Three Dog Bakery is a bakery that produces dog treats and other pet food products. It has grown from a single store to over 40 locations worldwide. The company has a large manufacturing facility that produces 70% of goods sold. It also has a wholesale business and sells online. Annual revenues exceed $20 million.

1. MANAGERIAL ACCOUNTING
– INTRODUCTION

2. FINANCIAL ACCOUNTING
• FA is the art of recording, classifying and
summarizing in a significant manner and in terms
of money, transactions and events which are, in
part at least, of financial character, and
interpreting the results thereof.
• Reporting to External Parties

3. MANAGEMENT/COST ACCOUNTING
• In ordinary language, any system of accounting which assists
management in carrying out its functions more efficiently may
be termed as Management Accounting.
• MA measures, analyses and reports Financial & Non-financial
information that helps managers make decisions to fulfill
organisation’s goal.
• Cost Accounting provides information for MA and FA. (e.g. Cost
of the product)
• CA measures, analyses and reports Financial & Non-financial
information relating to the cost of acquiring or using resources
in an organisation.
• Modern CA perspective.

4. FA v/s MA
• Users
• Purpose of Information
• Overall v/s Detailed Reporting
• Periodicity
• Following Regulations
• Type of Information
• Preciseness - Approximations

5. COST CONCEPT AND TERMINOLOGY
• Cost – Resource sacrificed or forgone to achieve a specific
objective.
• Cost Accumulation – Collection of Cost Data in some organized
way by means of an accounting system.
• Cost Object – Anything for which a measurement of cost is
desired.
• Cost Unit - A unit of product, service or time (or combination of
these) in relation to which costs may be ascertained or expressed.
• Cost Drivers - A "cost driver" is the unit of an activity that causes
the change of an activity cost. A cost driver is any activity that
causes a cost to be incurred.

6. COST DRIVER EXERCISE
FUNCTION REPRESENTATIVE COST DRIVER
A. Accounting 1. No. of computer transactions
B. Personnel 2. No. of invoices sent
C. Data Processing 3. No. of Research Scientists
D. R&D 4. No. of transactions processed
E. Purchasing 5. No. of new hires
F. Billing 6. No. of Purchase Orders

7. • Responsibility Center - A division or unit of an organization
for which a manager is held responsible – may be a cost
center, revenue center, profit center or investment center.
• Cost Center – manager is accountable for costs only.
• Revenue Center – manager is accountable for revenues
only.
• Profit Center - manager is accountable for revenues &
costs.
• Investment Center - manager is accountable for
investments, revenues & costs.

8. CLASSIFICATION OF COSTS
1. Acc. to ELEMENTS:- Direct & Indirect according to
elements viz, Material, Labour & Other Expenses.
2. Acc. to FUNCTIONS/OPERATIONS:- Production,
Administration, Selling, Distribution, Research,
Development.
3. Acc. to NATURE/BEHAVIOUR:- Fixed, Variable, Semi-
variable/Step/Mixed.
4. Acc. to CONTROLLABILTY:-
Discuss COST ALLOCATION & COST ABSORPTION
Controllable & Uncontrollable

9. 5. Acc. to ASSOCIATION WITH PRODUCT:- Product & Period
Product Costs: - are those costs which are associated with &
directly identified with the product . Cost that are
included in the cost of manufacturing a product.
Period Costs:- are those that are reported as expenses of the
period in question. These are costs which are not
assigned to the product but are charged against revenue
of the period in which they are incurred.
Eg:- administration exps., selling & distribution exps.

10. OVERHEADS
PRODUCTION /
WORK ADMINISTRATION SELLING DISTRIBUTION
OVERHEADS OVERHEADS OVERHEADS OVERHEADS

11. OTHER MANUFACTURING COSTS
• Overtime Premium: -
The extra compensation paid to an employee
who works beyond the time normally
scheduled.
• Idle Time: -
Time that is not spent productively by an
employee due to events such as equipment
breakdowns, power failure.

