Uploaded byjoellynpatrona
PPT, PDF1,490 views

Chapter 2 Managerial Accounting and Cost Concepts.ppt

The document discusses key concepts in managerial accounting including the functions of management, planning and control, cost classifications, and inventory accounting. It defines direct materials, direct labor, and manufacturing overhead as the three basic manufacturing cost categories. It also distinguishes between product costs and period costs, with examples of each. Finally, it covers the differences between variable and fixed costs, direct and indirect costs, and defines differential costs, opportunity costs, and sunk costs.

Embed presentation

Downloaded 17 times
Managerial Accounting and Cost Concepts
Work of Management Planning Controlling Directing and Motivating
Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative.
Directing and Motivating Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications.
Controlling The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
Planning and Control Cycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin
Learning Objective 1 Identify the major differences and similarities between financial and managerial accounting.
Comparison of Financial and Managerial Accounting Financial Accounting Managerial 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. GAAP Must follow GAAP Need not follow GAAP and prescribed formats or any prescribed format 7. Requirement Mandatory for Not external reports Mandatory
Learning Objective 2 Identify and give examples of each of the three basic manufacturing cost categories.
The Product Direct Materials Direct Labor Manufacturing Overhead Manufacturing Costs
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
Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers
Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect materials and indirect labor 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.
Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.
Learning Objective 3 Distinguish between product costs and period costs and give examples of each.
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 Balance Sheet Income Statement Sale Expense Income Statement
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.
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.
Classifications of Costs Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:
Comparing Merchandising and Manufacturing Companies Merchandisers . . .  Buy finished goods.  Sell finished goods. Manufacturers . . .  Buy raw materials.  Produce and sell finished goods. MegaLoMart McGraw-Hill/Irwin
Balance Sheet Merchandiser Current assets Cash Receivables Merchandise Inventory Manufacturer Current Assets Cash Receivables Inventories ‱ Raw Materials ‱ Work in Process ‱ Finished Goods
Merchandiser Current assets Cash Receivables Merchandise Inventory Manufacturer Current Assets Cash Receivables 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.
Learning Objective 4 Prepare an income statement including calculation of the cost of goods sold.
The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Manufacturing Company Cost of goods sold: Beg. finished goods inv. 14,200 $ + Cost of goods manufactured 234,150 Goods available for sale 248,350 $ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250 $ 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 $
Basic Equation for Inventory Accounts Beginning balance Additions to inventory + = Ending balance Withdrawals from inventory +
Quick Check  If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $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.
Quick Check  If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $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. $1,000 + $100 = $1,100 $1,100 - $300 = $800
Learning Objective 5 Prepare a schedule of cost of goods manufactured.
Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor, and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.
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. Product Cost Flows
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. Product Cost Flows
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 Cost Flows All manufacturing costs incurred during the period are added to the beginning balance of work in process.
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 – Ending work in inventory process inventory = Raw materials used = Cost of goods in production manufactured Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
Work In Process Finished Goods Beginning work in Beginning finished process inventory goods inventory + Manufacturing costs + Cost of goods for the period manufactured = Total work in process = Cost of goods for the period available for sale – Ending work in - Ending finished process inventory goods inventory = Cost of goods Cost of goods manufactured sold Product Cost Flows
Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials
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
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 Beg. raw materials 32,000 $ + Raw materials purchased 276,000 = Raw materials available for use in production 308,000 $ – Ending raw materials inventory 28,000 = Raw materials used in production 280,000 $
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.
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. Direct Materials 280,000 $ + Direct Labor 375,000 + Mfg. Overhead 180,000 = Mfg. Costs Incurred for the Month 835,000 $ Quick Check 
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.
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. Quick Check  Beginning work in process inventory 125,000 $ + Mfg. costs incurred for the period 835,000 = Total work in process during the period 960,000 $ – Ending work in process inventory 200,000 = Cost of goods manufactured 760,000 $
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.
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. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000
Learning Objective 6 Understand the differences between variable costs and fixed costs.
Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes.
Variable Cost Your total texting bill is based on how many texts you send. Number of Texts Sent Total Texting Bill
Variable Cost Per Unit Number of Texts Sent Cost Per Text Sent The cost per text sent is constant at 5 cents per text.
