making a selection among competing alternatives. What should we be selling? What should we be selling? Who should we be serving? Who should we be serving? How should we execute? How should we execute?

9. 1-9 Planning and Control Cycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin

10. 1-10 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions

11. 1-11 Assigning Costs to Cost Objects Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

12. 1-12 The Product Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs

13. 1-13 Direct Materials 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

14. 1-14 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

15. 1-15 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

16. 1-16 Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs. Administrative Costs All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

17. 1-17 Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

18. 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.

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

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

21. 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 1-21

22. 1-22 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 Balance Sheet Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed. 1-22

23. 1-23 The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. 1-23

24. 1-24 Inventory Flows Beginning balance Beginning balance Additions to inventory ++ == Ending balance Ending balance Withdrawals from inventory Withdrawals from inventory ++ 1-24

25. 1-25 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. 1-25

26. 1-26 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. Quick Check $1,000 + $100 = $1,100 $1,100 - $300 = $800 1-26

27. 1-27 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. 1-27

28. 1-28 As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Schedule of Cost of Goods Manufactured 1-28

29. 1-29 Conversion costs are costs incurred to convert the direct materials into a finished product. As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Schedule of Cost of Goods Manufactured 1-29

30. 1-30 All manufacturing costs incurred during the period are added to the beginning balance of work in process. Schedule of Cost of Goods Manufactured 1-30

31. 1-31 Costs associated with the goods that are completed during the period are transferred to finished goods inventory. Schedule of Cost of Goods Manufactured 1-31

32. 1-32 Cost of Goods Sold 1-32

33. 1-33 Manufacturing Cost Flows Selling and Administrative Period Costs Finished Goods Cost of Goods Sold Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material PurchasesRaw Materials 1-33

34. 1-34 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 1-34

35. 1-35 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 Quick Check 1-35

36. 1-36 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. 1-36

37. 1-37 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. Quick Check 1-37

38. 1-38 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. 1-38

39. 1-39 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. Quick Check 1-39

40. 1-40 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. 1-40

41. 1-41 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. Quick Check $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000 1-41

42. 1-42 Variable Cost A cost that varies, in total, in direct proportion to changes in the level of activity. Your total texting bill may be based on how many texts you send. Number of Texts Sent Total Texting Bill

43. 1-43 Variable Cost Per Unit However, variable cost per unit is constant. The cost per text sent may be constant at 5 cents per text message. Number of Texts Sent Cost Per Text Sent

44. 1-44 Fixed Cost A cost that remains constant, in total, regardless of changes in the level of the activity. Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

45. 1-45 Fixed Cost Per Unit However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. The average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

46. 1-46 Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Examples Depreciation on Buildings and Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short term by current managerial decisions Discretionary May be altered in the short term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Committed Long-term, cannot be significantly reduced in the short term.

47. 1-47 Cost Classifications for Predicting Cost Behavior 1-47

48. 1-48 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. 1-48

49. 1-49 Assigning Costs to Cost Objects Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: Direct material and direct labor Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: Manufacturing overhead 1-49

50. 1-50 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. 1-50

51. 1-51 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 1-51

52. 1-52 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. 1-52

53. 1-53 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. 1-53

54. 1-54 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. 1-54

55. 1-55 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. 1-55

56. 1-56 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. 1-56

57. 1-57 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Decision Making 1-57

58. 1-58 End of Chapter 1