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 © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 18 MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES

2. 18 - 2 Managerial accounting provides financial and nonfinancial information for managers of an organization and other decision makers. Financial accounting provides general purpose financial information to those who are outside the organization. M ANAGERIAL A CCOUNTING B ASICS C 1

3. 18 - 3 N ATURE OF M ANAGERIAL A CCOUNTING C 1

4. 18 - 4 Activity Cost Activity Cost T YPES OF C OST C LASSIFICATIONS C LASSIFICATION BY B EHAVIOR Cost behavior refers to how a cost will react to changes in the level of business activity. Total fixed costs do not change when activity changes. Total variable costs change in proportion to activity changes. Mixed costs are combinations of fixed and variable costs. Activity Cost C 2

5. 18 - 5 Direct costs Costs traceable to a single cost object. Examples: material and labor cost for a product. Indirect costs Costs that cannot be traced to a single cost object. Example: A maintenance expenditure benefiting two or more departments. T YPES OF C OST C LASSIFICATIONS C LASSIFICATION BY T RACEABILITY C 2

6. 18 - 6 T YPES OF C OST C LASSIFICATIONS C LASSIFICATION BY R ELEVANCE Sunk costs have already been incurred and cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: An automobile purchased two years ago cost $15,000. The $15,000 cost is sunk because whether the car is driven, sold, traded, or abandoned, the cost will not change. Out-of-pocket costs require future outlays of cash and should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend or not to spend the $25,000 next month. C 2

7. 18 - 7 T YPES OF C OST C LASSIFICATIONS C LASSIFICATION BY R ELEVANCE An opportunity cost is the potential benefit lost by choosing a specific action from two or more alternatives C 2 Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

8. 18 - 8 Product T YPES OF C OST C LASSIFICATIONS C LASSIFICATION BY F UNCTION Direct Labor Direct Material Manufacturing Overhead Period costs are expenses not attached to the product. Administrative costs are non-manufacturing costs of staff support and administrative functions. Selling costs are incurred to obtain orders and to deliver finished goods to customers. C 3

9. 18 - 9 P ERIOD AND P RODUCT C OSTS IN F INANCIAL S TATEMENTS C 3

10. 18 - 10 M ANUFACTURER ’ S B ALANCE S HEET Completed products for sale. Materials waiting to be processed. Can be direct or indirect. Partially complete products. Material to which some labor and/or overhead have been added. Raw Materials Finished Goods Goods in Process C 4

11. 18 - 11 Example: Steel used in the frame of a mountain bike. D IRECT M ATERIALS P 1 Direct material costs are the expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods.

12. 18 - 12 Example: Wages paid to a mountain bike assembly worker. D IRECT L ABOR P 1 Direct labor costs are the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods.

13. 18 - 13 Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs F ACTORY O VERHEAD P 1 Factory overhead consists of all manufacturing costs that are not direct materials or direct labor and the costs cannot be separately or readily traced to finished goods.

14. 18 - 14 Summarizes the types and amounts of costs incurred in a company’s manufacturing process. M ANUFACTURING S TATEMENT Direct Materials Used +Direct Labor +Factory Overhead =Total Manufacturing Costs +Beginning Work in Process – Ending Work in Process =Cost of Goods Manufactured P 2

15. 18 - 15 M ANUFACTURING S TATEMENT P 2

16. 18 - 16 O VERHEAD C OST F LOWS A CROSS A CCOUNTING R EPORTS P 2

17. 18 - 17 E ND OF C HAPTER 18