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 Used Within Monthly Plan Monthly Cell Phone Contract Fee
Fixed Cost Per Unit Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made.
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 Average fixed cost per unit goes the same even when the down as activity level goes up. activity level changes.
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.
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.
Learning Objective 7 Understand the differences between direct and indirect costs.
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 McGraw-Hill/Irwin
Learning Objective 8 Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
 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. Cost Classifications for Decision Making
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. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300
Opportunity Cost The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.
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: 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.
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.
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.
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.
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.
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.
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.
Summary of the Types of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions
Further Classification of Labor Costs Appendix 2A
Learning Objective 9 (Appendix 2A) Properly account for labor costs associated with idle time, overtime, and fringe benefits.
Idle Time The labor costs incurred during idle time are ordinarily treated as manufacturing overhead. Machine Breakdowns Material Shortages Power Failures
Overtime The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead.
Labor Fringe Benefits Fringe benefits include employer paid costs for insurance programs, retirement plans, supplemental unemployment programs, Social Security, Medicare, workers’ compensation, and unemployment taxes. Some companies include all of these costs in manufacturing overhead. Other companies treat fringe benefit expenses of direct laborers as additional direct labor costs.
Cost of Quality Appendix 2B
Learning Objective 10 (Appendix 2B) Identify the four types of quality costs and explain how they interact.
Quality of Conformance When the overwhelming majority of products produced conform to design specifications and are free from defects.
Prevention and Appraisal Costs Prevention Costs Support activities whose purpose is to reduce the number of defects Appraisal Costs Incurred to identify defective products before the products are shipped to customers
Internal and External Failure Costs Internal Failure Costs Incurred as a result of identifying defects before they are shipped External Failure Costs Incurred as a result of defective products being delivered to customers
Examples of Quality Costs Prevention Costs ‱ Quality training ‱ Quality circles ‱ Statistical process control activities Appraisal Costs ‱ Testing and inspecting incoming materials ‱ Final product testing ‱ Depreciation of testing equipment Internal Failure Costs ‱ Scrap ‱ Spoilage ‱ Rework External Failure Costs ‱ Cost of field servicing and handling complaints ‱ Warranty repairs ‱ Lost sales
Distribution of Quality Costs
Learning Objective 11 (Appendix 2B) Prepare and interpret a quality cost report.
Quality cost reports provide an estimate of the financial consequences of the company’s current defect rate. Amount Percent* Amount Percent* Prevention costs: Systems development 400,000 $ 0.80% 270,000 $ 0.54% Quality training 210,000 0.42% 130,000 0.26% Supervision of prevention activities 70,000 0.14% 40,000 0.08% Quality improvement 320,000 0.64% 210,000 0.42% Total prevention cost 1,000,000 2.00% 650,000 1.30% Appraisal costs: Inspection 600,000 1.20% 560,000 1.12% Reliability testing 580,000 1.16% 420,000 0.84% Supervision of testing and inspection 120,000 0.24% 80,000 0.16% Depreciation of test equipment 200,000 0.40% 140,000 0.28% Total appraisal cost 1,500,000 3.00% 1,200,000 2.40% Internal failure costs: Net cost of scrap 900,000 1.80% 750,000 1.50% Rework labor and overhead 1,430,000 2.86% 810,000 1.62% Downtime due to defects in quality 170,000 0.34% 100,000 0.20% Disposal of defective products 500,000 1.00% 340,000 0.68% Total internal failure cost 3,000,000 6.00% 2,000,000 4.00% External failure costs: Warranty repairs 400,000 0.80% 900,000 1.80% Warranty replacements 870,000 1.74% 2,300,000 4.60% Allowances 130,000 0.26% 630,000 1.26% Cost of field servicing 600,000 1.20% 1,320,000 2.64% Total external failure cost 2,000,000 4.00% 5,150,000 10.30% Total quality cost 7,500,000 $ 15.00% 9,000,000 $ 18.00% * As a percentage of total sales. In each year sales totaled $50,000,000. Year 2 Year 1 Quality Cost Report For Years 1 and 2
Quality Cost Reports in Graphic Form $10 9 8 7 6 5 4 3 2 1 Appraisal 0 Prevention Prevention 1 2 Year Quality Cost (in millions) Appraisal Internal Failure External Failure Internal Failure External Failure 20 18 16 14 12 10 8 6 4 2 Appraisal 0 Prevention Prevention 1 2 Year Quality Cost as a Percentage of Sales Appraisal Internal Failure External Failure Internal Failure External Failure Quality reports can also be prepared in graphic form.
Uses of Quality Cost Information Help managers see the financial significance of defects. Help managers identify the relative importance of the quality problems. Help managers see whether their quality costs are poorly distributed.
Limitations of Quality Cost Information Simply measuring and reporting quality cost problems does not solve quality problems. Results usually lag behind quality improvement programs. The most important quality cost, lost sales, is often omitted from quality cost reports.
ISO 9000 Standards ISO 9000 standards have become international measures of quality. To become ISO 9000 certified, a company must demonstrate: 1. A quality control system is in use, and the system clearly defines an expected level of quality. 2. The system is fully operational and is backed up with detailed documentation of quality control procedures. 3. The intended level of quality is being achieved on a sustained basis.
End of Chapter 2

