1. Basic Management Accounting Concepts Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2. Learning Objectives 1.Explain the meaning of cost and how costs are assigned to products and services. 2.Define the various costs of producing and services, as well as the costs of selling and administration. 3.Prepare income statements for manufacturing and service organizations.

3. Match Definitions Cost Assigning Costs Expenses Expired costs Revenue per unit The way a cost is linked to some cost object Accumulating Costs PriceAmount of cash sacrificed for goods or services expected to bring future or current benefit The way costs are measured and recorded

4. Discuss Costs ◙ One of the most important objectives of an organization to determine cost for a good or service ◙ Incurred to produce future benefits ◙ Reducing costs demonstrates improved efficiency ◙ Expenses are expired costs that are deducted from revenues on an income statement

5. ◙ In order to stay in business revenues must be greater then expenses (expired costs) - this difference is called profit ◙ Consumed costs are charged to the income statement as expenses ◙ Managers need to know costs and cost trends Discuss Costs Continued

6. What are cost objects? Anything for which costs are measured

7. What is the difference between direct and indirect costs? ◙ Direct costs can be easily and accurately traced to a cost object, usually meaning physically observed ◙ Indirect costs cannot be easily and accurately traced to a cost object. They are assigned to the cost object.

8. Illustrate Object Costing

9. Review Assigning Indirect Costs ◙ Assignment is done with allocation ◙ Done using a Reasonable and Convenient Method ◙ Necessary to determine the value of inventory and cost of goods sold ◙ Direct and indirect costs also occur in service businesses

10. Match Definitions Variable Cost Opportunity Cost Fixed Cost Benefits given up when one alternative is chosen over another A cost that does not change as output increases or decreases A cost that increases as output increases & decreases as output decreases

11. How do products and services differ? Products ◙ Tangible ◙ Raw materials ◙ Direct labor ◙ Capital input ◙ Inventoriable ◙ Has value ◙ Direct contact with consumer ◙ More consistency in product Services ◙ Intangible ◙ Can’t be stored ◙ Must have contact with consumer ◙ Greater chance of variance or variation

12. Define the three components of producing a product. ◙ Raw Materials ◙ Materials directly traced to the final product ◙ Direct Labor ◙ Labor directly traced to the goods or services being produced ◙ Overhead ◙ All other product costs that are not direct materials and direct labor

13. Illustrate Product Costing

14. How to calculate product cost in total and per unit. BlueDenim Company makes blue jeans. Last week, direct materials costing $38,400 were put into production. Direct labor of $24,000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57,600. By the end of the week, the company had completed 24,000 pairs of jeans. 2-1

15. How to calculate product cost in total and per unit. REQUIRED: Calculate the total product cost for the last week. Calculate the cost of one pair of jeans that produced for the last week. Calculation: 2-1 Direct materials Direct labor Overhead Total product cost $ 38,400 24,000 57,600 $120,000 Per-unit product cost = $120,000 / 24,000 = $5 Therefore, one pair of jeans cost $5 to produce.

16. What costs make up prime costs and conversion costs? Direct Materials Direct Labor Overhead Prime Costs Conversion Costs

17. How to calculate prime cost and conversion cost in total and per unit. 2-2 BlueDenim Company makes blue jeans. Last week, direct materials costing $38,400 were put into production. Direct labor of $24,000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57,600. By the end of the week, the company had completed 24,000 pairs of jeans.

18. How to calculate prime cost and conversion cost in total and per unit. 2-2 REQUIRED: Calculate the total prime cost last week. Calculate the per-unit prime cost. Calculate the total conversion cost for last week. Calculate the per-unit conversion cost. Calculation: Direct materials Direct labor Prime cost $ 38,400 24,000 $ 62,400 Per-unit prime cost = $62,400 / 24,000 = $2.60

19. How to calculate prime cost and conversion cost in total and per unit. 2-2 REQUIRED: Calculate the total prime cost last week. Calculate the per-unit prime cost. Calculate the total conversion cost for last week. Calculate the per-unit conversion cost. Calculation: Direct labor Overhead Conversion Cost $ 24,000 57,600 $ 81,600 Per-unit conversion cost = $81,600 / 24,000 = $3.40

20. Define Period Costs

21. How to calculate the direct materials used in production. 2-3 BlueDenim Company makes blue jeans. On July 1, BlueDenim had $48,000 of materials in inventory. During the month of July, the company purchased $238,000 of materials. On July 31, materials inventory equaled $30,000.

