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Chapter 1 introduction

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cost accounting 1 for student Uitm

cost accounting 1 for student Uitm


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  • 1. Introduction to Managerial Accounting and Cost Concepts MAF 220 – COST ACCOUNTING I
  • 2. 2 Management Accounting Relates to the provision of appropriate information for decision making, planning, control and performance evaluation. What is Management Accounting?
  • 3. 3 Differences Between Financial and Managerial Accounting Financial Managerial Accounting 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. Requirements Must follow GAAP Need not follow GAAP and prescribed formats or any prescribed format
  • 4. 4 Planning and Controlling It is the purposeful choice from among a set of alternative courses of action designed to achieve some objective. What is decision making? This is the core of the management process.
  • 5. 5 Work of Management Planning Controlling Directing and Motivating
  • 6. 6 Planning and Control Cycle Formulating Long-and Short-Term Plans (Planning) Measuring Performance (Controlling) Comparing Actual to Planned Performance (Controlling) Implementing the Plans (Directing and Motivating) Begin Decision Making
  • 7. 7 Planning and Controlling The Management Process Internal Accounting System Planning •Increase Productivity Controlling •Actions •Evaluations Correct ofPlansan Budgets, Special Reports Financial Accounting System Performance Reports Customer surveys Competitor analysis Advertising impact New items report
  • 8. 8 Role of Budgets A budget is a quantitative expression of a plan of action and is an aid to coordinating and implementing the plan. Budgets are the chief devices for compelling and disciplining management planning.
  • 9. 9 Role of Performance Reports Performance reports formalize controls and provide feedback by comparing results with plans and by highlighting variances. Variances are deviations from the plan.
  • 10. 10 Performance Report Budgeted Actual Variance Amount Amount Amount Revenues 25,000 19,000 6,000 U Expenses 20,000 15,000 5,000 F Net Income 5,000 4,000 1,000 U F = Favorable U= Unfavorable
  • 11. 11 Cost and Cost Terminology Cost is a resource sacrificed or forgone to achieve a specific objective. An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object is anything for which a separate measurement of costs is desired.
  • 12. 12 Cost and Cost Terminology Cost Accumulation Cost Object Cost Object Cost Object Cost Assignment Tracing Allocating
  • 13. 13 Direct Costs and Indirect Costs Direct 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
  • 14. 14 Direct and Indirect Costs Direct Costs Example: Paper on which Sports Illustrated magazine is printed Indirect Costs Example: Lease cost for Time-Warner building housing the senior editors of its magazine COST OBJECT Example: Sports Illustrated magazine COST OBJECT Example: Sports Illustrated magazine
  • 15. 15 Direct and Indirect Costs Example Direct Costs: Maintenance Department $40,000 Personnel Department $20,600 Assembly Department $75,000 Finishing Department $55,000 Assume that Maintenance Department costs are allocated equally among the production departments. How much is allocated to each department?
  • 16. 16 Direct and Indirect Costs Example Allocated $20,000 Maintenance $40,000 Assembly Direct Costs $75,000 Finishing Direct Costs $55,000 $20,000
  • 17. 17 MegaLoMart Comparing Merchandising and Manufacturing Activities Merchandisers . . . Buy finished goods. Sell finished goods. Manufacturers . . . Buy raw materials. Produce and sell finished goods.
  • 18. 18 The ProductThe Product Direct Materials Direct Materials Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Manufacturing Costs
  • 19. 19 Direct Materials Those materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobileExample: A radio installed in an automobile
  • 20. 20 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
  • 21. 21 Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.
  • 22. 22 Classifications of Costs Direct Material Direct Material Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:
  • 23. 23 Nonmanufacturing Costs Marketing and selling costs . . . Costs necessary to get the order and deliver the product. Administrative costs . . . All executive, organizational, and clerical costs.
  • 24. 24 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.
  • 25. 26 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs are not included in product costs. They are expensed on the income statement. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
  • 26. 27 Inventoriable Costs Inventoriable costs (assets)… become cost of goods sold… after a sale takes place.
  • 27. 28 Period Costs Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred.
  • 28. 29 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.
  • 29. 31 Merchandiser Current assets Cash Receivables Prepaid expenses Merchandise inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods Balance Sheet
  • 30. 32 Merchandiser Current assets Cash Receivables Prepaid expenses Merchandise inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods Balance Sheet Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.