More Related Content

PDF
test-bank-managerial-accounting-16th-edition-ray-h-garrison.pdf
byRaedMaani
 
PPT
Managerial Accounting Garrison Noreen Brewer Chapter 01
byAsif Hasan
 
PPT
Chapter 4 Process Costing.ppt
byMuhammadTayyabMehmoo
 
PPT
Managerial Accounting Garrison Noreen Brewer Chapter 02
byAsif Hasan
 
PDF
Test bank for Managerial Accounting 17th edition by Ray Garrison.pdf
bystudenthelptbsm
 
PDF
| Managerial Accounting | Chapter 3 | Systems Design: Job-Order Costing | Int...
byAhmad Hassan
 
PPT
Managerial Accounting Garrison Noreen Brewer Chapter 04
byAsif Hasan
 
PPTX
Bab 12
bykim rae KI
 
test-bank-managerial-accounting-16th-edition-ray-h-garrison.pdf
byRaedMaani
 
Managerial Accounting Garrison Noreen Brewer Chapter 01
byAsif Hasan
 
Chapter 4 Process Costing.ppt
byMuhammadTayyabMehmoo
 
Managerial Accounting Garrison Noreen Brewer Chapter 02
byAsif Hasan
 
Test bank for Managerial Accounting 17th edition by Ray Garrison.pdf
bystudenthelptbsm
 
| Managerial Accounting | Chapter 3 | Systems Design: Job-Order Costing | Int...
byAhmad Hassan
 
Managerial Accounting Garrison Noreen Brewer Chapter 04
byAsif Hasan
 
Bab 12
bykim rae KI
 

What's hot

PPTX
Process costing explained
bySam zain
 
PPTX
Master Budget.pptx
byLayTekchhay2
 
PPT
Chapter 5 Cost Behavior: Analysis and Use
byViệt HoĂ ng DÆ°ÆĄng
 
PDF
6 inventory valuation
byKaran Kukreja
 
PPTX
Chapter 6 Absorption and variable costing.pptx
byYuslinda Yusof
 
PPT
Job Order Costing
bynarman1402
 
PPT
Chapter 2 Systems Design: Job-Order Costing
byViệt HoĂ ng DÆ°ÆĄng
 
PPTX
Standard costs and variance analysis
bySumit Malhotra
 
PPTX
ch02-Job Order Costing.pptx
byMohammadKhan467
 
PPT
Standard costing presentation
byJay Singh
 
PPT
Chapter 2.ppt
byAsmamawYigzawChirkos
 
PDF
| Managerial Accounting | Chapter 8 | Master Budgeting | Introduction to Mana...
byAhmad Hassan
 
PPTX
Econ606 chapter 28 2020
bysakanor
 
PPT
Managerial Accounting Garrison Noreen Brewer Chapter 07
byAsif Hasan
 
PPTX
Fixed & variable cost
byMuhammadAwais642
 
PPTX
marginal and absorption costing
bysangeeta saini
 
PPTX
Econ606 chapter 27 2020
bysakanor
 
PPTX
Econ606 chapter 30 2020
bysakanor
 
PPT
Managerial Accounting Garrison Noreen Brewer Chapter 03
byAsif Hasan
 
PPTX
Econ606 chapter 29 2020
bysakanor
 
Process costing explained
bySam zain
 
Master Budget.pptx
byLayTekchhay2
 
Chapter 5 Cost Behavior: Analysis and Use
byViệt HoĂ ng DÆ°ÆĄng
 
6 inventory valuation
byKaran Kukreja
 
Chapter 6 Absorption and variable costing.pptx
byYuslinda Yusof
 
Job Order Costing
bynarman1402
 
Chapter 2 Systems Design: Job-Order Costing
byViệt HoĂ ng DÆ°ÆĄng
 
Standard costs and variance analysis
bySumit Malhotra
 
ch02-Job Order Costing.pptx
byMohammadKhan467
 
Standard costing presentation
byJay Singh
 
Chapter 2.ppt
byAsmamawYigzawChirkos
 
| Managerial Accounting | Chapter 8 | Master Budgeting | Introduction to Mana...
byAhmad Hassan
 
