Managerial Accounting and Cost

Concepts
Chapter 1

McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All

1-2

Work of Management

Planning
Planning
Directing
Directing and
and
Motivating
Motivating

Controlling
Controlling
1-3

Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organizations
organizations objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
1-4

Directing and Motivating

Directing and motivating involves
managing day-to-day activities to
keep the organization running
smoothly.
Employee work assignments.
Routine problem solving.
Conflict resolution.
Effective communications.
1-5

Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
1-6

Planning and Control

Cycle
Formulating
Formulatinglong-
long- Begin
and
andshort-term
short-termplans
plans
(Planning)
(Planning)

Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance Making plans(Directing
(Directing
performance and
(Controlling) andMotivating)
Motivating)
(Controlling)

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
1-7

Learning Objective 1

Identify the major differences

and similarities between
financial and managerial
accounting.
1-8

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
1-9

Learning Objective 2

Identify and give examples of

each of the three basic
manufacturing cost
categories.
1-10

Manufacturing Costs

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead

The Product
1-11

Direct Materials

Raw 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
1-12

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
1-13

Manufacturing Overhead

Manufacturing costs cannot be traced directly to

specific units produced.

Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
automobile assembly plant. workers, janitors and
security guards.
1-14

Classifications of
Nonmanufacturing Costs

Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
1-15

Learning Objective 3

Distinguish between
product costs and period
costs and give examples
of each.
1-16

Product Costs Versus Period

Costs
Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
1-17

Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company? (There may be
more than one correct answer.)
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.
1-18

Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company? (There may be
more than one correct answer.)
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.
1-19

Prime Cost and

Conversion Cost
Manufacturing costs are often
classified as follows:

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost
1-20

Comparing Merchandising
and Manufacturing Activities

Merchandisers . . .
Purchase finished
goods from
suppliers for
resale to
customers. Manufacturers . . .
Purchases raw
MegaLoMart materials from
suppliers.
Produce and sell
finished goods to
customers.
1-21

Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
Cash Cash
Receivables Receivables
Prepaid Expenses Prepaid Expenses
Merchandise Inventory Inventories:
1. Raw Materials
2. Work in Process
3. Finished Goods
1-22

Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
Cash Cash
Receivables Receivables
Materials waiting to
Prepaid Expenses Prepaid Expenses
be processed.
Merchandise Inventory Inventories:
Partially complete
products some 1. Raw Materials
material, labor, or 2. Work in Process
overhead has been 3. Finished Goods
added.
Completed products
awaiting sale.
1-23

Learning Objective 4

Prepare an income
statement including
calculation of the cost of
goods sold.
1-24

The Income Statement

Cost of goods sold for manufacturers
differs only slightly from cost of goods
sold for merchandisers.
Merchandising Company Manufacturing Company
Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $236,250
1-25

Inventory Flows

Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
1-26

Quick Check
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $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.
1-27

Quick Check
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000. $1,000 + $100 = $1,100
B. $ 800. $1,100 - $300 = $800
C. $1,200.
D. $ 200.
1-28

Learning Objective 5

Prepare a schedule of cost

of goods manufactured.
1-29

Schedule of Cost of Goods

Manufactured

Calculates the cost of raw

materials, direct labor and
manufacturing overhead used
in production.

Calculates the manufacturing

costs associated with goods
that were finished during the
period.
1-30

Schedule of Cost of Goods

Manufactured
Manufacturing Work
As items
AsCosts are removed
items are removed from
from
Raw Materials In Process
raw
raw materials
materials inventory
inventory and
and
Beginning raw
materials inventory placed
placed into
into the
the production
production
+ Raw materials process,
process, they
they are
are called
called direct
direct
purchased
= Raw materials materials.
materials.
available for use
in production
Ending raw materials
inventory
= Raw materials used
in production
1-31

Schedule of Cost of
Goods Manufactured
Manufacturing Work
Conversion
Conversion
Raw Materials Costs In Process
costs
costs are
are costs
costs
Beginning raw Direct materials incurred
incurred toto
materials inventory + Direct labor convert
+ Raw materials + Mfg. overhead convert the
the
purchased = Total manufacturing direct
direct materials
materials
= Raw materials costs into
into aafinished
finished
available for use product.
product.
in production
Ending raw materials
inventory
= Raw materials used As
As items
itemsare
areremoved
removedfrom
fromraw
raw
in production materials
materials inventory
inventoryand
and placed
placedinto
into
the
the production
production process,
process, they
theyare
are
called
called direct
direct materials.
materials.
1-32

