Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Managerial Accounting 15th ed Chapter 2

13,995 views

Published on

Managerial Accounting 15th ed Chapter 2

Published in: Education

Managerial Accounting 15th ed Chapter 2

  1. 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Managerial Accounting and Cost Concepts Chapter 2
  2. 2. 2-2 Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions
  3. 3. 2-3 Learning Objective 1 Understand cost classifications used for assigning costs to cost objects: direct costs and indirect costs.
  4. 4. 2-4 Assigning Costs to Cost Objects Direct costs • Costs that can be easily and conveniently traced to a unit of product or other cost object. • Examples: direct material and direct labor Indirect costs • Costs that cannot be easily and conveniently traced to a unit of product or other cost object. • Example: manufacturing overhead Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
  5. 5. 2-5 Learning Objective 2 Identify and give examples of each of the three basic manufacturing cost categories.
  6. 6. 2-6 The ProductThe Product Direct Materials Direct Materials Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Classifications of Manufacturing Costs
  7. 7. 2-7 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 automobileExample: A radio installed in an automobile
  8. 8. 2-8 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
  9. 9. 2-9 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor
  10. 10. 2-10 Nonmanufacturing Costs Administrative Costs All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.
  11. 11. 2-11 Learning Objective 3 Understand cost classifications used to prepare financial statements: product costs and period costs.
  12. 12. 2-12 Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
  13. 13. 2-13 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. E. Sales commissions.
  14. 14. 2-14 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. E. Sales commissions.
  15. 15. 2-15 Prime Costs and Conversion Costs Manufacturing costs are often classified as follows: Direct Material Direct Material Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Prime Cost Conversion Cost
  16. 16. 2-16 Learning Objective 4 Understand cost classifications used to predict cost behavior: variable costs, fixed costs, and mixed costs.
  17. 17. 2-17 Cost Classifications for Predicting Cost Behavior Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are: ▫ Variable costs. ▫ Fixed costs. ▫ Mixed costs.
  18. 18. 2-18 Variable Cost A cost that varies, in total, in direct proportion to changes in the level of activity. Your total texting bill may be based on how many texts you send. Number of Texts Sent TotalTextingBill
  19. 19. 2-19 Variable Cost Per Unit However, variable cost per unit is constant. The cost per text sent may be constant at 5 cents per text message. Number of Texts Sent CostPerTextSent
  20. 20. 2-20 The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost A measure of what causes the incurrence of a variable cost Units produced Units produced Miles driven Miles driven Machine hours Machine hours Labor hours Labor hours
  21. 21. 2-21 Fixed Cost A cost that remains constant, in total, regardless of changes in the level of the activity. Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan MonthlyCellPhone ContractFee
  22. 22. 2-22 Fixed Cost Per Unit However, if expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. The average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan MonthlyCellPhone ContractFee
  23. 23. 2-23 Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Examples Depreciation on Buildings and Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short term by current managerial decisions Discretionary May be altered in the short term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Committed Long-term, cannot be significantly reduced in the short term.
  24. 24. 2-24 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity TotalCost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)
  25. 25. 2-25 Fixed Costs and the Relevant Range Fixed costs would increaseFixed costs would increase in a step fashion at a rate ofin a step fashion at a rate of $30,000 for each additional$30,000 for each additional 1,000 square feet.1,000 square feet. The relevant range of activity pertains to fixed cost asThe relevant range of activity pertains to fixed cost as well as variable costs. For example, assume office spacewell as variable costs. For example, assume office space is available at a rental rate of $30,000 per year inis available at a rental rate of $30,000 per year in increments of 1,000 square feet.increments of 1,000 square feet.
  26. 26. 2-26 RentCostinThousands ofDollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 Fixed Costs and the Relevant Range 90 Relevant Range The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat. The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.