22. How to calculate the direct materials used in production. 2-3 REQUIRED: Calculate the direct materials used in production for the month of July. Calculation: Materials inventory, July 1 Purchases Materials inventory, July 31 Direct materials used in production $ 48,000 238,000 (30,000) $ 256,000

23. How to calculate the cost of goods manufactured. Recall that BlueDenim Company makes blue jeans. During the month of July, the company purchased $238,000 of materials. On July 31, materials inventory equaled $30,000. During the month of July BlueDenim Company incurred direct labor of $115,000 and overhead of $150,000. 2-4 July 1 July 31 Materials$ 48,000$ 30,000 Work in process30,00026,000

24. How to calculate cost of goods manufactured. 2-4 REQUIRED: Calculate the cost of goods manufactured for the month of July. Calculate the cost of one pair of jeans assuming 105,000 pairs of jeans were completed during July. Calculation: Direct materials Direct labor Overhead Total manufacturing cost for July Work in process, July 1 Work in process, July 31 Cost of goods manufactured $ 256,000 115,000 150,000 $ 521,000 30,000 (26,000) $ 525,000 Per-unit cost of goods manufactured = $525,000 / 105,000 = $5

25. How to calculate cost of goods sold. 2-5 BlueDenim Company makes blue jeans. During the month of July 105,000 pairs of jeans were completed at a cost of goods manufactured of $525,000. Suppose that on July 1 BlueDenim had 8,000 units in finished goods inventory costing $40,000, and on July 31 the company had 14,000 finished goods costing $70,000.

26. How to calculate cost of goods sold. 2-6 REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation: Cost of goods manufactured Finished goods inventory July 1 Finished goods inventory, July 31 Cost of goods sold $ 525,000 40,000 (70,000) $ 495,000

27. How to calculate cost of goods sold. Continued 2-6 REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation: Number of Units Sold Finished goods inventory July 1 Units finished in July Finished goods inventory, July 31 Units sold in July 8,000 105,000 (14,000) 99,000

28. How to prepare an income statement for a manufacturing company. 2-6 Recall that BlueDenim sold 99,000 pairs of jeans during the month of July at a total cost of $495,000. Each pair sold at a price of $8. BlueDenim also incurred two types of selling costs: commissions equal to 10% of the sales price and other selling expenses of $120,000. Administrative expenses totaled $85,000.

29. How to prepare an income statement for a manufacturing firm. 2-6 REQUIRED: Prepare an income statement for BlueDenim for the month of July. Calculation: Sales revenue (99,000 x $8) Cost of goods sold Gross Margin Less: Selling Expense: Commission (0.10 x $792,000) Fixed Selling Expense Administrative Expense Operating Income $ 792,000 495,000 $ 297,000 199,200 85,000 $ 12,800 BlueDenim Company Income Statement For the Month of July $ 79,200 120,000

30. How to calculate the percentage of sales for each line of the income statement. 2-7 Recall BlueDenim Company income statement for the month of July was completed and shown on Cornerstone 2- 6. REQUIRED: Prepare an income statement for BlueDenim for the month of July. Calculation: Income statement appears on the next slide. Every item is divided by Sales, i.e., Sales; 792,000 / 792,000 = 100.0%, Cost of goods sold; $495,000 / $795,000 = 62.5%

31. How to calculate the percentage of sales for each line of the income statement. 2-7 $ 792,000 495,000 $ 297,000 199,200 85,000 $ 12,800 $ 79,200 120,000 Sales revenue Cost of goods sold Gross Margin Less: Selling Expense: Commission Fixed Selling Expense Administrative Expense Operating Income Percent 100.0% 62.5% 37.5% 25.2% 10.7% 1.6%

32. How to prepare an income statement for a service organization. Komala Information Systems designs and installs human resources software for small companies. Last month, Komala had materials costs of $8,000, direct labor (computer technicians, software designers) of $50,000 and overhead of $65,000. Selling expenses of $7,000 and administrative expenses equaled $7,000. Sales totaled $165,000. REQUIRED: Prepare an income statement for Komala Information Systems for the past month. Calculation: Appears on the next slide 2-8

33. How to prepare an income statement for a service organization. Sales Cost of services sold: Direct materials Direct labor Overhead Gross margin Less: Selling expenses Administrative expenses Operating income 2-8 Komala Information Systems Income Statement For the Past Month $ 165,000 123,000 $ 42,000 7.000 7,000 $ 28,000 $ 8,000 50,000 65,000