Copyright ©2008 Prentice Hall. All rights reserved 2-1 Building Blocks of Managerial Accounting Chapter 2.

Copyright ©2008 Prentice Hall. All rights reserved

2-1

Building Blocks of Managerial Accounting

Chapter 2


2-2

Objective 1

Distinguish among service, merchandising, and manufacturing companies


2-3

Service Companies

• Sell services

• No inventory or cost of goods sold accounts

• Labor costs – incurred to develop new services, advertise, provide customer service


2-4

Merchandising Companies

• Purchase inventory from suppliers; resell to customers

• Retailers and wholesalers

• One inventory account – includes all costs to acquire and get inventory ready for sale

• Labor costs – identify new products and locations for stores, advertising, selling, customer service


2-5

Manufacturing Companies

• Use labor, plant, and equipment to convert raw materials into finished products

• Three inventory accounts: Raw Materials inventory Work in process inventory Finished goods inventory


2-6

Objective 2

Describe the value chain and its elements


2-7

Value Chain

• Activities that add value to products and services

R&D DesignProduction/Purchases

MarketingDistributionCustomer

Service


2-8

Objective 3

Distinguish between direct and indirect costs


2-9

Cost Object

• Anything for which managers want a separate measurement of cost Direct cost – can be traced directly to cost

object Indirect cost – cannot be traced directly to

cost object


2-10

Objective 4

Identify the inventoriable product costs and period costs of merchandising and

manufacturing firms


2-11

Inventoriable Product Costs

• Inventoriable product costs – costs incurred during production or purchases stage of value chain


2-12

Inventoriable Product Costs: Incurred During Production or

Purchases Stage of Value Chain

R&D Design


Service

Production/Purchases



2-13

Period Costs: All Costs Incurred in the Other Stages of the Value Chain


Service

Period Costs


2-14

Merchandising Company Product Costs

• Purchase price plus cost of getting merchandise ready for sale


2-15

Manufacturing Company’s Inventoriable Product Costs

• Direct materials

• Direct labor

• Manufacturing overhead

Direct Costs

Indirect Costs


2-16

Manufacturing Overhead

• Indirect costs related to manufacturing operations

• Generally all manufacturing costs that are not direct costs Indirect materials Indirect labor


2-17

Prime and Conversion Costs

Direct Materials

Direct Labor

Manufacturing Overhead

Prime Costs Conversion Costs


2-18

Direct and Indirect Labor Compensation

• Salaries & wages

• Fringe benefits

• Payroll taxes


2-19

Service Company

• All costs are period costs

• Operating income = Service revenue – operating expenses


2-20

Objective 5

Prepare the financial statements for service,

merchandising, and manufacturing companies


2-21

2008 Product

costs

2008 Income

Statement

Inventory sold in 2008

Cost of goods sold

Cost of goods sold

Inventory

2008 Balance

Sheet

2009 Income

Statement

Inventory sold in 2009


2-22

Merchandising Company: Income Statement

Sales

- Cost of goods sold

Gross profit

- Operating expenses

Operating income


2-23

Merchandising Company: Cost of Goods Sold Calculation

Cost of goods sold:

Beginning inventory

+ Purchases

+ Freight-in

Cost of goods available for sale

- Ending inventory

Cost of goods sold


2-24

Manufacturing Companies: Income Statement

Sales

- Cost of goods sold

Gross profit

- Operating expenses

Operating income


2-25

Manufacturing Company: Calculating Cost of Goods Sold

Cost of goods sold:

Beginning finished goods inventory

+ Cost of goods manufactured

Cost of goods available for sale

- Ending finished goods inventory

Cost of goods sold


2-26

Manufacturing Company: Calculating Cost of Goods

Manufactured

Cost of goods manufactured:

Beginning work in process inventory+ Direct materials used+ Direct labor+ Manufacturing overheadTotal manufacturing costs to account for- Ending work in process inventory

Cost of goods manufactured


2-27

Manufacturing Company: Direct Materials Calculation

Direct materials used:

