Braun Ma4 Inppt 02

Building Blocks
of Managerial
Accounting
Chapter 2
Objective 1
Distinguish among service,
merchandising, and
manufacturing companies
Copyright 2015 Pearson Education, Inc.
Three types of companies

Service
Merchandisers
Manufacturers
Service Companies
Provide a service only
No inventory
Examples
Advertising agencies
Banks
Law firms
Insurance companies
Merchandisers
Resell products purchased from
suppliers
One inventory account
Examples
Walmart
Best Buy
Amazon.com
Retailers vs. Wholesalers

Manufacturers
Use labor and other inputs to convert
raw materials into finished products
Examples
Procter & Gamble
General Mills
Dell Computer
Three inventory accounts

Manufacturers
Three inventory accounts
Raw materials
Work in process
Finished goods
Objective 2
Describe the value chain
and its elements
Value Chain
Activities that add value to products
and services and cost money.
Now turn to E2-18A
10
E2-16A
Cost incurred
Newspaper advertisements
Payment to consultant for advice on location
of new store
Purchases of merchandise
Freight-in
Salespeoples salaries
Depreciation expense on delivery trucks
Research on whether store should sell
satellite radio service
Customer Complaint Department
Rearranging store layout
Category of the
value chain
Marketing
R&D
Purchases
Purchases
Marketing
Distribution
R&D
Customer Service
Design
11
Objective 3
Distinguish between direct
and indirect costs
12
Cost Object
Anything for which managers want a
separate measurement of cost
Direct cost
Indirect cost
13
Now turn to S2-4
14
S2-4
Cost incurred
Direct or indirect
Depreciation of the building
Indirect
Cost of costume jewelry on the mannequins in
the Juniors Department
Direct
Cost of bags used to package customer
Indirect
purchases at the main registers for the store
Indirect
The Medina Kohls store managers salary
Indirect
Cost of the security staff at the Medina store
Direct
Manager of Juniors Department
Direct
Juniors Department sales clerks
Direct
Cost of Juniors clothing
Cost of hangers used to display the clothing in
Indirect
the store
15
S2-4 (cont.)
Cost incurred
Direct or indirect
Electricity for the building
Indirect
Cost of radio advertising for the store
Indirect
Juniors clothing buyers salaries (these
buyers buy for all of the Juniors Departments
Indirect
of Kohls stores)
16
Objective 4
Identify the inventoriable product
costs and period costs of
merchandising and manufacturing
firms
17
Two definitions of product

cost
Total costs: used internally only (we
will see this in later chapters)
Inventoriable product costs: used
for external reporting
18
Inventoriable Product Costs

and
Period Costs
19

Merchandiser
+
+
+
+
Purchase price from suppliers

Cost to get ready for sale
Freight-in
Import duties or tariffs
20

Manufacturer
Direct materials
Direct Costs
Direct labor
Manufacturing overhead Indirect Costs
21
Manufacturing Overhead
Indirect costs related to
manufacturing that are not direct
materials or direct labor
Indirect materials
Indirect labor
Other indirect manufacturing costs
22
Now turn to S2-8
COST
Period Cost or
Inventoriable
Product Cost?
If an
Inventoriable
Product Cost:
Is it DM, DL,
or MOH?
1. Cost of milk purchased from local dairy

farmers
2. Depreciation on Marketing Departments
computers
3. Property tax on dairy processing plant
4. Gasoline used to operate refrigerated trucks
delivering finished dairy products to grocery
stores
5. Company presidents annual bonus
6. Depreciation on refrigerated trucks used to
collect raw milk from local dairy famers
7. Plastic gallon containers in which milk is
packaged
8. Research and development on improving milk
pasteurization process
9. Television advertisements for Dairy Plains
23
S2-8
COST
1. Cost of milk purchased from local dairy
farmers
2. Depreciation on Marketing Departments
computers
3. Property tax on dairy processing plant
4. Gasoline used to operate refrigerated trucks
delivering finished dairy products to grocery
stores
5. Company presidents annual bonus
Period Cost or
Inventoriable
Product
Cost?
Product
If an
Inventoriable
Product Cost:
Is it DM, DL,
orDM
MOH?
Period
Product
MOH
Period
Period
Product
Product
MOH
DM
Period
Period
Product
MOH
6. Depreciation on refrigerated trucks used to

collect raw milk from local dairy famers
7. Plastic gallon containers in which milk is
Product
packaged
8. Research and development on improving milk
pasteurization process
9. Television advertisements for Dairy Plains
products
10. Lubricants used in running bottling
machines
11. Wages and salaries paid to machine
DL
24
Prime and Conversion Costs
25
Direct and Indirect Labor Costs

