Managerial Accounting and Cost Concepts Chapter 2 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative. 2-2

Directing and Motivating Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications. 2-3

Controlling The control function ensures 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. 2-4

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 2-5

Comparison of Financial and Managerial Accounting 2-6

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 2-7

Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers 2-8

Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead 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. 2-9

Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs. 2-10

Product Costs Versus Period Costs 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 2-11

Balance Sheet Merchandiser Current assets  Cash  Receivables  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Inventories Raw Materials Work in Process Finished Goods 2-12

Merchandiser Current assets  Cash  Receivables  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Inventories Raw Materials Work in Process Finished Goods Balance Sheet Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed. 2-13

The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. 2-14

Basic Equation for Inventory Accounts Beginning balance Beginning balance Additions to inventory ++ == Ending balance Ending balance Withdrawals from inventory Withdrawals from inventory

Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor, and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period. 2-16

Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material PurchasesRaw Materials 2-17

Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes. 2-18

Variable Cost Your total texting bill is based on how many texts you send. Number of Texts Sent Total Texting Bill 2-19

Variable Cost Per Unit Number of Texts Sent Cost Per Text Sent The cost per text sent is constant at 5 cents per text. 2-20

Fixed Cost Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee 2-21

Fixed Cost Per Unit Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made. 2-22

Cost Classifications for Predicting Cost Behavior 2-23

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