  27. 27. 2-27 Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost Increase Variable cost per unit and decrease in proportion remains constant. to changes in the activity level. Fixed Total fixed cost is not affected Fixed cost per unit decreases by changes in the activity as the activity level rises and level within the relevant range. increases as the activity level falls.
  28. 28. 2-28 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.
  29. 29. 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.
  30. 30. 2-30 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) TotalUtilityCost X Y A mixed cost contains both variable and fixed elements. Consider the example of utility cost. A mixed cost contains both variable and fixed elements. Consider the example of utility cost. Mixed Costs Total mixed cost
  31. 31. 2-31 Mixed Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) TotalUtilityCost X Y Total mixed cost
  32. 32. 2-32 Mixed Costs – An Example If your fixed monthly utility charge is $40, yourIf your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and yourvariable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what ismonthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?the amount of your utility bill? If your fixed monthly utility charge is $40, yourIf your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and yourvariable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what ismonthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?the amount of your utility bill?
  33. 33. 2-33 Analysis of Mixed Costs InIn account analysisaccount analysis, each account is, each account is classified as either variable or fixed basedclassified as either variable or fixed based on the analyst’s knowledge of howon the analyst’s knowledge of how the account behaves.the account behaves. InIn account analysisaccount analysis, each account is, each account is classified as either variable or fixed basedclassified as either variable or fixed based on the analyst’s knowledge of howon the analyst’s knowledge of how the account behaves.the account behaves. The engineering approach classifies costs based upon an industrial engineer’s evaluation of production methods, and material, labor, and overhead requirements. The engineering approach classifies costs based upon an industrial engineer’s evaluation of production methods, and material, labor, and overhead requirements. Account Analysis and the Engineering ApproachAccount Analysis and the Engineering ApproachAccount Analysis and the Engineering ApproachAccount Analysis and the Engineering Approach
  34. 34. 2-34 Learning Objective 5 Analyze a mixed cost using a scattergraph plot and the high-low method.
  35. 35. 2-35 Scattergraph Plots – An Example Assume the following hours of maintenance work and the total maintenance costs for six months.
  36. 36. 2-36 Plot the data points on a graph (Total Cost Y “dependent variable” vs. Activity X “independent variable”). Plot the data points on a graph (Total Cost Y “dependent variable” vs. Activity X “independent variable”). The Scattergraph Method X Y Hours of Maintenance TotalMaintenanceCost
  37. 37. 2-37 The High-Low Method – An Example TheThe variable costvariable cost per hourper hour ofof maintenance ismaintenance is equal to the changeequal to the change in cost divided byin cost divided by the change in hours.the change in hours. TheThe variable costvariable cost per hourper hour ofof maintenance ismaintenance is equal to the changeequal to the change in cost divided byin cost divided by the change in hours.the change in hours. = $6.00/hour$6.00/hour $2,400 400
  38. 38. 2-38 The High-Low Method – An Example Total Fixed Cost = Total Cost – Total Variable CostTotal Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = $9,800 – ($6/hourTotal Fixed Cost = $9,800 – ($6/hour × 850 hours)× 850 hours) Total Fixed Cost = $9,800 – $5,100Total Fixed Cost = $9,800 – $5,100 Total Fixed Cost =Total Fixed Cost = $4,700$4,700
  39. 39. 2-39 The High-Low Method – An Example YY = $4,700 + $6.00= $4,700 + $6.00XX The Cost Equation for Maintenance
  40. 40. 2-40 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit
  41. 41. 2-41 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit Quick Check 
  42. 42. 2-42 Quick Check  Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
  43. 43. 2-43 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check 
  44. 44. 2-44 Least-Squares Regression Method A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables. This method usesThis method uses allall of theof the data points to estimatedata points to estimate the fixed and variablethe fixed and variable cost components of acost components of a mixed cost.mixed cost. This method usesThis method uses allall of theof the data points to estimatedata points to estimate the fixed and variablethe fixed and variable cost components of acost components of a mixed cost.mixed cost. The goal of this method isThe goal of this method is to fit a straight line to theto fit a straight line to the data thatdata that minimizes theminimizes the sum of the squared errorssum of the squared errors.. The goal of this method isThe goal of this method is to fit a straight line to theto fit a straight line to the data thatdata that minimizes theminimizes the sum of the squared errorssum of the squared errors..
