MANAGEMENT ACCOUNTING 1
MKM 1013
SAJIAH YAKOB
2013
CHAPTER 2
COST CONCEPTS
•Every company will incurred costs
•Company has to know its costs for producing products
•Why???? To improve...
•What is direct materials, direct labor and manufacturing
overhead
•DM= those materials that become an integral part of th...
•Direct labor or labor cost that can be physically and conveniently
traced to individual units of products
•Example: assem...
•Various names for manufacturing OH: indirect manufacturing
costs, factory overhead and factory burden
•Non-manufacturing ...
PRODUCT COST VERSUS PERIOD COST
•Distinction between manufacturing and non-manufacturing cost – other
way to look at a cos...
Product costs
•Include all the cost that are involved in acquiring or making a product
•Examples……….
•Product cost are vie...
Period cost
•All the costs that are not included in product costs
•These costs are expensed on the income statement at the...
Balance sheet
•In merchandising company just one type of inventory
•Manufacturing company has 3 class of inventory:
Raw m...
Income statement
ITEM RM RM ITEM RM RM
Sales 1,000,000 Sales 1,500,000
Cost of good sold
;
Cost of goods sold:
Beginning i...
• 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
...
Variable cost = is a cost that varies in total, in direct
proportion to changes in the level of activity
-Examples…..
-Var...
-Examples…..
Fixed cost are not affected by changes in activity
Examples: good example is rent
Very few costs are complete...
Cost Classification For Assigning Costs To Costs Objects
•Costs assigning to cost object for a variety of purpose includin...
DIRECT COST & INDIRECT COST
-Direct cost is a cost that can be easily and
conveniently traced to the particular cost
objec...
ASSIGNMENT 3:
• GIVE DEFINITION; SUNK COST,
OPPURTUNITY COST & INCREMENTAL
COST
COST BEHAVIOUR
ANALYSIS & USE
-Mixed cost:
oMixed cost contain fixed cost and variable
cost
oAlso known as semi variable c...
•Analysis of mixed cost
-Scatter graph plot
-Regression
-High-low method
SCATTERGRAPH
PLOT
MONTH ACTIVITY LEVEL
PATIENT DAYS
MAINTENANCE
COST INCURRED
(RM)
JANUARY 5600 7900
FEBUARY 7100 8500
MAR...
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...
ABSORPTION COSTING
•Treats all manufacturing costs as
product cost regardless whether there
are fixed or variable
•Known a...
VARIABLE COSTING
•Only those manufacturing costs that vary with
output are treated as product cost
•Usually include DM, DL...
Absorption costing Variable
costing
Product cost Direct materials Product
costDirect labor
Variable manufacturing
overhed
...
Unit cost computation
Example:
Sasa company, a small company
that produces a single product and
has the following in cost ...
Solution:
Absorption costing
DM 2
DL 4
MANUFACTURING OH
VARIABLE 1
FIXED (30,000/6,000) 5
TOTAL 12
Variable costing
DM 2
D...
INCOME COMPARISON UNDER ABSORPTION AND
VARIABLE COSTING
To illustrate,
Sasa company, a small company that produces a singl...
Solution
Absorption
costing
RM RM Variable
costing
RM RM
Sales Sales
Less; COGS Less; variable
expenses
Beginning
inventor...
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Chapter 2 ma note

  1. 1. MANAGEMENT ACCOUNTING 1 MKM 1013 SAJIAH YAKOB 2013
  2. 2. CHAPTER 2
  3. 3. 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 materials oDirect labor oManufacturing overhead
  4. 4. •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 oDirect materials
  5. 5. •Direct labor or labor cost that can be physically and conveniently traced to individual units of products •Example: assembly line workers/operators oDirect labor
  6. 6. •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 oManufacturing overhead
  7. 7. 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???
  8. 8. 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
  9. 9. 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
  10. 10. Balance sheet •In merchandising company just one type of inventory •Manufacturing company has 3 class of inventory: Raw materials Work in progress Finished goods -Refer example in page 41
  11. 11. Income statement ITEM RM RM ITEM RM RM Sales 1,000,000 Sales 1,500,000 Cost 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 250,000 Administrative expenses 200,000 300,000 Administrative expenses 300,000 550,000 Net operating income 100,000 Net operating income 150,000
  12. 12. • What is the different between IS merchandising and manufacturing company?.....
  13. 13. Assignment 2: • What is the different between costs and expenses?
  14. 14. 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 cost Activity can be expressed in many ways, such as unit produced, units sold, miles driven, beds occupied, hours work, lines of print etc
  15. 15. 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
  16. 16. -Examples….. Fixed cost are not affected by changes in activity Examples: good example is rent Very few costs are completely fixed Most will change if there is a large enough change in activity So 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.
  17. 17. 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
  18. 18. 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
  19. 19. ASSIGNMENT 3: • GIVE DEFINITION; SUNK COST, OPPURTUNITY COST & INCREMENTAL COST
  20. 20. COST BEHAVIOUR ANALYSIS & USE -Mixed cost: oMixed cost contain fixed cost and variable cost oAlso known as semi variable costs oFormula –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
  21. 21. •Analysis of mixed cost -Scatter graph plot -Regression -High-low method
  22. 22. SCATTERGRAPH PLOT MONTH ACTIVITY LEVEL PATIENT DAYS MAINTENANCE COST INCURRED (RM) JANUARY 5600 7900 FEBUARY 7100 8500 MARCH 5000 7400 APRIL 6500 8200 MAY 7300 9100 JUNE 8000 9800 JULY 6200 7800
  23. 23. Maintenance cost/Patient days GRAPH PAPER
  24. 24. Regression Regression method not cover midterm and final exam.
  25. 25. HIGH-LOW METHOD -formula to REMEMBER!!!! VARIABLE COST = CHANGE IN COST/CHANGE IN ACTIVITY
  26. 26. 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
  27. 27. ABSORPTION COSTING •Treats all manufacturing costs as product cost regardless whether there are fixed or variable •Known as full cost method
  28. 28. 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
  29. 29. Absorption costing Variable costing Product cost Direct materials Product costDirect labor Variable manufacturing overhed Fixed manufacturing overhed Period costPeriod cost Variable selling and administrative expenses Fixed selling and administrative expenses
  30. 30. Unit cost computation Example: Sasa company, a small company that produces a single product and has the following in cost structure: RM No of unit produced each year 6,000 Variable cost per unit: DM 2 DL 4 Variable manufacturing OH 1 Variable selling and admin expenses 3 Fixed cost per year Fixed manufacturing OH 30,000 Fixed selling and admin expenses 10,000 Required: •Compute the unit product cost under absorption costing •Compute the unit product cost under variable costing
  31. 31. Solution: Absorption costing DM 2 DL 4 MANUFACTURING OH VARIABLE 1 FIXED (30,000/6,000) 5 TOTAL 12 Variable costing DM 2 DL 4 VARIABLE MANUFACTURING OH 1 TOTAL 7
  32. 32. 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: RM No of unit produced each year 6,000 Variable cost per unit: DM 2 DL 4 Variable manufacturing OH 1 Variable selling and admin expenses 3 Fixed cost per year Fixed manufacturing OH 30,000 Fixed selling and admin expenses 10,000 Units in beginning inventory 0 Units produced 6000 Units sold 5000 Units in ending inventory 1000 Selling price per unit 20 Selling and admin expenses Variable per unit 3 Fixed per year 10,000 Required: Compute net operating income under absorption and variable costing
  33. 33. Solution Absorption costing RM RM Variable costing RM RM Sales Sales Less; COGS Less; variable expenses Beginning 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 expenses Net operating income

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