Econ606 chapter 28 2020
bysakanor
 
Managerial Accounting Garrison Noreen Brewer Chapter 07
byAsif Hasan
 
Fixed & variable cost
byMuhammadAwais642
 
marginal and absorption costing
bysangeeta saini
 
Econ606 chapter 27 2020
bysakanor
 
Econ606 chapter 30 2020
bysakanor
 
Managerial Accounting Garrison Noreen Brewer Chapter 03
byAsif Hasan
 
Econ606 chapter 29 2020
bysakanor
 

Similar to Chapter 2 Managerial Accounting and Cost Concepts.ppt

PPTX
Acc mgt noreen01 an introduction to managerial accounting and cost concepts
byJudianto Nugroho
 
PPT
chapter 2 ppt slides Management Accounting MBA
bySaifRaihan4
 
PPT
Introduction to Managerial Accounting and Cost Concepts
byViệt HoĂ ng DÆ°ÆĄng
 
PDF
| Managerial Accounting | Chapter 1 | An Overview to Managerial Accounting | ...
byAhmad Hassan
 
PPTX
Chapter 02-Managerial Accounting and Cost.pptx
byMaverick740737
 
PPTX
445528381-CHAPTER-2-COST-TERMS-CONCEPTS-AND-CLASSIFICATIONS-pptx.pptx
byratha24
 
PPT
Akaun Chapter 8
byWanBK Leo
 
PPTX
CH 01 Cost of Manaufactured.pptx
byAshfaqAhmed381082
 
PPTX
management accounting 1 topic 2 bkam1013
byElvianaAnn
 
PPT
Gnb 02 12e
bySaif Mahmud
 
PPT
COST-CONCEPT to manage and utilize cost and to solve
byemnacemacjones
 
PPTX
2nd bab daia and 3rd Meeting Chapter 2.pptx
byalifnurrvan
 
PPT
Chap002
byAdnan Khan
 
PDF
chap02notes.pdf
byEllamae79
 
PPT
Management Accounting: A Business Partner
byAdugna37
 
PPT
Cost accounting chapter two(cost classifications)
bySyedaBeenaZaidi3
 
PPT
Ch2 Cost Terms Concept dan Classification.ppt
byEMONKALYANCHOWDHURY1
 
PPT
Biaya Konsep Akuntansi Manajemen pertemuan
byummuhafshah0511
 
PPT
Tipi di Costi 3.Flussi inventariali e costi di prodotto da vicino
byManager.it
 
PPT
Module 1 lesson 2 cost classifications according to purpose
byPamantasan Ng Lungsod Ng Pasig
 
Acc mgt noreen01 an introduction to managerial accounting and cost concepts
byJudianto Nugroho
 
chapter 2 ppt slides Management Accounting MBA
bySaifRaihan4
 
Introduction to Managerial Accounting and Cost Concepts
byViệt HoĂ ng DÆ°ÆĄng
 
| Managerial Accounting | Chapter 1 | An Overview to Managerial Accounting | ...
byAhmad Hassan
 
Chapter 02-Managerial Accounting and Cost.pptx
byMaverick740737
 
445528381-CHAPTER-2-COST-TERMS-CONCEPTS-AND-CLASSIFICATIONS-pptx.pptx
byratha24
 
Akaun Chapter 8
byWanBK Leo
 
CH 01 Cost of Manaufactured.pptx
byAshfaqAhmed381082
 
management accounting 1 topic 2 bkam1013
byElvianaAnn
 
Gnb 02 12e
bySaif Mahmud
 
COST-CONCEPT to manage and utilize cost and to solve
byemnacemacjones
 
2nd bab daia and 3rd Meeting Chapter 2.pptx
byalifnurrvan
 
Chap002
byAdnan Khan
 
chap02notes.pdf
byEllamae79
 
Management Accounting: A Business Partner
byAdugna37
 
Cost accounting chapter two(cost classifications)
bySyedaBeenaZaidi3
 
Ch2 Cost Terms Concept dan Classification.ppt
byEMONKALYANCHOWDHURY1
 
Biaya Konsep Akuntansi Manajemen pertemuan
byummuhafshah0511
 
Tipi di Costi 3.Flussi inventariali e costi di prodotto da vicino
byManager.it
 
Module 1 lesson 2 cost classifications according to purpose
byPamantasan Ng Lungsod Ng Pasig
 

