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 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting, Brewer, Garrison,Noreen

/08/18/managerial-accounting-today/ Video preparation Pizza Hut

1-3 Different knives for different purposes

1-4 Different costs Different purposes

1-5 Direct Materials (DM) Raw materials Manufacturing cost categories

1-6 Steel Wood Plastic

1-7 Direct Labor (DL) Assembly line workers Manufacturing cost categories

1-8 Manufacturing cost categories Manufacturing overhead Also known as burden Electricity Rent Property taxes Materials - minor parts / material – solder, washers, grease

1-9 Manufacturing cost categories Manufacturing overhead Also known as burden Electricity Rent, Depreciation Property taxes Materials - minor parts / material – solder, washers, grease

1-10 Manufacturing overhead Indirect Labor examples  Forklift truck operators  Janitors  Security  Rework labor (fix defects)  Overtime premium paid to ALL workers  Manager’s salaries

1-11 Direct Cost Easily traced to it. Wood Baseball bat Trace

1-12 Indirect Cost  Cannot be easily traced to it.  Allocated to cost objects

1-13 Nonmanufacturing Costs Selling Costs Costs to secure order and deliver product. Administrative Costs All executive, organizational, and clerical costs.

1-14 Product Costs  Capitalized on the balance sheet (inventory)  Expensed only when the product sold  Direct labor  Direct materials  Overhead

1-15 Product Costs  Capitalized on the balance sheet (inventory)  Expensed only when the product sold  Direct labor  Direct materials  Overhead

1-16 Period Costs  Expensed on the income statement as they are incurred Selling, general and administrative costs

1-17 Product Costs Versus Period Costs Product costs Period costs Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

1-18 Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? 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 Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? 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.

1-20 Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost

1-21 Predicting Cost Behavior Changes in activity create a reaction ▫ Variable costs -> Change ▫ Fixed costs => same ▫ Mixed costs => change how a cost will react to changes such as sales volume, production volume, or orders processed.

1-22 What would be the cost per student if two students bought this delicious fish dish? What if four students ordered the dish? Fixed cost example ¥45

1-23 Variable costs example a beverage costs ¥ 10 and each student eating the fish has one beverage Fixed cost: Fish ¥ 45 Variable costs: 4 10 ¥ 40

1-24 Cost behavior patterns Variable Cost  Constant per unit (beverage) but changes in total in proportion to changes in the cost driver (activity) within the relevant range  Examples Materials (parts), fuel costs for a trucking company, line employee wages $ Volume

1-25 $ Volume Fixed Cost A cost which constant in total as volume changes but changes on a per-unit (fish) basis as the cost driver increases and decreases within the relevant range Such as depreciation, insurance, real estate taxes, supervisor salary Cost behavior patterns

1-26 Activity Base (Cost Driver) What drives cost to change? Units produced Kilometers driven Machine- hours Labor- hours

1-27 Types of Fixed Costs Committed Long term, cannot be significantly reduced in the short term. Committed Long term, cannot be significantly reduced in the short term.

1-28 Discretionary May be altered in the short term by current managerial decisions Discretionary May be altered in the short term by current managerial decisions Types of Fixed Costs

1-29 Relevant Range Major Assumptions  Costs => variable and fixed  Specific Time Span  Linear Total Cost Relationship  Only one cost driver  Variations of the cost driver are within the relevant range

1-30 Relevant Range Major Assumptions  Costs => variable and fixed  Specific Time Span  Linear Total Cost Relationship  Only one cost driver  Variations of the cost driver are within the relevant range

1-31 Relevant Range The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.

1-32 Relevant Range and Cost Behavior $ Volume $ Relevant Range Variable Cost Relevant Range Fixed Cost

1-33 Fixed Costs and the Relevant Range Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet. Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet. Assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet.

1-34 Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) Fixed Costs and the Relevant Range 90 Relevant Range Range of activity over which the graph of the cost is flat.

1-35 Predicting Cost Behavior

1-36 Quick Check Which of these costs change (variable) with the number of ice cream 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.

1-37 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

1-38 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Contains both variable and fixed elements Mixed Costs (or semivariable costs) Total mixed cost

1-39 Mixed Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Total mixed cost

1-40 Mixed Costs – An Example 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 + bX Y = $40 + ($0.03 × 2,000) Y =$100

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1-42 Different Types of Profit Firms  Merchandising-sector companies Product resellers  Manufacturing-sector companies Create and sell their own products - BMW  Service-sector companies Provide services / intangible products For ex.: legal advice, auditors.

1-43 Income statement formats Used primarily for external reporting. Used primarily by management.

1-44 Uses of the Contribution Format The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for: 1.Cost-volume-profit analysis (Chapter 5). 2.Budgeting (Chapter 7). 3.Segmented reporting of profit data (Chapter 6). 4.Special decisions such as pricing and make-or- buy analysis (Chapter 10). The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for: 1.Cost-volume-profit analysis (Chapter 5). 2.Budgeting (Chapter 7). 3.Segmented reporting of profit data (Chapter 6). 4.Special decisions such as pricing and make-or- buy analysis (Chapter 10).

1-45 Costs for Decision Making Every decision choice between at least two alternatives.

1-46 Only consider costs that differ between alternatives

1-47 Differential Cost and Revenue 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

1-48 Opportunity Cost Benefit 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. Cost of not enjoying the benefit of earning a salary

1-49 Sunk Costs Already incurred and cannot be changed now or in the future. Ignore when making decisions.

1-50 Summary of the Types of Cost Classifications Financial Reporting Product vs Period Predicting Cost Behavior Fixed, Variable, Mixed Assigning Costs to Cost Objects Direct, Indirect Making Business Decisions Differential, Sunk, Opportunity