  • 31. 33 The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
  • 32. 34 Selling and Administrative Period Costs Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials
  • 33. 35 Manufacturing Company Materials Inventory Finished Goods Inventory Revenues Cost of Goods Sold INCOME STATEMENT Period Costs Inventoriable Costs BALANCE SHEET Equals Operating Income when sales occur deduct Equals Gross Margin deduct Work in Process Inventory
  • 34. 36 Merchandising Company INCOME STATEMENTBALANCE SHEET when sales occur Inventoriable Costs Merchandise Purchases Inventory Revenues deduct Cost of Goods Sold Equals Gross Margin deduct Period Costs Equals Operating Income
  • 35. 37 Many Meanings of Product Cost A product cost is the sum of the costs assigned to a product for a specific purpose. 1. Pricing and product emphasis decisions 2. Contracting with government agencies 3. Preparing financial statements for external reporting under generally accepted accounting principles
  • 36. 38 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.
  • 37. 40 Inventory Flows Beginning balance $$ Beginning balance $$ Additions $$$ Additions $$$+ Available $$$$$ Available $$$$$= Ending balance $$ Ending balance $$ =Withdrawals $$$ Withdrawals $$$ _Available $$$$$ Available $$$$$
  • 38. 41 Quick Check  If your bank balance at the beginning of the month was $1,000, you deposited $100 during the month, and withdrew $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.
  • 39. 43 Manufacturing Work Raw Materials Costs In Process Beginning raw materials inventory Product Costs - A Closer Look Beginning inventory is the inventory carried over from the prior period. Beginning inventory is the inventory carried over from the prior period.
  • 40. 44 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Raw materials purchased = Raw materials available for use in production – Ending raw materials inventory = Raw materials used in production As items are removed from raw materials inventory and placed into the production process, they are called direct materials. As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Costs - A Closer Look
  • 41. 45 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
  • 42. 47 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Total manufacturing = Raw materials costs available for use in production – Ending raw materials inventory = Raw materials used in production Product Costs - A Closer Look
  • 43. 48 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Total manufacturing = Raw materials costs available for use in production – Ending raw materials inventory = Raw materials used in production Conversion costs are costs incurred to convert the direct material into a finished product. Conversion costs are costs incurred to convert the direct material into a finished product. Product Costs - A Closer Look
  • 44. 49 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.
  • 45. 51 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 inventory = Raw materials used in production Product Costs - A Closer Look All manufacturing costs incurred during the period are added to the beginning balance of work in process. All manufacturing costs incurred during the period are added to the beginning balance of work in process.
  • 46. 52 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 work in process inventory = Cost of goods manufactured. Product Costs - A Closer Look Costs associated with the goods that are completed during the period are transferred to finished goods inventory. Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
  • 47. 53 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.
  • 48. 55 Product Costs - A Closer Look
  • 49. 56 Quick Check  Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And 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.
  • 50. 58 Cost Drivers Output measures of resources and activities are called cost drivers. What are cost drivers?
  • 51. 59 Cost Behavior It is how costs are related to, and affected by, the activities of an organization. What is cost behavior?
  • 52. 60 Production Example Example costs: Labor wages Supervisory salaries Maintenance wages Depreciation Energy Example cost drivers: Labor hours No. of people supervised No. of mechanic hours No. of machine hours Kilowatt hours Cost Drivers
  • 53. 61 Cost Drivers How well the accountant does at identifying the most appropriate cost drivers determines how well managers understand cost behavior and how well costs are controlled.
  • 54. 62 Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.
  • 55. 63 Comparison of Variable and Fixed Costs A variable cost is a cost that changes in direct proportion to changes in the cost driver. A fixed cost is not immediately affected by changes in the cost driver.
  • 56. 64 Rules of Thumb Total fixed costs remain unchanged regardless of changes in cost-driver activity. Think of fixed costs as a total.
  • 57. 65 Rules of Thumb The per-unit variable cost remains unchanged regardless of changes in the cost-driver activity. Think of variable costs on a per-unit basis.
  • 58. 66 Relevant Range This rule of thumb holds true only within reasonable limits. The relevant range is the limit of cost- driver activity within which a specific relationship between costs and the cost driver is valid.
  • 59. 67 FixedCosts Volume in Units $16,000 – $12,000 – $8,000 – $4,000 0 500 1,000 1,500 2,000 2,500 – – – Relevant Range Relevant Range
  • 60. 68 Total Variable Cost Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked TotalLongDistance TelephoneBill
  • 61. 69 Variable Cost Per Unit Minutes Talked PerMinute TelephoneCharge The cost per long distance minute talked is constant. For example, 10 cents per minute.
  • 62. 70 Total Fixed Cost Your monthly basic telephone bill probably does not change when you make more local calls. Number of Local Calls MonthlyBasic TelephoneBill
  • 63. 71 Fixed Cost Per Unit Number of Local Calls MonthlyBasicTelephone BillperLocalCall The average cost per local call decreases as more local calls are made.