Include
Salaries and wages
Fringe benefits
Payroll taxes
26
Objective 5
Prepare the financial statements
for service, merchandising, and
manufacturing companies
27
Income StatementService
Company
Simplest income statement
All costs are period costs
Service revenues
Operating expenses
Operating income
28
Income StatementMerchandiser
+
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
29
Cost of Goods Sold Calculation

Merchandiser
+ Beginning inventory
+ Purchases
+ Import duties or tariffs
+ Freight-in
= Cost of goods available for sale
Ending inventory
=Cost of goods sold
30
Now turn to S2-10
31
S2-10
Cost of Goods Sold Computation
Beginning inventory
Purchases
Import duties
Freight -in
Cost of goods avail for sale
Ending inventory
Cost of goods sold
$45,000
700
3,300
$ 3,600
49,000
52,600
(5,500)
$47,100
32
Now turn to S2-11
33
S2-11
Simply Hair
Schedule of Cost of Goods Sold
Beginning inventory
Purchases
2,500,000
21,400,000
Cost of goods available
Ending inventory
23,900,000
(3,245,000)
Cost of goods sold
20,655,000
34
S2-11
Simply Hair
Income Statement
Sales revenue
Cost of goods sold
20,655,000
Gross profit
Operating expenses
Operating income
39,225,000
18,570,000
6,850,000
$
11,720,000
35
Direct Materials Used Calculation

Manufacturer
+ Beginning raw materials inventory
+ Purchases of raw materials
+ Freight in
= Materials available for use
Ending raw materials inventory
= Direct materials used
36
Now turn to S2-12
37
S2-12
Thomas Bikes
Computation of Direct Materials Used
Direct materials used:
Beginning raw materials inventory
Purchases of direct materials
$ 4,100
$16,400
1,300
Import duties
Freight-in
200
17,900
Direct materials available for use
22,000
Ending raw materials inventory
(1,900 )
Direct materials used

$20,100
38
Cost of Goods Manufactured

CalculationManufacturer
+ Beginning work in process inventory
+ Direct materials used
+ Direct labor
+ Manufacturing overhead
= Total manufacturing costs to
account for
Ending work in process inventory
= Cost of goods manufactured
39
How to Calculate
Beginning inventory + Net purchases
=
Cost of goods sold + Ending inventory
40
Cost of Goods Sold Calculation

Manufacturer
+
+
=
Beginning finished goods inventory

Cost of goods manufactured
Cost of goods available for sale
Ending finished goods inventory
Cost of goods sold
41
Now turn to E2-25A
42
E2-25A, Direct Materials

Used
Blue Sea Company
Direct Materials Used
Beginning raw materials
inventory
Plus: Purchases of direct
materials
Available for use
Less: Ending raw materials
inventory
Direct materials
used
$
27,000
79,000
$
106,000
(31,000)
$
75,000
43
E2-25A, Cost of Goods

Manufactured
Blue Sea Company
Schedule of Cost of Goods Manufactured
Beginning work in process inventory
Plus: Manufacturing costs incurred:
Direct materials used
Direct labor
Manufacturing overhead*
Cost of goods available
Ending work in process inventory
Cost of manufactured
*Manufacturing overhead:
Indirect labor
Insurance on plant
Deprec - Plant bldg and equip
Repairs and maintenance plant
Manufacturing overhead (total)
43,000
75,000
83,000
70,800
271,800
(28,000)
$
243,800
46,000
8,000
12,700
4,100
70,800
44
E2-25A, Cost of Goods Sold

Blue Sea Company
Schedule of Cost of Goods Sold
Beginning finished goods inventory
Plus: Cost of goods manufactured