12. COST CLASSIFICATION EXERCISE
ABC Entertainment Co. operates a large store in Mumbai. The store has both
Video & Music section. ABC reports revenues for the video section
separately from the music section. Classify each of the following cost
items as:-
1. Direct or Indirect costs w.r.t. the total no. of videos sold.
2. Variable or Fixed costs w.r.t. how the total cost of video section change
as the total no. of videos are sold changes.
Cost Items: -
a) Annual retainer paid to video distributor
b) Electricity costs of ABC store (single bill covers entire store)
c) Costs of videos purchased for sale to customers
d) Subscription to video trends maganize
e) Leasing of computer software used for financial budgeting at ABC store
f) Cost of popcorn provided free to all customers of the store
g) Insurance policy for the store
h) Transportation costs of videos purchased by the store

13. COST TRACING, ALLOCATION & ABSORPTION
COST TRACING: - defined as the assignment of DIRECT COSTS to the
chosen cost object.
COST ALLOCATION:- defined as the assignment of INDIRECT COSTS
to the chosen cost object.
COST ABSORPTION: - defined as the process of absorbing all
INDIRECT COSTS ALLOCATED to or APPORTIONED over a
particular cost centre or production department by the units
produced.
• Hence, while allocating, the relevant cost objects would be the
concerned cost centre or the concerned department, while, the
process of absorption would consider the units produced as the
relevant cost object.
• Cost Absorption can take place only after Cost Allocation.

14. • DIFFERENTIAL COSTS (INCREMENTAL OR DECREMENTAL
COSTS): -
The amount by which the cost differs under two alternative
actions.
• CAPITALISED COSTS: -
These are costs which are initially recorded as assets and
subsequently treated as expenses.
• OPPORTUNITY COSTS: -
This cost refers to the benefit that is sacrificed when choice
of one action precludes taking an alternative course of
action.

15. • SHUT DOWN COSTS: -
Those costs, which continue to be, incurred even when a
plant is temporarily shutdown.
All fixed costs, which cannot be avoided during the
temporary closure of a plant, will be known as shut down
costs.
• SUNK COSTS: -
Historical costs incurred in the past are known as sunk
costs. They play no role in decision making in the current
period.
• OUT OF POCKET COSTS: -
Those that require the payment of cash or other assets as a
result of their incurrence.

16. • MARGINAL COST: -
The extra cost that is incurred when one
additional unit is produced.
• AVERAGE/UNIT = Total Cost .
COST No. of units manufactured

17. COST CLASSIFICATION EXERCISE
The following costs are incurred by the Loan Dept. of a Bank. For each cost,
indicate which of the following classifications best describe the cost.
More than one classification may apply to the same cost item.
Cost Classifications: -
• Controllable by the Loan Dept. Manager
• Uncontrollable by the Loan Dept. Manager
• Direct Cost of the Loan Dept.
• Indirect Cost of the Loan Dept.
• Differential Cost
• Marginal Cost
• Opportunity Cost
• Sunk Cost

18. Cost Item C/U D/I Dif. M Op. S
1 Salary of the Loan Dept. Manager
2 Cost of office supplies used in the Loan
Dept.
3 Cost of the dept.’s PCs purchased by the
Loan Dept. Manager last year
4 Cost of general advertising by the Bank,
which is allocated to the Loan Dept.
5 Revenue that the Loan Dept. would have
generated for the Bank if a branch loan
office had been located in a posh locality
instead of a village
6 Difference in the cost incurred by the Bank
when one additional loan application is
processed.

19. THREE DOG BAKERY – Understanding Cost Terms
“Going to the Dogs” has been good for Mark Beckloff & Dan Dye. Back in 1989,
they founded the first bakery just for four legged canine friends with little more
than the desire to satisfy the finicky palate of their beloved 114-pound, deaf Great
Dane, Gracie.
The small venture has grown from a single store in downtown Kansas City to more
than 40 locations worldwide, including Japan & Korea. Their dog treats are made
from wholesome ingredients such as flour, eggs, carrots, spinach, peanut butter, &
carob, & have clever names such as Rollovers, Pup Tarts, Scottie Biscottis, & Great
Danish. Some treats are even frosted with honey-yogurt icings & decorated with
colourful, edible flourishes. Special-occasion carrot or carob cakes can be
personalized by an in-store pastry chef. The company regularly updates its 100+
product line to entice dog lovers everywhere back to the stores again & again.
Selling prices range from a few cents for a small biscuit to more than $20 for a
special-order cake.
Three Dog Bakery has an 80,000 Sq. Ft. warehouse in Kansas City, containing
manufacturing, distribution & corporate offices, that prepares 70 % of the goods
sold.

