Introduction to
Managerial Accounting
and Cost Concepts
Management Accounting
What is Management Accounting?
It is the process of identifying, measuring,
accumulating, analyzing, preparing,
interpreting, and communicating
information that managers use to
fulfill organizational objectives.
Managerial
Accounting
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6. Requirements
1. Users
2. Time focus
Work of Management
Planning
Directing and
Motivating
Controlling
Comparing Actual
to
Planned Performance
(Controlling)
Decision
Making
Measuring
Performance
(Controlling)
6
Begin
Implementing
the Plans
(Directing and
Motivating)
Planning
Increase
Productivity
Financial
Accounting
System
Controlling
Actions
Evaluations
Performance
Reports
7
Customer
surveys
Competitor
analysis
Advertising
impact
New items
report
Role of Budgets
A budget is a quantitative expression of a
Role of
Performance Reports
Performance reports formalize controls and
provide feedback by comparing results with
plans and by highlighting variances.
Variances are deviations from the plan.
Performance Report
Budgeted Actual
Variance
Amount Amount Amount
Revenues 25,000 19,000 6,000 U
Expenses 20,000 15,000 5,000 F
Net Income 5,000 4,000 1,000 U
F = Favorable
U = Unfavorable
10
Cost Object
Cost
Accumulation
Cost Object
Cost Object
Cost
Assignment
Tracing
Allocating
12
Indirect costs
Examples: direct
13
Example:
manufacturing
overhead
Direct Costs
Example: Paper on which
Sports Illustrated magazine
is printed
Indirect Costs
Example: Lease cost for
Time-Warner building
housing the senior editors
of its magazine
14
COST
COSTOBJECT
OBJECT
Example:
Example:Sports
Sports
Illustrated
Illustratedmagazine
magazine
Finishing
Direct Costs
$55,000
$20,000
$20,000
Allocated
16
Manufacturers . . .
finished goods.
MegaLoMart
17
Manufacturing Costs
Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor
The Product
18
Manufacturing
Manufacturing
Overhead
Overhead
Direct Materials
Those materials that become an integral part
of the product and that can be conveniently
traced directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
19
Direct Labor
Those labor costs that can be easily traced to
individual units of product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
20
Manufacturing Overhead
Manufacturing costs that cannot be traced directly
to specific units produced.
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
21
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Direct
Material
Material
Direct
Direct
Labor
Labor
Prime
Cost
Manufacturing
Manufacturing
Overhead
Overhead
Conversion
Cost
22
Nonmanufacturing Costs
Marketing and selling costs . . .
Costs necessary to get the order and deliver the
product.
Administrative costs . . .
All executive, organizational, and clerical costs.
23
Quick Check
Which of the following costs would be
considered manufacturing overhead at Boeing?
(More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.
24
Sale
Balance
Sheet
Income
Statement
26
Income
Statement
Inventoriable Costs
Period Costs
28
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.
29
Balance Sheet
Manufacturer
Merchandiser
Current Assets
Current assets
Cash
Cash
Receivables
Receivables
Prepaid expenses
Merchandise inventory
Prepaid Expenses
31
Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser
Manufacturer
Current assets
Current Assets
Cash
Cash
Receivables
Receivables
Materials
waiting to
be processed.
Prepaid
Expenses
Prepaid expenses
Merchandise
Partially complete
inventory
products some
material, labor, or
overhead has been
added.
Inventories
Raw Materials
Work in Process
Finished Goods
Completed products
awaiting sale.
32
$ 14,200
234,150
$ 248,350
(12,100)
$ 236,250
33
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period Costs
34
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Manufacturing Company
BALANCE SHEET
Inventoriable
Costs
Materials
Inventory
INCOME STATEMENT
Revenues
Finished
Goods
Inventory
when
sales
occur
deduct
Cost of
Goods Sold
Work in
Process
Inventory
Period
Costs
Equals Operating Income
35
Merchandising Company
BALANCE SHEET
Inventoriable
Costs
Merchandise
Purchases
INCOME STATEMENT
Revenues
Inventory
when
sales
occur
deduct
Cost of
Goods Sold
Period
Costs
Equals Operating Income
36
Quick Check
Which of the following transactions would
immediately result in an expense? (There may
be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and
paid.