  • 64. 72 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 Fixed cost per unit goes the same even when the down as activity level goes up. activity level changes.
  • 65. 73 Cost Behavior Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers Sales commissions and shipping costs Service Organizations Supplies and travel Examples of normally variable costs Examples of normally fixed costs Merchandisers, manufacturers, and service organizations Real estate taxes, Insurance, Sales salaries Depreciation, Advertising
  • 66. 74 The Activity Base Machine hours Labor hours Miles driven A measure of the event causing the incurrence of a variable cost – a cost driver Units produced
  • 67. 75 Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment Types of Fixed Costs Fixed Costs Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be reduced in the short term.
  • 68. 76 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.
  • 69. 78 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.
  • 70. 80 Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost. Fixed Costs and Relevant Range Continue
  • 71. 81 RentCostin ThousandsofDollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 Fixed Costs and Relevant Range 90 Relevant Range Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
  • 72. 82 Quick Check  Which of the following statements about cost behavior are true? a. Fixed costs per unit vary with the level of activity. b. Variable costs per unit are constant within the relevant range. c. Total fixed costs are constant within the relevant range. d. Total variable costs are constant within the relevant range.
  • 73. 84 Cost Behavior Patterns Example Bicycles by the Sea buys a handlebar at $52 for each of its bicycles. What is the total handlebar cost when 1,000 bicycles are assembled?
  • 74. 85 Cost Behavior Patterns Example 1,000 units × $52 = $52,000 What is the total handlebar cost when 3,500 bicycles are assembled? 3,500 units × $52 = $182,000
  • 75. 86 Cost Behavior Patterns Example Bicycles by the Sea incurred $94,500 in a given year for the leasing of its plant. This is an example of fixed costs with respect to the number of bicycles assembled.
  • 76. 87 Cost Behavior Patterns Example What is the leasing (fixed) cost per bicycle when Bicycles assembles 1,000 bicycles? $94,500 ÷ 1,000 = $94.50 What is the leasing (fixed) cost per bicycle when Bicycles assembles 3,500 bicycles? $94,500 ÷ 3,500 = $27
  • 77. 88 Cost Drivers The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately. The number of bicycles assembled is a cost driver of the cost of handlebars.
  • 78. 89 Relevant Range Example Assume that fixed (leasing) costs are $94,500 for a year and that they remain the same for a certain volume range (1,000 to 5,000 bicycles). 1,000 to 5,000 bicycles is the relevant range.
  • 79. 90 Relevant Range Example 0 20000 40000 60000 80000 100000 120000 0 1000 2000 3000 4000 5000 6000 Volume FixedCosts $94,500
  • 80. 91 Relationships of Types of Costs Direct Indirect Variable Fixed
  • 81. 92 Interpret unit costs cautiously.
  • 82. 93 Total Costs and Unit Costs Example What is the unit cost (leasing and handlebars) when Bicycles assembles 1,000 bicycles? Total fixed cost $94,500 + Total variable cost $52,000 = $146,500 $146,500 ÷ 1,000 = $146.50
  • 83. 94 Total Costs and Unit Costs Example 0 50000 100000 150000 200000 0 500 1000 1500 Volume TotalCosts $94,500 $94,500 + $52x $146,500
  • 84. 95 Use Unit Costs Cautiously Assume that Bicycles management uses a unit cost of $146.50 (leasing and wheels). Management is budgeting costs for different levels of production. What is their budgeted cost for an estimated production of 600 bicycles? 600 × $146.50 = $87,900
  • 85. 96 Use Unit Costs Cautiously What is their budgeted cost for an estimated production of 3,500 bicycles? 3,500 × $146.50 = $512,750 What should the budgeted cost be for an estimated production of 600 bicycles?
  • 86. 97 Use Unit Costs Cautiously Total fixed cost $ 94,500 Total variable cost ($52 × 600) 31,200 Total $125,700 $125,700 ÷ 600 = $209.50 Using a cost of $146.50 per unit would underestimate actual total costs if output is below 1,000 units.
  • 87. 98 Use Unit Costs Cautiously What should the budgeted cost be for an estimated production of 3,500 bicycles? Total fixed cost $ 94,500 Total variable cost (52 × 3,500) 182,000 Total $276,500 $276,500 ÷ 3,500 = $79.00
  • 88. 99 Prime Costs Direct Materials Direct Labor Prime Costs+ =
  • 89. 100 Conversion Costs Direct Labor Manufacturing Overhead+ = Conversion Costs Indirect Labor Indirect Materials Other
  • 90. 101 Sunk Costs 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.
  • 91. 102 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.