Schedule of Cost of
Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending raw materials Ending work in
inventory All
All manufacturingcosts
manufacturing costs incurred
incurred
process inventory
= Raw materials used during
during the
theperiod
periodare
=are added
Costadded to
of goods tothe
the
in production beginning balance of work in
manufactured.
beginning balance of work in
process.
process.
1-33

Schedule of Cost of
Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
Ending raw materials Ending work in
inventory process inventory
Costs
Costs associated
associated with
with the
the goods
goods thatthat
= Raw materials used = Cost of goods
are completed
arein production during
completed during the
theperiod
periodare are manufactured.
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
1-34

Cost of Goods Sold

Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
1-35

Manufacturing Cost
Flows
Balance Sheet Income
Costs Inventories Statement
Material Purchases Raw Materials Expenses

Direct Labor Work in

Process
Manufacturing
Overhead Finished Cost of
Goods Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
1-36

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
1-37

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 $ 32,000

A. $276,000 + Raw materials

purchased 276,000

B. $272,000 = Raw materials available

for use in production $ 308,000

C. $280,000 Ending raw materials

inventory 28,000
D. $ 2,000 = Raw materials used
in production $ 280,000
1-38

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.
1-39

Quick Check

Direct materials used in production totaled

$280,000. Direct labor was $375,000 and
factory overhead was Direct
$180,000.
Materials
What $were
280,000
total manufacturing costs incurred
+ Direct Labor for the375,000
+ Mfg. Overhead 180,000
month? = Mfg. Costs Incurred
for the Month $ 835,000
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
1-40

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.
1-41

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.
Beginning work in
What was the cost of goodsprocess manufactured
inventory $ 125,000
+ Mfg. costs incurred
during the month? for the period 835,000

A. $1,160,000 = Total work in process

during the period $ 960,000

B. $ 910,000 Ending work in

process inventory 200,000

C. $ 760,000 = Cost of goods

manufactured $ 760,000
D. Cannot be determined.
1-42

Quick Check

Beginning finished goods inventory was

$130,000. The cost of goods manufactured for
the month was $760,000. 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.
1-43

Quick Check

Beginning finished goods inventory was

$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.
1-44

Learning Objective 6

Understand the
differences between
variable costs and fixed
costs.
1-45

Cost Classifications for

Predicting Cost Behavior

How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.

Total
Total variable
variable costs
costs change
change
when
when activity
activity changes.
changes.

Total
Total fixed
fixed costs
costs remain
remain
unchanged
unchanged when when activity
activity
changes.
changes.
1-46

Variable Cost

Your total texting bill is

based on how many texts you
send.
Total Texting Bill

Number of Texts Sent

1-47

Variable Cost Per Unit

The cost per text sent is
constant at
5 cents per text.

Cost Per Text Sent

Number of Texts Sent
1-48

Fixed Cost
Your monthly contract fee for your cell phone is
fixed for the number of monthly minutes in your
contract. The monthly contract fee does not
change based on the number of calls you make.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
1-49

Fixed Cost Per Unit

Within the monthly contract allotment, the
average fixed cost per cell phone call
made decreases as more calls are made.

Monthly Cell Phone

Contract Fee

Number of Minutes Used

Within Monthly Plan
1-50

Cost Classifications for

Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit

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.
1-51

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.
1-52

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.
1-53

Learning Objective 7

Understand the
differences between
direct and indirect costs.
1-54

Assigning Costs to Cost

Objects
Direct costs Indirect costs
Costs that can be Costs that cannot be
easily and easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost object. or other cost object.
Examples: Direct Example:
material and direct Manufacturing
labor overhead
1-55

Learning Objective 8

Understand cost
classifications used in making
decisions: differential costs,
opportunity costs, and sunk
costs.
1-56

Cost Classifications for

Decision Making
Every decision involves a choice
between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
1-57

Differential Costs and

Revenues
Costs and revenues that
differ among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.

Differential revenue is: Differential cost is:

$2,000 $1,500 = $500 $300

Net Differential Benefit is:

$200
1-58

Opportunity Costs

The potential benefit that is given up

when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
1-59

Sunk Costs

Cannot be changed by any decision. They

are not differential costs and should be
ignored when making decisions.

Example: You bought an automobile that cost

$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
1-60

Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
1-61

Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
1-62

Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
1-63

Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
1-64

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.
1-65

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.
1-66

Summary of the Types of

Cost Classifications
Predicting
Financial
Cost
Reporting
Behavior

Assigning
Decision
Costs to Cost
Making
Objects
1-67

End of Chapter 1