Chapter 2 ma note

MANAGEMENT ACCOUNTING 1

MKM 1013SAJIAH YAKOB

2013

CHAPTER 2

COST CONCEPTS

•Every company will incurred costs•Company has to know its costs for producing products•Why???? To improve performance•Company focused on cost leadership will focused on

-Cost reduction -Simplify processing

•Most manufacturing companies divide costs into 3 broad categories:

oDirect materialsoDirect labor oManufacturing overhead

•What is direct materials, direct labor and manufacturing overhead•DM= those materials that become an integral part of the finished products and that can be physically and conveniently traced to it.•Example: bread, direct material flour•Chair: direct material wood

o Direct materials

•Direct labor or labor cost that can be physically and conveniently traced to individual units of products•Example: assembly line workers/operators

o Direct labor

•Various names for manufacturing OH: indirect manufacturing costs, factory overhead and factory burden•Non-manufacturing costs;

-marketing or selling cost-administrative costs

•summary; handout/text book; page 40, exhibit 2-1

o Manufacturing overhead

PRODUCT COST VERSUS PERIOD COST

•Distinction between manufacturing and non-manufacturing cost – other way to look at a cost; product and period cost•When will cost being recognized???

Product costs

•Include all the cost that are involved in acquiring or making a product•Examples……….•Product cost are viewed as attaching to units of product as the goods are purchased or manufactured•Remain attach to the goods to the inventory awaiting sale•Product cost will assign to inventory in balance sheet•When the goods was sold, cost released from inventory as expenses (cost of good sold), will be matched against sales revenue•Product cost also known as inventoriable costs

Period cost•All the costs that are not included in product costs•These costs are expensed on the income statement at the period in which they are incurred

•Examples…….Cost classification on financial statement•FS in manufacturing company is more complex•Manufacturing company produce products•The production process includes so much costs that are not incurred in merchandising company

Balance sheet

•In merchandising company just one type of inventory•Manufacturing company has 3 class of inventory:

Raw materialsWork in progressFinished goods

-Refer example in page 41

Income statement

ITEM RM RM ITEM RM RM

Sales 1,000,000 Sales 1,500,000Cost of good sold;

Cost of goods sold:

Beginning inventory 100,000 Beginning finished good inventory

125,000

(+) purchased 650,000 (+) cost of goods manufactured

850,000

Goods available for sale

750,000 Goods available for sale 975,000

(-) ending inventory 150,000 600,000 (-) ending finished goods inventory

175,000 800,000

Gross margin 400,000 Gross margin 700,000(-) operating expenses: (-) operating expenses:

Selling expenses 100,000 Selling expenses 250,000Administrative expenses

200,000 300,000 Administrative expenses

300,000 550,000

Net operating income 100,000 Net operating income 150,000

• What is the different between IS merchandising and manufacturing company?.....

Assignment 2:

• What is the different between costs and expenses?

COST CLASSIFICATION FOR PREDICTING COST BEHAVIOUR

What is cost behavior; cost behavior refers to how a cost will react to changes in a level of activity•Costs are often categorized into 3 categories: fixed cost, variable cost and mixed costActivity can be expressed in many ways, such as unit produced, units sold, miles driven, beds occupied, hours work, lines of print etc

Variable cost = is a cost that varies in total, in direct proportion to changes in the level of activity

- Examples…..-Variable cost ordinarily mean that it is variable with respect to the amount of good or services the organization produced

- Examples…..Fixed cost are not affected by changes in activityExamples: good example is rentVery few costs are completely fixedMost will change if there is a large enough change in activitySo can conclude..fixed cost becomes fixed within some relevant range

Fixed cost = is a cost that remain constant, in total, regardless of changes in the level of activity.

