Managerial Accounting and Cost Concepts Chapter 02
Jan 18, 2018
Managerial Accounting and Cost ConceptsChapter 02
2-2
Public
Creditors
Tax authorities
Investors Board ofmanagements
Middle managers
Bottom line managers
Employees
Company
Users of accounting information
2-3
Managerial Accounting vs. Financial Accounting
Managerial accountingprovides information
for managers inside anorganization whodirect and control
its operations.
Financial accountingprovides information
to stockholders,creditors and others
who are outsidethe organization.
2-4
Financial Accounting vs. Managerial Accounting
2-5
Work of Management
Planning
Controlling
Directing and Motivating
2-6
Planning and Control Cycle
DecisionMaking
Formulating long-and short-term plans
(Planning)
Measuringperformance (Controlling)
Implementing plans (Directing and Motivating)
Comparing actualto planned
performance (Controlling)
Begin
Exh.1-1
2-7
Functions
Behaviors
Traceability
Relevance
Cost classifications by:
2-8
Cost classification by functions
A. Manufacturing costs (Product costs).B. Non-manufacturing costs (period
costs).
2-9
The ProductThe Product
DirectMaterials
DirectLabor
ManufacturingOverhead
Classifications of Manufacturing Costs
2-10
Direct Materials Raw materials that become an integral
part of the product and that can be conveniently traced directly to it.
Example: A radio installed in an automobile
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Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
2-12
Manufacturing OverheadManufacturing costs that cannot be easily traced directly to specific units produced.
Examples: Indirect materials and indirect labor
2-13
Classifications of CostsManufacturing costs are often
classified as follows:
DirectMaterial
DirectLabor
ManufacturingOverhead
PrimeCost
ConversionCost
2-14
Nonmanufacturing Costs
Administrative Costs
All executive, organizational, and
clerical costs.
2-15
Quick Check Which of the following costs would be
considered manufacturing overhead at Boeing? (More than one answer may be correct.)A. Depreciation on factory forklift trucks.B. Sales commissions.C. The cost of a flight recorder in a Boeing
767.D. The wages of a production shift
supervisor.
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Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing
overhead.
Period costs include all selling costs and
administrative costs.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
2-17
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.
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Selling andAdministrative
Period Costs
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
2-19
Quick Check Which of the following transactions would
immediately result in an expense? (There may be more than one correct answer.)A. Work in process is completed.B. Finished goods are sold.C. Raw materials are placed into production.D. Administrative salaries are accrued and
paid.
2-20
Example 1AQUAS is a bottled water producer. It was established on Oct. 1,
2013. Clever Man – the company’s accountant is required to prepare an income statement to report on the first quarter
performance.
20
1. Sales 8002. Expenses
Materials purchased 200Wages for workers 100Wages for marketing staff 50Salaries for office clerks 60Payment for Advertising 150Plant rent 55Office rent 65Payment for office utility 120Payment for plant utility 180Total expenses 980
3. Loss (180)
AQUASIncome Statement
For the quarter ended Dec. 31, 2013(in VND mil.)
2-21
Cost Classifications by Behaviors
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goesthe same even when the down as activity level goes up. activity level changes.
2-22
Variable Cost Your total texting bill is based on how
many texts you send.
Number of Texts Sent
Tota
l Tex
ting
Bill
2-23
Variable Cost Per Unit
The cost per text sent is constant at 5 cents per text message.
Number of Texts Sent
Cos
t Per
Tex
t Sen
t
2-24
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.
Number of Minutes UsedWithin Monthly Plan
Mon
thly
Cel
l Pho
ne
Con
trac
t Fee
2-25
Fixed Cost Per UnitWithin the monthly contract allotment, the average fixed cost per
cell phone call made decreases as more calls are made.
Number of Minutes UsedWithin Monthly Plan
Mon
thly
Cel
l Pho
ne
Con
trac
t Fee
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ExamplesAdvertising and Research and Development
ExamplesDepreciation on Buildings and Equipment and Real
Estate Taxes
Types of Fixed Costs
DiscretionaryMay be altered in the short-term by current managerial decisions
CommittedLong-term, cannot be
significantly reduced in the short term.
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RelevantRange
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
Activity
Tota
l Cos
t
Economist’sCurvilinear Cost
Function
The Linearity Assumption and the Relevant Range
Accountant’s Straight-Line Approximation (constant
unit variable cost)
2-28
Mixed Costs
Fixed MonthlyUtility Charge
Variable Cost per KW
Activity (Kilowatt Hours)
Tota
l Util
ity C
ost
X
Y
Total mixed cost
2-29
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.
2-30
Quick Check Which of the following costs would be
variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)A. The cost of renting the film.B. Royalties on ticket sales.C. Wage and salary costs of theater
employees.D. The cost of cleaning up after the show.
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Income statement under contribution format
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Income statement under contribution format
Total per unitSales 100,000$ 50$ Variable costs 60,000 30 Contribution margin 40,000$ 20$ Fixed costs 30,000 Net Income 10,000$
The contribution format focuses on the relationship between costs and activity level. Contribution margin
will cover fixed costs and generate income.
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Cost classification by traceabilityDirect costs• Costs that can be
easily and conveniently traced to a unit of product or other cost objective.
• Examples: direct material and direct labor
Indirect costs• Costs cannot be
easily and conveniently traced to a unit of product or other cost object.
• Example: manufacturing overhead
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Cost classification by relevance
1. Differential cost.2. Sunk cost.3. Opportunity cost.
2-35
Differential cost
• In 2013, Honda Vietnam established Asimo robots used for assembling motobikes. Their costs are VND 2.1 billions and their estimated useful life is 6 years.
• There is a new Asimo version which is much better than the old ones: if Honda Vietnam uses the new version, the company will save 70% annual operating expenses.
• The new version’s price is VND 4 billions and its useful life is 5 years.
• The current robots’s disposal value is VND 1 billion. • Honda Vietnam’s current annual operating expenses are VND900
millions. Should Honda Vietnam buy the new version?
Costs and revenues that differ among alternatives.
2-36
Sunk Costs Sunk costs inccured in the past and cannot be
changed by any decision. They are not differential costs and should be ignored when making decisions.
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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
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Example 2•Ennerdale Ltd has been asked to quote a
price for a one-off contract. The company's management accountant has asked for your advice on the relevant costs for the contract.
•The following information is available:
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Materials• The contract requires 3,000 kg of material K,
which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of £19,600. Since then the price per kilogram for material K has increased by 5%.
• The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material L would be sold for £11 per kg.
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Labour• The contract requires 800 hours of skilled labour.
Skilled labour is paid £9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P.
• The following information relates to product P:£ per unit
Selling price 100Less Skilled labour 38Other variable costs 22
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End of Chapter 02