20. Except for slow summer months, the manufacturing operation runs 24 hours a day,
7 days in a week, producing baked biscuits & carob-dipped items that can pack &
ship well. There is one main assembly-line with stations for mixing ingredients,
mechanized cutting of shapes, extruding doughnut-shaped biscuits, placing
biscuits on baking sheets, baking in ovens, cooling, carob-dipping (for selected
biscuits), hand packing into trays or containers, shrink-wrapping & boxing. Most
trays hold 12 specialty biscuits that are hand-packed. A conveyor belt is used for
automated packing of small biscuits into 7-ounce tubs. Employees are cross-
trained to perform multiple assembly-line functions & can work on every type of
product produced at the plant.
For remaining 30 % of finished goods, each store has specially outfitted kitchen
used for preparing cakes, brownies, tarts & other delicate or frosted items.
Prepackaged mixes created back at the production facility are used to assure
consistent quality across all stores. The retail outlets also sell nonfood products
such as bowls, leashes, books, mugs & T-shirts. Some stores even host “yappie
hours” & in-store birthday parties for dog socialization. Customers don’t have to
visit a Three Dog Bakery to enjoy the treats, however. The company has a
whimsical Web site at www.threedog.com that is home to the “dogalog” (well, it
can’t be called a “cat-alog,” can it?).

21. The site features all kinds of treats available for immediate shipping & accounts for
10 % of the company’s business now. In addition to its retail & e-commerce
channels, Three Dog Bakery places heavy emphasis on its expanding wholesale
business. The products were originally offered through national chains, such as
PetsMart & Target, but are now finding success with high-end grocery stores that
have lost much of their pet business to “big box” specialty pet stores & want a
higher-end quality product to offer their shoppers. Even Wal-Mart can’t ignore the
appeal of Three Dog Bakery products. Dog lovers can find Lick ‘n Crunch Cookies
on the shelves there.
Annual revenues exceed $20 million for this privately held company. As for the pet
market itself, there are more than 60 million pet dogs in the United States alone,
with nearly every owner buying anywhere from one to five packages of treats per
month. Two-thirds of pet owners give their pets gifts, more than half give
Christmas presents, & 25 % give birthday gifts. Pet owners spend in excess of $20
billion each year in industry that includes animal products, food & services.
Owners who spend more than $300 per year on their dogs tend to be younger,
more affluent, married & have no children.

22. QUESTIONS
1. To what cost objects Three Dog Bakery trace its costs?
2. Classify the following items as Direct / Indirect & Fixed / Variable w.r.t. the
Production Dept.
Cost Item D/I F/V
a) Salary of the Production Dept. Manager who oversees
manufacturing
b) Salaries of founders Dan Dye & Mark Beckloff
c) Cardboard trays used to package sets of specialty biscuits
d) Salary of the Web graphics designer who prepares the online
dogalog illustrations & layout
e) Annual maintenance service agreement for the conveyor belt
f) Wages paid to assembly line workers who mix Scotti Biscotti
ingredients in batches
g) Utilities (water, electricity, waste) for the entire Kansas City
warehouse
h) Cost of flour, eggs, & honey-yogurt icing for Pup Tarts

23. 3. What sectors – manufacturing, merchandising, or service – does Three
Dog Bakery operate in? Why are they classified this way?
4. When Wal-Mart purchases Lick ‘n Crunch Cookies for sale in its stores,
is the purchase considered a period cost or an inventoriable cost?
Why? What costs can Wal-Mart include as part of the purchase cost?