Recently uploaded

PDF
The $410.7 Billion Question Every CFO Needs to Answer
byPrima Consulting
 
PDF
Anatomy of a Capture: How One Foreclosure Exposes a National Equity Machine
byJeremy Bass
 
DOCX
Understanding Twitter Accounts_ A Deep Exploration of Digital Voice, Identity...
bymarketing
 
PDF
How to Buy Verified Binance Account at .A new of it_.pdf
byusatrustacc
 
DOCX
6 Steps to Buy Verified Stripe Accounts – in 2025.docx
byusatrustacc
 
PDF
_how to buy Buy/// Self Bank Account.pdf
bymarketing
 
PDF
Buying Verified Cash App Accounts_ Step-by-Step Guide for 2026 .pdf
by#SEO, #usaallhub, #socialmedia, #USAaccounts, #seoservice, #Digitalmarketer
 
DOCX
Case Study: The Industrialized Negative SEO & Extortion Model of TraderKnows
byQingShieldCenter
 
PPTX
1585557622_13765780_Autocorrelation.pptx
byfannahsaad
 
PPTX
Top Inventory Financing Mistakes Small Businesses Must Avoid
byAvon River Ventures
 
PDF
Trade Facilitation Monitoring in Ukraine № 96
byĐ†ĐœŃŃ‚ĐžŃ‚ŃƒŃ‚ Đ”ĐșĐŸĐœĐŸĐŒŃ–Ń‡ĐœĐžŃ… ĐŽĐŸŃĐ»Ń–ĐŽĐ¶Đ”ĐœŃŒ та ĐżĐŸĐ»Ń–Ń‚ĐžŃ‡ĐœĐžŃ… ĐșĐŸĐœŃŃƒĐ»ŃŒŃ‚Đ°Ń†Ń–Đč
 
PPTX
Income_Tax_Master_Presentation_All_Modules.pptx
byRohitGupta920212
 
PPTX
Structure of Office of the dad PCDA O.pptx
bysasdad209601
 
PDF
The Default/Foreclosure Machine - 2008 frauds missed and cover ring
byJeremy Bass
 
DOCX
How to buy LinkedIn accounts from us A new of it_.docx
byhi1885171
 
PDF
Asstkaft_Seeman_Newsletter_December_2025.pdf
byAshis Kumar Dey
 
PDF
Buy LinkedIn Accounts_Best Step-by-Step Guide for 2025.pdf
bymarketing
 
DOCX
Case Study: The Mechanics of TraderKnows Extortion
byBittam Sobrenome
 
PDF
_How to Buy////// TikTok Seller Account.pdf
byhi1885171
 
PPTX
Beacon Kit slides tech framework for world game (s) pptx
bySteven McGee
 
The $410.7 Billion Question Every CFO Needs to Answer
byPrima Consulting
 
Anatomy of a Capture: How One Foreclosure Exposes a National Equity Machine
byJeremy Bass
 
Understanding Twitter Accounts_ A Deep Exploration of Digital Voice, Identity...
bymarketing
 
How to Buy Verified Binance Account at .A new of it_.pdf
byusatrustacc
 
6 Steps to Buy Verified Stripe Accounts – in 2025.docx
byusatrustacc
 
_how to buy Buy/// Self Bank Account.pdf
bymarketing
 
Buying Verified Cash App Accounts_ Step-by-Step Guide for 2026 .pdf
by#SEO, #usaallhub, #socialmedia, #USAaccounts, #seoservice, #Digitalmarketer
 
Case Study: The Industrialized Negative SEO & Extortion Model of TraderKnows
byQingShieldCenter
 
1585557622_13765780_Autocorrelation.pptx
byfannahsaad
 
Top Inventory Financing Mistakes Small Businesses Must Avoid
byAvon River Ventures
 