Beginning materials inventory

+ Purchases of direct materials

+ Freight in

Materials available for use

- Ending materials inventory

Direct materials used


2-28

Product and Period CostsType of Company


Period Costs

Service Company

None All costs along the value chain

Merchandising Company

Purchases plus cost of freight

All costs except purchases

Manufacturing Company

Direct Materials, Labor and MFG OH

All costs except production

Accounting Treatment

Inventory, then expense

Always Expense


2-29

Manufacturing Companies’Inventory Accounts

Materials InventoryBeginning inventory

Purchases & freight

Ending inventory

Materials used


2-30


Work in Process Inventory

Materials usedDirect labor

Manufacturing overhead

Beginning inventory

Ending inventory

Cost of goodsmanufactured


2-31


Finished Goods Inventory

Beginning inventory

Ending inventory

Cost of goodssoldCost of goods

manufactured

Income Statement


2-32

E2-23

a. __________ can be traced to cost objects.

b. ____________ are expensed when incurred.

c. _____ are the combination of direct materials and direct labor.

d. Compensation includes wages, salaries, and _________________.

Direct costs

Period costs

fringe benefits

What is the term applied to

the total of direct material

and direct labor?


2-33

E2-23

e. ________________________ are treated as _______until sold.

f. ________________________ include costs from only the production or purchases element of the value chain.

g. _____________are allocated to cost objects.

h. Both direct and indirect costs are ______ to ________________.

Inventoriable product costs


Indirect costs

assignedcost objects

What section of the Balance

Sheet does the Inventory

account live in?


2-34

E2-23

i. __________________ include costs from every element of the value chain.

j. __________________ are the combination of direct labor and manufacturing overhead.

k. _________________________ are expensed as __________________when sold.

Full product costs


cost of goods sold

What is the name of the activity that

involves turning raw materials into finished

goods?


2-35

E2-23

l. Manufacturing overhead includes all ______________ of production.indirect costs


2-36

Objective 6

Describe costs that are relevant and irrelevant for decision making


2-37

Controllable vs Uncontrollable Costs

• Controllable – management can influence or change cost

• Uncontrollable – management cannot change or influence cost in the short-run


2-38

Relevant and Irrelevant Costs

• Relevant – costs that differ between alternatives Differential costs

• Irrelevant – costs that do not differ Sunk costs


2-39

Objective 7

Classify costs as fixed or variable and calculate total and average costs at

different volumes


2-40

Cost Behavior

• Variable costs – change in total in direct proportion to changes in volume

• Fixed costs – stay constant in total over a wide range of activity levels


2-41

Total Variable Costs

Assume we pay 5% sales commissions on all sales. The cost of sales commissions increases proportionately with increases in sales.

$0

$500

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

To

tal

Sa

les

Co

mm

iss

ion

s


2-42

Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels

$0

$500

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

To

tal S

ale

s S

ala

ries


2-43

Total Cost

Total fixed costs

+ (Variable cost per unit x number of units)

= Total CostExample:

If Fixed Costs are $20,000,000 and Variable Costs are $5,000 per vehicle, and there are 10,000 vehicles, then:

Total Cost= $20,000,000 + ($5,000 x 10,000) or $70,000,000


2-44

Average Cost

Total cost ÷ number of units = Average cost

Example:

$70,000,000 (Total Cost)_ = $7,000 per vehicle 10,000 vehicles


2-45

Marginal Cost

• Cost of making one more unit Example – fixed costs will not change when

one more unit is manufactured, so therefore the marginal cost of a unit is simply its variable cost


2-46

E2-32

a.Managers cannot influence __________ _____ in the short-run.

b.Total _____________ decrease when production volume decreases.

c. For decision-making purposes, costs that do not differ between alternatives are ________________.

d.Costs that have already been incurred are called ____________.

uncontrollable costs

irrelevant costs

sunk costs

This type of cost changes

as another cost changes.


2-47

E2-32

e. Total ___________ stay constant over a wide range of production volume.

f. The _______________ is the difference in cost between two alternative courses of action.

g. The product’s ____________ is the cost of making one more unit.

differential cost

marginal cost

This type of cost does not change with changes in other costs.


2-48

E2-32

h. A product’s ____________ and ____________, not the product’s ___________, should used to forecast

total costs at different production volumes.

fixed costsvariable costsaverage cost


2-49

End of Chapter 2

Copyright ©2008 Prentice Hall. All rights reserved 2-1 Building Blocks of Managerial Accounting Chapter 2.

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