Cost Classification For Assigning Costs To Costs Objects

•Costs assigning to cost object for a variety of purpose including pricing, profitability etc•Cost objects means anything for which cost data are desired•Examples: customers, jobs, product lines, departments, unit etc•Assigning cost to cost object, classified into 2 categories: direct cost and indirect cost

DIRECT COST & INDIRECT COST

- Direct cost is a cost that can be easily and conveniently traced to the particular cost objects under consideration

- Indirect costs is a cost that cannot be easily and conveniently traced to the particular cost objects under consideration

ASSIGNMENT 3:

• GIVE DEFINITION; SUNK COST, OPPURTUNITY COST & INCREMENTAL COST

COST BEHAVIOURANALYSIS & USE

-Mixed cost:oMixed cost contain fixed cost and variable costoAlso known as semi variable costsoFormula –relationship between mixed costs and level of activity can be express by equation:

•Fixed cost, variable cost and mixed cost

Y = a + bX

Y = total mixed cost

a = total fixed cost

b = variable cost per unit of activity

X = level of activity

•Analysis of mixed cost-Scatter graph plot-Regression-High-low method

SCATTERGRAPH PLOT

MONTH ACTIVITY LEVELPATIENT DAYS

MAINTENANCE COST

INCURRED (RM)

JANUARY 5600 7900FEBUARY

7100 8500

MARCH 5000 7400APRIL 6500 8200MAY 7300 9100JUNE 8000 9800JULY 6200 7800

Maintenance cost/Patient days

GRAPH PAPER

Regression

Regression method not cover midterm and final exam.

HIGH-LOW METHOD

-formula to REMEMBER!!!!

VARIABLE COST = CHANGE IN COST/CHANGE IN ACTIVITY

VARIABLE COSTING:A TOOL FOR MANAGEMENT

•2 general approaches used by the manufacturing companies for costing products for valuing inventories and cost of goods sold•Absorption costing and variable costing•Absorption costing used for external reporting•Variable used by managers to make internal decisions

ABSORPTION COSTING

•Treats all manufacturing costs as product cost regardless whether there are fixed or variable•Known as full cost method

VARIABLE COSTING

•Only those manufacturing costs that vary with output are treated as product cost•Usually include DM, DL and the variable portion of manufacturing OH•Fixed manufacturing OH are not treated as product cost and treated as period cost•Known as marginal costing or direct costing

Absorption costing Variable costing

Product cost Direct materials Product costDirect labor

Variable manufacturing overhedFixed manufacturing overhed

Period cost

Period cost Variable selling and administrative expensesFixed selling and administrative expenses

Unit cost computation

Example:Sasa company, a small company that produces a single product and has the following in cost structure:

RMNo of unit produced each year 6,000Variable cost per unit:DM 2DL 4Variable manufacturing OH 1Variable selling and admin expenses 3Fixed cost per yearFixed manufacturing OH 30,000Fixed selling and admin expenses 10,000

Required:•Compute the unit product cost under absorption costing•Compute the unit product cost under variable costing

Solution:

Absorption costingDM 2DL 4MANUFACTURING OHVARIABLE 1FIXED (30,000/6,000) 5TOTAL 12Variable costingDM 2DL 4VARIABLE MANUFACTURING OH1TOTAL 7

INCOME COMPARISON UNDER ABSORPTION AND VARIABLE COSTING

To illustrate, Sasa company, a small company that produces a single product and has the following in cost structure:

RMNo of unit produced each year 6,000Variable cost per unit:DM 2DL 4Variable manufacturing OH 1Variable selling and admin expenses 3Fixed cost per yearFixed manufacturing OH 30,000Fixed selling and admin expenses 10,000Units in beginning inventory 0Units produced 6000Units sold 5000Units in ending inventory 1000Selling price per unit 20Selling and admin expensesVariable per unit 3Fixed per year 10,000

Required:Compute net operating income under absorption and variable costing

Solution

Absorption costing

RM RM Variable costing

RM RM

Sales SalesLess; COGS Less; variable

expensesBeginning inventory

Variable COGS

Plus; cost of goods manufactured

Beginning inventory

Less: ending inventory

Plus; variable manufacturing cost

Gross margin Less: ending inventory

Less;selling and admin expensesNet operating income