Trade Facilitation Monitoring in Ukraine № 96
byĐ†ĐœŃŃ‚ĐžŃ‚ŃƒŃ‚ Đ”ĐșĐŸĐœĐŸĐŒŃ–Ń‡ĐœĐžŃ… ĐŽĐŸŃĐ»Ń–ĐŽĐ¶Đ”ĐœŃŒ та ĐżĐŸĐ»Ń–Ń‚ĐžŃ‡ĐœĐžŃ… ĐșĐŸĐœŃŃƒĐ»ŃŒŃ‚Đ°Ń†Ń–Đč
 
Income_Tax_Master_Presentation_All_Modules.pptx
byRohitGupta920212
 
Structure of Office of the dad PCDA O.pptx
bysasdad209601
 
The Default/Foreclosure Machine - 2008 frauds missed and cover ring
byJeremy Bass
 
How to buy LinkedIn accounts from us A new of it_.docx
byhi1885171
 
Asstkaft_Seeman_Newsletter_December_2025.pdf
byAshis Kumar Dey
 
Buy LinkedIn Accounts_Best Step-by-Step Guide for 2025.pdf
bymarketing
 
Case Study: The Mechanics of TraderKnows Extortion
byBittam Sobrenome
 
_How to Buy////// TikTok Seller Account.pdf
byhi1885171
 
Beacon Kit slides tech framework for world game (s) pptx
bySteven McGee
 

Chapter 2 Managerial Accounting and Cost Concepts.ppt

  • 1.
  • 2.
  • 3.
    Planning Identify alternatives. Select alternative thatdoes the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative.
  • 4.
    Directing and Motivating Directingand motivating involves managing day-to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications.
  • 5.
    Controlling The control functionensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
  • 6.
    Planning and ControlCycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin
  • 7.
    Learning Objective 1 Identifythe major differences and similarities between financial and managerial accounting.
  • 8.
    Comparison of Financialand Managerial Accounting Financial Accounting Managerial 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. GAAP Must follow GAAP Need not follow GAAP and prescribed formats or any prescribed format 7. Requirement Mandatory for Not external reports Mandatory
  • 9.
    Learning Objective 2 Identifyand give examples of each of the three basic manufacturing cost categories.
  • 10.
  • 11.
    Direct Materials Raw materialsthat become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile
  • 12.
    Direct Labor Those laborcosts that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers
  • 13.
    Manufacturing costs thatcannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect materials and indirect labor 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.
  • 14.
    Nonmanufacturing Costs Selling Costs Costs necessaryto secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.
  • 15.
    Learning Objective 3 Distinguishbetween product costs and period costs and give examples of each.
  • 16.
    Product Costs VersusPeriod 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 Balance Sheet Income Statement Sale Expense Income Statement
  • 17.
    Quick Check  Whichof 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.
  • 18.
    Quick Check  Whichof 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.
  • 19.
  • 20.
    Comparing Merchandising and ManufacturingCompanies Merchandisers . . .  Buy finished goods.  Sell finished goods. Manufacturers . . .  Buy raw materials.  Produce and sell finished goods. MegaLoMart McGraw-Hill/Irwin
  • 21.
    Balance Sheet Merchandiser Current assets Cash Receivables MerchandiseInventory Manufacturer Current Assets Cash Receivables Inventories ‱ Raw Materials ‱ Work in Process ‱ Finished Goods
  • 22.
    Merchandiser Current assets Cash Receivables Merchandise Inventory Manufacturer CurrentAssets Cash Receivables 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.
  • 23.
    Learning Objective 4 Preparean income statement including calculation of the cost of goods sold.
  • 24.
    The Income Statement Costof goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Manufacturing Company Cost of goods sold: Beg. finished goods inv. 14,200 $ + Cost of goods manufactured 234,150 Goods available for sale 248,350 $ - Ending finished goods inventory (12,100) = Cost of goods sold 236,250 $ 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 $
  • 25.
    Basic Equation forInventory Accounts Beginning balance Additions to inventory + = Ending balance Withdrawals from inventory +
  • 26.
    Quick Check  Ifyour inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $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.
  • 27.
    Quick Check  Ifyour inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $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. $1,000 + $100 = $1,100 $1,100 - $300 = $800
  • 28.
    Learning Objective 5 Preparea schedule of cost of goods manufactured.
  • 29.
    Schedule of Costof Goods Manufactured Calculates the cost of raw material, direct labor, and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.
  • 30.
    Manufacturing Work Raw MaterialsCosts 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. Product Cost Flows
  • 31.
    Manufacturing Work Raw MaterialsCosts 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. Product Cost Flows
  • 32.
