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UMST-MBA BATCH 8 M ANAGERIAL A CCOUNTING. C OURSE CONTENT  Production, marketing and administrative costs  Accounting for materials, labor and overheads.

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Presentation on theme: "UMST-MBA BATCH 8 M ANAGERIAL A CCOUNTING. C OURSE CONTENT  Production, marketing and administrative costs  Accounting for materials, labor and overheads."— Presentation transcript:

1 UMST-MBA BATCH 8 M ANAGERIAL A CCOUNTING

2 C OURSE CONTENT  Production, marketing and administrative costs  Accounting for materials, labor and overheads  Cost behavior and cost estimation  ABC  Job order costing  Joint products  Budgeting  Variance  Cost –volume –profit analysis  Ethical Issues in managerial Accounting

3 R EFERENCES -Cost Accounting a Managerial Emphasis Horngren-Foster-Dater(10 th edition) - Introduction to Management Accounting Horngren (10 th edition) -Managerial Accounting Louderback- Holmen(10 th edition)

4 W HAT IS COST ?  There are different definitions for cost.They all revolve around Holmen definition  “ Cost is the economic sacrifice made to achieve the organization goal. ” Costs for goods are the resources used such as labor, materials and overheads. For services costs are the monetary sacrifices made to provide the service.

5 W HAT IS COST ACCOUNTING ?  It is the discipline that identifies, measures reports and analyzes various elements of direct and indirect costs of goods and services associated with the production and marketing of goods and services..

6 MAIN OBJECTIVE  The main objective of cost accounting is communicating financial information to management for planning, controlling and evaluating performances.  Cost and financial accounting  Cost accounting provides us with cost information which helps in preparing financial statements. e.g. inventory and income determination

7 C OST BEHAVIOR  Costs can be variable, fixed or semi variable.  Variable costs are costs that vary in direct proportion to change in the cost drive (units or machine hours). Direct labor is a good example only if workers are paid by piece.  Fixed costs are costs that that remain the same despite change in the cost drive e.g. Depreciation, rent and insurance.

8  Fixed costs are committed in the sense that management can not change them or they can be discretionary because management uses its professional judgment to decide on the amount of cost.  Semi-variable costs are costs that behave partly as fixed and partly as variable. e.g. indirect labor costs and indirect material.

9 P RODUCTION, M ARKETING AND A DMINISTRATIVE COSTS Terminology : Prime costs: direct material and direct labor costs Conversion costs: direct labor and overhead costs Production costs: include  direct materials  direct labor and  factory overhead. Direct materials are any raw materials that become an identifiable part of the finished good. eg. fabric in clothes

10 Direct labor are the wages earned by workers who transform the material from its raw form to the finished good form. Factory overhead are any production costs other than direct material or direct labor. E.g. indirect material and labor, depreciation on manufacturing facilities, light and heat. Marketing costs: result from selling, delivering and costs for promoting sales retaining costumers as well as transportation, warehousing and other distribution costs. Administrative costs: result from directing and controlling the company. They include rental fees, telephone costs and salaries.

11 C OST OF G OODS S OLD S TATEMENT Where are production costs portrayed? They appear in the statement of cost of goods sold. This statement has the following format Company Name Cost of Goods Sold Statement Date

12  Direct materials Inventory1.1  +Purchases  - Purchase discount  -Purchase returns  Total material available for use  - Material  Materials used  + Direct labor cost  Direct cost of manufacturing  + Overhead cost  Add work in process 1.1  Less work in process  Cost of completed goods  Add finished goods inventory 1.1  Goods available for sale  Less finished goods inventory  Cost of goods sold

13 I NCOME STATEMENT Where are marketing and administrative costs portrayed? Company name Income statement Date ◦ Revenue ◦ Less CGS  Gross income ◦ Less Marketing costs ◦ Less Administrative costs  Profit before tax ◦ Less tax  Net income

14 B OTTOM LINE Production costs are treated as product costs and they are included in the work in process or finished goods inventory. Marketing and administrative costs are treated as period costs and they are charged to revenues.

15 E XAMPLE  Jerry Manufacturing Company purchased $ of materials and had the following account balances for the year 2006  Account Balance  Direct labor90000  Plant supervision 5000  Indirect labor 3000  Buildings  Equipment22000  Land  Factory insurance 900  Manufacturing supplies 1500  Repairs and maintenance 1500  Advertising expenses 3000

16  Traveling cost administrative staff 4000  Circulation pieces distributed 2500  Materials inventory  Work in process  Finished goods inventory  Utilities 2500  Marketing manger salary 6000  Clerical Salaries5000  Administrative staff salaries7000  Depreciation on factory buildings 4500  Depreciation on factory equipments 4000

17  Materials inventory  Work in process  Finished goods inventory  Purchase returns 1500  Purchase discount Calculate the materials used during the year. 2. Develop an analysis to find the total manufacturing cost for the year. 3. Calculate the cost of manufactured goods. 4. Calculate the cost of goods sold

18 Solution  Materials inventory ,000  +Purchase 310,000  -Purchase discount 2,500  -Purchase returns 1,500  Materials available for use 328,000  -Materials inventory ,000 Materials used 312,000  2. Manufacturing cost for the Year  Direct Material 312,000  Direct Labor 90,000  Total direct cost of manufacturing 402,000

19  Add overhead costs  Plant supervision 5,000  Indirect labor 3,000  Factory insurance 900  Manufacturing supplies 1,500  Repairs and maintenance 1,500  Utilities 2,500  Depreciation on factory buildings 4,500  Depreciation on factory equipment 4,000  Total cost for year424900

20  Cost of manufactured goods  Work in process ,000 + main cost for the period 424,900  - Work in process ,000  Cost of completed goods 426,900  Cost of goods sold  Finished goods inventory ,000  +cost of completed goods 426,900  - Finished goods ,000  Cost of goods sold425900


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