  45. 45. 2-45 Least-Squares Regression Method • Software can be used to fit a regression line through the data points. • The cost analysis objective is the same: Y = a + bX Least-squares regression also provides a statistic, called the R2 , which is a measure of the goodness of fit of the regression line to the data points. Least-squares regression also provides a statistic, called the R2 , which is a measure of the goodness of fit of the regression line to the data points.
  46. 46. 2-46 Comparing Results From the Two Methods The two methods just discussed provideThe two methods just discussed provide different estimates of the fixed and variable costdifferent estimates of the fixed and variable cost components of a mixed cost.components of a mixed cost. This is to be expected because each methodThis is to be expected because each method uses differing amounts of the data points touses differing amounts of the data points to provide estimates.provide estimates. Least-squares regression providesLeast-squares regression provides the mostthe most accurate estimateaccurate estimate because it uses all the databecause it uses all the data points.points. The two methods just discussed provideThe two methods just discussed provide different estimates of the fixed and variable costdifferent estimates of the fixed and variable cost components of a mixed cost.components of a mixed cost. This is to be expected because each methodThis is to be expected because each method uses differing amounts of the data points touses differing amounts of the data points to provide estimates.provide estimates. Least-squares regression providesLeast-squares regression provides the mostthe most accurate estimateaccurate estimate because it uses all the databecause it uses all the data points.points.
  47. 47. 2-47 Learning Objective 6 Prepare income statements for a merchandising company using the traditional and contribution formats.
  48. 48. 2-48 The Traditional and Contribution Formats Comparison of the Contribution Income Statement with the Traditional Income Statement Traditional Format Contribution Format Sales 100,000$ Sales 100,000$ Cost of goods sold 70,000 Variable expenses 60,000 Gross margin 30,000$ Contribution margin 40,000$ Selling & admin. expenses 20,000 Fixed expenses 30,000 Net operating income 10,000$ Net operating income 10,000$ Used primarily forUsed primarily for external reporting.external reporting.
  49. 49. 2-49 Uses of the Contribution Format The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for: 1.Cost-volume-profit analysis (Chapter 5). 2.Budgeting (Chapter 8). 3.Segmented reporting of profit data (Chapter 6). 4.Special decisions such as pricing and make-or- buy analysis (Chapter 12). The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for: 1.Cost-volume-profit analysis (Chapter 5). 2.Budgeting (Chapter 8). 3.Segmented reporting of profit data (Chapter 6). 4.Special decisions such as pricing and make-or- buy analysis (Chapter 12).
  50. 50. 2-50 Learning Objective 7 Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
  51. 51. 2-51 • Every decision involves a choice between at least two alternatives. • Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored as irrelevant. Cost Classifications for Decision Making
  52. 52. 2-52 Differential Cost and Revenue Costs and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300
  53. 53. 2-53 Opportunity Cost The potential benefit that is given up when one alternative is selected over another. These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions. What are the opportunity costs you incur to attend this class? These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions. What are the opportunity costs you incur to attend this class?
  54. 54. 2-54 Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions. Example: Suppose you had purchased gold for $1,100 an ounce, but now it is selling for $950 an ounce. Should you wait for the gold to reach $1,100 an ounce before selling it? You may say, “Yes” even though the $1,100 purchase is a sunk costs.
  55. 55. 2-55 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
  56. 56. 2-56 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
  57. 57. 2-57 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.
  58. 58. 2-58 Quick Check  Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.
  59. 59. 2-59 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.
  60. 60. 2-60 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.
  61. 61. 2-61 End of Chapter 2

×