    Manufacturing Work Raw MaterialsCosts 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 Cost Flows All manufacturing costs incurred during the period are added to the beginning balance of work in process.
  • 33.
    Manufacturing Work Raw MaterialsCosts 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 – Ending work in inventory process inventory = Raw materials used = Cost of goods in production manufactured Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
  • 34.
    Work In Process FinishedGoods Beginning work in Beginning finished process inventory goods inventory + Manufacturing costs + Cost of goods for the period manufactured = Total work in process = Cost of goods for the period available for sale – Ending work in - Ending finished process inventory goods inventory = Cost of goods Cost of goods manufactured sold Product Cost Flows
  • 35.
    Manufacturing Cost Flows Finished Goods Costof Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials
  • 36.
    Quick Check  Beginningraw 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
  • 37.
    Quick Check  Beginningraw 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 Beg. raw materials 32,000 $ + Raw materials purchased 276,000 = Raw materials available for use in production 308,000 $ – Ending raw materials inventory 28,000 = Raw materials used in production 280,000 $
  • 38.
    Quick Check  Directmaterials 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.
  • 39.
    Direct materials usedin 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. Direct Materials 280,000 $ + Direct Labor 375,000 + Mfg. Overhead 180,000 = Mfg. Costs Incurred for the Month 835,000 $ Quick Check 
  • 40.
    Quick Check  Beginningwork 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.
  • 41.
    Beginning work inprocess 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. Quick Check  Beginning work in process inventory 125,000 $ + Mfg. costs incurred for the period 835,000 = Total work in process during the period 960,000 $ – Ending work in process inventory 200,000 = Cost of goods manufactured 760,000 $
  • 42.
    Quick Check  Beginningfinished 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.
  • 43.
    Quick Check  Beginningfinished 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. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000
  • 44.
    Learning Objective 6 Understandthe differences between variable costs and fixed costs.
  • 45.
    Cost Classifications forPredicting Cost Behavior How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes.
  • 46.
    Variable Cost Your totaltexting bill is based on how many texts you send. Number of Texts Sent Total Texting Bill
  • 47.
    Variable Cost PerUnit Number of Texts Sent Cost Per Text Sent The cost per text sent is constant at 5 cents per text.
  • 48.
    Fixed Cost Your monthlycontract 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 Used Within Monthly Plan Monthly Cell Phone Contract Fee
  • 49.
    Fixed Cost PerUnit Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made.
  • 50.
    Cost Classifications forPredicting 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 Average fixed cost per unit goes the same even when the down as activity level goes up. activity level changes.
  • 51.
    Quick Check  Whichof 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.
  • 52.
    Quick Check  Whichof 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.
  • 53.
    Learning Objective 7 Understandthe differences between direct and indirect costs.
  • 54.
    Assigning Costs toCost 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 McGraw-Hill/Irwin
  • 55.
    Learning Objective 8 Defineand give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
  • 56.
     Every decisioninvolves 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. Cost Classifications for Decision Making
  • 57.
    Differential Cost andRevenue 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. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300
  • 58.
    Opportunity Cost The potentialbenefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.
  • 59.
    Sunk Costs Sunk costshave already been incurred and cannot be changed now or in the future. These costs 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.
  • 60.
    Quick Check  Supposeyou 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.
  • 61.
    Quick Check  Supposeyou 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.
  • 62.
    Quick Check  Supposeyou 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.
  • 63.
    Quick Check  Supposeyou 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.
  • 64.
    Quick Check  Supposethat 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.
  • 65.
    Quick Check  Supposethat 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.
  • 66.
    Summary of theTypes of Cost Classifications Financial Reporting Predicting Cost Behavior Assigning Costs to Cost Objects Making Business Decisions
  • 67.
    Further Classification ofLabor Costs Appendix 2A