Available for sale
243,800
$
Less: Ending finished goods inventory

Cost of Goods Sold
259,800
(29,000)
16,000
230,800
45
Income StatementManufacturer
+
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
46
Now turn to E2-26A
47
E2-26A
Blue Sea Company
Income Statement
Sales revenue
Cost of goods sold
Gross profit
Operating expenses
Marketing expenses
$
390,000
230,800
$
159,200
76,000
General andCopyright
admin
expenses 27,500
2015 Pearson Education, Inc.
48
Product and Period Costs

Type of
Inventoriable
Product Costs
Period
Costs
49
Manufacturing Companies
Inventory Accounts
Raw Materials Inventory
+ Beginning
inventory
+ Purchases and
freight
= Ending
inventory
Materials used
in work in
process
50
Inventory Accounts
Work in Process Inventory
+ Beginning
inventory
+ Materials used from
raw materials
+ Direct Labor
+ Manufacturing
overhead
= Ending
inventory
Cost of goods
manufactured and sent
to finished goods
51
Inventory Accounts
Finished Goods Inventory
+ Beginning
inventory
+ Cost of goods
Cost of goods
sold
manufactured
= Ending
inventory
52
Balance Sheet Differences

Type of Company
Inventory Accounts
Service Company
None
Merchandiser
Merchandise inventory
Raw materials, work in process,
Manufacturer
and finished goods inventory
53
Objective 6
Describe costs that are
relevant and irrelevant for
decision making
54
Controllable and Uncontrollable

Costs
Controllabl Management can
e
influence or change cost
Management cannot
Uncontroll
change or influence cost
able
in the short run
55
Relevant and Irrelevant

Costs
Releva
nt
Differential costs, which are
costs that differ between

alternatives
Costs that do not differ
between alternatives
Irreleva or
nt
Sunk costs costs incurred in
the past that cannot be
changed
56
Objective 7
Classify costs as fixed or variable
and calculate total and average
costs at different volumes
57
Cost Behavior
Variable
costs
Fixed
costs
Change in total cost in

direct proportion to
changes in volume
Stay constant in total cost
over a wide range of
activity levels
58
Total Variable Costs

Assume we pay 5% sales commissions on all sales.
The cost of sales commissions increases
proportionately with increases in sales.
59
Total Fixed Costs: Stay Constant in

Total over a Wide Range of Activity
Levels
60
Total Cost
Total cost = Fixed costs + (Variable
cost per unit x number of units)
Example:
Fixed costs = $20,000
Variable cost per unit = $50 per unit
Number of units = 100
Total cost = $20,000 + ($50 x 100)
= $25,000
61
Average Cost
Total cost number of units = Average cost
Example:
$25,000 = $250 per unit
100 units
The average cost per unit is NOT
appropriate for predicting total costs at
different levels of output.
62
Marginal Cost
Cost of making one more unit
63
End of Chapter 2
64
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reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.
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Building Blocks

Copyright 2015 Pearson Education, Inc.

Three types of companies

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Retailers vs. Wholesalers

Three inventory accounts

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Now turn to E2-18A

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Now turn to S2-4

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Two definitions of product

Copyright 2015 Pearson Education, Inc.

Inventoriable Product Costs

Copyright 2015 Pearson Education, Inc.

Inventoriable Product Costs

Purchase price from suppliers

Copyright 2015 Pearson Education, Inc.

Inventoriable Product Costs

Copyright 2015 Pearson Education, Inc.

Now turn to S2-8

1. Cost of milk purchased from local dairy

6. Depreciation on refrigerated trucks used to

Prime and Conversion Costs

Copyright 2015 Pearson Education, Inc.

Direct and Indirect Labor Costs

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Cost of Goods Sold Calculation

Now turn to S2-10

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Now turn to S2-11

Copyright 2015 Pearson Education, Inc.

Cost of goods available

Cost of goods sold

Copyright 2015 Pearson Education, Inc.

Cost of goods sold

Direct Materials Used Calculation

Copyright 2015 Pearson Education, Inc.

Now turn to S2-12

Copyright 2015 Pearson Education, Inc.

Direct materials available for use

Ending raw materials inventory

Direct materials used

Cost of Goods Manufactured

Copyright 2015 Pearson Education, Inc.

Cost of Goods Sold Calculation

Beginning finished goods inventory

Copyright 2015 Pearson Education, Inc.

Now turn to E2-25A

Copyright 2015 Pearson Education, Inc.

E2-25A, Direct Materials