38
Inventory Flows
Beginning
Beginning
balance
balance
$$
$$
Available
Available
$$$$$
$$$$$
Additions
Additions
$$$
$$$
_ Withdrawals
Withdrawals
$$$
$$$
40
Available
Available
$$$$$
$$$$$
Ending
Ending
balance
balance
$$
$$
Quick Check
If your bank balance at the beginning of the
month was $1,000, you deposited $100 during
the month, and withdrew $300 during the
month, what would be the balance at the end of
the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
41
Manufacturing
Costs
Work
In Process
Beginning raw
materials inventory
Beginning
Beginning inventory
inventory
is
is the
the inventory
inventory
carried
carried over
over from
from
the
the prior
prior period.
period.
43
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Work
In Process
Direct materials
As
Asitems
itemsare
areremoved
removed from
from raw
raw
materials
materialsinventory
inventoryand
and placed
placedinto
into
the
theproduction
productionprocess,
process, they
theyare
are
called
called direct
direct materials.
materials.
44
Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000
45
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
47
Work
In Process
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
48
Work
In Process
Conversion
Conversion
costs
costsare
arecosts
costs
incurred
incurredto
to
convert
convert the
the
direct
directmaterial
material
into
into aafinished
finished
product.
product.
Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.
49
+
=
Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production
Manufacturing
Costs
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Work
In Process
Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
All
All manufacturing
manufacturing costs
costsincurred
incurred
during
during the
theperiod
period are
areadded
addedto
tothe
the
beginning
beginningbalance
balanceof
of work
workin
in
process.
process.
51
Manufacturing
Costs
Work
In Process
Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs
Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured.
+
=
Costs
Costsassociated
associated with
with the
thegoods
goodsthat
that
are
arecompleted
completedduring
duringthe
the period
period are
are
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
52
Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.
53
55
Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
56
Cost Drivers
58
Cost Behavior
59
Cost Drivers
Production Example
Example costs:
Example cost drivers:
Labor wages
Labor hours
Supervisory salaries
No. of people supervised
Maintenance wages
No. of mechanic hours
Depreciation
No. of machine hours
Energy
Kilowatt hours
60
Cost Drivers
61
Total
Totalvariable
variablecosts
costs
change
changewhen
whenactivity
activity
changes.
changes.
Total
Totalfixed
fixedcosts
costs
remain
remain unchanged
unchanged
when
whenactivity
activitychanges.
changes.
62
Comparison of
Variable and Fixed Costs
A variable cost is a cost that changes in direct
proportion to changes in the cost driver.
A fixed cost is not immediately affected
by changes in the cost driver.
63
Rules of Thumb
64
Rules of Thumb
65
Relevant Range
This rule of thumb holds true only within
reasonable limits.
The relevant range is the limit of costdriver activity within which a specific
relationship between costs and the cost
driver is valid.
66
Relevant Range
Fixed Costs
$16,000
$12,000
Relevant Range
$8,000
500
$4,000
2,500
Minutes Talked
68
Per Minute
Telephone Charge
Minutes Talked
69
Monthly Basic
Telephone Bill
In Total
Per Unit
Variable
Fixed
72
Cost Behavior
Examples of normally variable costs
Merchandisers
Service Organizations
Manufacturers
Merchandisers and
Manufacturers
Machine
hours
Miles
driven
Labor
hours
74
Discretionary
Long-term, cannot be
reduced in the short
term.
Examples
Examples
Depreciation on
Buildings and
Equipment
Advertising and
Research and
Development
75
Quick Check
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.
76
Quick Check
Which of the following costs would be variable
with respect to the number of people who buy a
ticket for a show at a movie theater? (There
may be more than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater
employees.
D. The cost of cleaning up after the show.
78
Rent Cost in
Thousands of Dollars
60
Range
30
00
1,000
2,000
3,000
Rented Area (Square Feet)
81
Quick Check
Which of the following statements about cost
behavior are true?
a. Fixed costs per unit vary with the level of
activity.
b. Variable costs per unit are constant within
the relevant range.
c. Total fixed costs are constant within the
relevant range.
d. Total variable costs are constant within the
relevant range.
82
84
85
86
Cost Drivers
88
89
$94,500
90
Variable
Fixed
Indirect
91
92
93
$94,500
94
96
98
Prime Costs
Direct
Materials
Direct
Labor
99
Prime
Costs
Conversion Costs
Direct
Labor
Manufacturing
Overhead
Indirect
Labor
Indirect
Materials
100
Other
Conversion
Costs
Sunk Costs
Sunk costs cannot be changed by any decision. They are not
differential costs and should be ignored when making decisions.
101
Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
102