  • 68.
    Learning Objective 9 (Appendix2A) Properly account for labor costs associated with idle time, overtime, and fringe benefits.
  • 69.
    Idle Time The laborcosts incurred during idle time are ordinarily treated as manufacturing overhead. Machine Breakdowns Material Shortages Power Failures
  • 70.
    Overtime The overtime premiumsfor all factory workers are usually considered to be part of manufacturing overhead.
  • 71.
    Labor Fringe Benefits Fringebenefits include employer paid costs for insurance programs, retirement plans, supplemental unemployment programs, Social Security, Medicare, workers’ compensation, and unemployment taxes. Some companies include all of these costs in manufacturing overhead. Other companies treat fringe benefit expenses of direct laborers as additional direct labor costs.
  • 72.
  • 73.
    Learning Objective 10 (Appendix2B) Identify the four types of quality costs and explain how they interact.
  • 74.
    Quality of Conformance Whenthe overwhelming majority of products produced conform to design specifications and are free from defects.
  • 75.
    Prevention and AppraisalCosts Prevention Costs Support activities whose purpose is to reduce the number of defects Appraisal Costs Incurred to identify defective products before the products are shipped to customers
  • 76.
    Internal and ExternalFailure Costs Internal Failure Costs Incurred as a result of identifying defects before they are shipped External Failure Costs Incurred as a result of defective products being delivered to customers
  • 77.
    Examples of QualityCosts Prevention Costs ‱ Quality training ‱ Quality circles ‱ Statistical process control activities Appraisal Costs ‱ Testing and inspecting incoming materials ‱ Final product testing ‱ Depreciation of testing equipment Internal Failure Costs ‱ Scrap ‱ Spoilage ‱ Rework External Failure Costs ‱ Cost of field servicing and handling complaints ‱ Warranty repairs ‱ Lost sales
  • 78.
  • 79.
    Learning Objective 11 (Appendix2B) Prepare and interpret a quality cost report.
  • 80.
    Quality cost reports provide anestimate of the financial consequences of the company’s current defect rate. Amount Percent* Amount Percent* Prevention costs: Systems development 400,000 $ 0.80% 270,000 $ 0.54% Quality training 210,000 0.42% 130,000 0.26% Supervision of prevention activities 70,000 0.14% 40,000 0.08% Quality improvement 320,000 0.64% 210,000 0.42% Total prevention cost 1,000,000 2.00% 650,000 1.30% Appraisal costs: Inspection 600,000 1.20% 560,000 1.12% Reliability testing 580,000 1.16% 420,000 0.84% Supervision of testing and inspection 120,000 0.24% 80,000 0.16% Depreciation of test equipment 200,000 0.40% 140,000 0.28% Total appraisal cost 1,500,000 3.00% 1,200,000 2.40% Internal failure costs: Net cost of scrap 900,000 1.80% 750,000 1.50% Rework labor and overhead 1,430,000 2.86% 810,000 1.62% Downtime due to defects in quality 170,000 0.34% 100,000 0.20% Disposal of defective products 500,000 1.00% 340,000 0.68% Total internal failure cost 3,000,000 6.00% 2,000,000 4.00% External failure costs: Warranty repairs 400,000 0.80% 900,000 1.80% Warranty replacements 870,000 1.74% 2,300,000 4.60% Allowances 130,000 0.26% 630,000 1.26% Cost of field servicing 600,000 1.20% 1,320,000 2.64% Total external failure cost 2,000,000 4.00% 5,150,000 10.30% Total quality cost 7,500,000 $ 15.00% 9,000,000 $ 18.00% * As a percentage of total sales. In each year sales totaled $50,000,000. Year 2 Year 1 Quality Cost Report For Years 1 and 2
  • 81.
    Quality Cost Reportsin Graphic Form $10 9 8 7 6 5 4 3 2 1 Appraisal 0 Prevention Prevention 1 2 Year Quality Cost (in millions) Appraisal Internal Failure External Failure Internal Failure External Failure 20 18 16 14 12 10 8 6 4 2 Appraisal 0 Prevention Prevention 1 2 Year Quality Cost as a Percentage of Sales Appraisal Internal Failure External Failure Internal Failure External Failure Quality reports can also be prepared in graphic form.
  • 82.
    Uses of QualityCost Information Help managers see the financial significance of defects. Help managers identify the relative importance of the quality problems. Help managers see whether their quality costs are poorly distributed.
  • 83.
    Limitations of QualityCost Information Simply measuring and reporting quality cost problems does not solve quality problems. Results usually lag behind quality improvement programs. The most important quality cost, lost sales, is often omitted from quality cost reports.
  • 84.
    ISO 9000 Standards ISO9000 standards have become international measures of quality. To become ISO 9000 certified, a company must demonstrate: 1. A quality control system is in use, and the system clearly defines an expected level of quality. 2. The system is fully operational and is backed up with detailed documentation of quality control procedures. 3. The intended level of quality is being achieved on a sustained basis.
  • 85.

Editor's Notes