Professional Documents
Culture Documents
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1. An Overview
Financial Accounting
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Management Accounting
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Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
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Planning
Establish Goals.
Develop Budgets.
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Controlling
The control function gathers feedback to
ensure that plans are being followed.
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Decision Making
What should
we be selling?
Who should
we be serving?
How should
we execute?
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Management Accounting
Cost Management
Management Control
Systems Systems
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Cost Accounting
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Management Control System
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2. Basic Cost Concepts
Cost Classifications
External uses
For financial reporting purposes, product
cost is determined in a standard way.
Internal uses
Inside the organization costs serve many different
purposes, e.g., pricing, product mixing, etc. The way
the cost is to be used will define the way it should be
computed.
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Types of Cost Classifications
Sale
Direct Manufacturing
Manufacturing Costs Overhead R&D expenses;
Design expense;
Marketing;
Distribution;
After-sale;
All manufacturing
General
Direct Materials costs except direct
Administration
materials and direct
Direct Labor labor
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Manufacturing Costs
The Product
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
“Touch labor”
Prime Conversion
Cost Cost
Flow of Inventoriable Costs and Period
Costs in Manufacturing Company
1-22
Schedule of Cost of Goods Manufactured of
a Manufacturing company
Cellular Products
Schedule of Cost of Goods Manufactured
For the Year Ended Dec 31, 2009 (in thousands)
Direct materials:
Beginning inventory, Jan 1, 2009 $11,000
Purchases of direct materials 73,000
STEP 1 Cost of direct materials available for use 84,000
Ending inventory, Dec 31, 2009 8,000
Direct materials used $76,000
Direct manufacturing labor 9,000
Manufacturing overhead costs:
Indirect manufacturing labor $7,000
Supplies 2,000
STEP 2 Heat, light, and power 5,000
Depreciation - plant building 2,000
Depreciation - plant equipment 3,000
Miscellaneous 1,000
Total manufacturing overhead costs 20,000
Manufacturing costs incurred during 2009 105,000
Beginning WIP inventory, Jan 1, 2009 6,000
STEP 3 Total manufacturing costs to account for 111,000
Ending WIP inventory, Dec 31, 2009 7,000
Cost of goods manufactured (to Income Statement) $104,000
1-23
Income Statement of a Manufacturing
Company
Cellular Products
Income Statement
For the Year Ended Dec 31, 2009 (in thousands)
Revenues $210,000
Cost of goods sold:
From Schedule of
Beginning finished goods inventory, Jan 1, 2009 $22,000
Cost of Goods
Cost of goods manufactured 104,000 Manufactured
STEP 4 Cost of goods available for sale 126,000
Ending finished goods inventory, Dec 31, 2009 18,000
Cost of goods sold 108,000
Gross margin (or gross profit) 102,000
Operating costs:
R&D, design, mktg., dist., & cust. -service cost 70,000
Total operating costs 70,000
Operating income $32,000
1-24
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.
E. Sales commissions.
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.
E. Sales commissions.
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
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? Beg. raw materials $
A. $276,000 + Raw materials
purchased
B. $272,000 = Raw materials available
for use in production $
C. $280,000 – Ending raw materials
inventory
D. $ 2,000
= Raw materials used
in production $
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.
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 Direct Materials $ 280,000
C. $655,000 + Direct Labor 375,000
+ Mfg. Overhead 180,000
D. Cannot be determined.
= Mfg. Costs Incurred
for the Month $ 835,000
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.
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? Beginning work in
A. $1,160,000 process inventory
+ Mfg. costs incurred
$ 125,000
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Cost Object -- DELL
Specific Product Dell XPS 600
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What Does Cost Mean?
The way the cost is to be used will define the way it
should be computed.
Now suppose that you are told that the flight is going
anyway and you must compute the cost of adding one more
person on board. Would you use the same cost to make the
decision?
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Research &
Customer-
Development Design Production Marketing Distribution
Service
Cost Cost Costs Cost Costs
Costs
Product Cost
for Financial
Statements
(inventoriable
cost)
1-39
Cost Behavior Visualized
$6,000
F = $48,000
4,800 VYV = $300X $48,000
3,600
2,400 24,000
1,200
4,000 8,000 12,000 16,000 20,000 4,000 8,000 12,000 16,000 20,000
1-40
Cost Classifications for
Predicting Cost Behavior
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Exercise: Variable Cost vs. Fixed Cost
Pizza Hut
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Use Unit Costs Cautiously
Example: $40M of manufacturing costs are incurred in 2014 to
produce 500,000 cellular phones. The $40M costs consist of
$10M of fixed costs and $30M of variable costs?
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Cost Classifications for Assigning
Cost to Cost Object
According to the methods used to assign costs to cost objects,
costs can be classified into:
1-45
Cost Classifications for Decision Making
Alternative A
Alternative B
Psychologists show:
Many people have a tendency to treat opportunity
and outlay costs differently.
e.g.., Holding Cost for Inventory (i.e., funds tied up in
inventory are not available for investment elsewhere) is
often ignored.
IMBA6033 Topic 4 Page 4-49
Sunk Cost
Costs incurred in the past that cannot be
changed by present or future decisions.
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