Building Blocks of Managerial Accounting

transcript

Chapter 2

Objective 1Distinguish among service,

merchandising, and manufacturing companies

Three types of companies

• Service

• Merchandisers

• Manufacturers

Service Companies

• Provide a service only• No inventory• Examples

– Accountants– Banks– Doctors– Lawyers

Merchandisers

• Resell products purchased from suppliers • One inventory account• Examples

– Amazon.com– J. C. Penney– Sears

• Retailers vs. Wholesalers

Manufacturers

• Use labor and other inputs to convert raw materials into finished products

• Examples– Crayola Crayons– Dell Computers– Craftsman Tools

• 3 inventory accounts

Manufacturers

• 3 inventory accounts

– Raw materials

– Work in process

– Finished goods

Objective 2Describe the value chain

and its elements

Value Chain• Activities that add value to products and

services and cost money.

R&D Production/Purchases

Marketing

Design

DistributionCustomer Service

Now turn to E2-16A

E2-16A

Research on selling satellite radio service

Purchases of merchandise

Rearranging store layout

E2-16A

Research on selling satellite radio service R & D

Purchases of merchandise

E2-16A

Purchases of merchandise Purchases

E2-16A

Purchases of merchandise Purchases

Rearranging store layout Design

E2-16A (cont.)

Newspaper advertisements

Deprec. expense on delivery trucksPayment to consultant for advice on location of new store

E2-16A (cont.)

Newspaper advertisements Marketing

Deprec. expense on delivery trucksPayment to consultant for advice on location of new store

E2-16A (cont.)

Deprec. expense on delivery trucks DistributionPayment to consultant for advice on location of new store

E2-17A (cont.)

Deprec. expense on delivery trucks DistributionPayment to consultant for advice on location of new store R & D

E2-16A (cont.)

Freight-in

Salespersons’ salaries

Customer complaint department

E2-16A (cont.)

Freight-in Purchases

Salespersons’ salaries

E2-16A (cont.)

Salespersons’ salaries Marketing

E2-16A (cont.)

Salespersons’ salaries Marketing

Customer complaint departmentCustomer service

Objective 3Distinguish between direct and

indirect costs

Cost Object

• Anything for which managers want a separate measurement of cost– Direct cost

– Indirect cost

Now turn to S2-4

a. The wages of store employees

b. The cost of operating the corporate payroll department

c. The cost of carpet steamers offered for rent

d. The cost of gas and oil sold at the store

Direct

Indirect

Direct

S2-4 (cont.)e. Store utilitiesf. The CEO’s salaryg. The cost of chainsaws

offered for renth. The cost of national

advertising

Indirect

Direct

DirectIndirect

Objective 4Identify the inventoriable product costs and period costs of merchandising and

manufacturing firms

Two definitions of product cost

• Total costs – used internally only (will see this in later chapters)

• Inventoriable product costs – used for external reporting

R&D Design

MarketingDistributionCustomer Service

Production/Purchases

Inventoriable Product Costs

Inventoriable product costs

Period Costs: All costs incurred in the other stages of the value chain

Peri o d C os ts

MarketingDistributionCustomer Service

R&D Design

Inventoriable Product Costs -- Merchandiser

• + Purchase price from suppliers • + Cost to get ready for sale• + Freight-in• + Import duties or tariffs

Inventoriable Product Costs -- Manufacturer

• Direct materials• Direct labor• Manufacturing overhead

Direct Costs

Indirect Costs

Manufacturing Overhead

• Indirect costs related to manufacturing that are not direct materials or direct labor– Indirect materials

– Indirect labor

– Other indirect manufacturing overhead

Now turn to S2-7

1. Company president’s annual bonus

2. Plastic gallon containers in which milk is packaged

3. Depreciation on marketing department’s computers

4. Wages and salaries paid to machine operators at dairy processing plant

Period

Product, DM

Product, DL

5. Research and Development on improving milk pasteurization process

6. Cost of milk purchased from dairy farmers

Product, DM

7. Lubricants used in running bottling machines

8. Depreciation on refrigerated trucks used to collect raw milk from dairy farms

S2-7 (cont.)

Product,MOH

Period

Product,MOH37

9. Property tax on dairy processing plant

10. Television advertisements for DairyPlains’ products

11.Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores

S2-7 (cont.)

Period

Product,MOH

Period

Prime and Conversion Costs

Manufacturing Overhead

Direct Materials

Prime Costs

Direct Labor

Conversion Costs

Direct and indirect labor costs include

• Salaries and wages • Fringe benefits• Payroll taxes

Objective 5Prepare the financial statements for

service, merchandising and manufacturing companies

Income Statement – Service Company

• Simplest income statement• All costs are period costs

Service Revenues- Operating expenses Operating income

Cost of Goods Sold Calculation – Merchandiser

+ Beginning inventory+ Purchases+ Import duties or tariffs+ Freight-in= Cost of goods available for sale- Ending inventory= Cost of goods sold

Now turn to S2-9

Cost of Goods Sold Computation

Beginning inventory $ 4,200Purchases $42,000Import duties 1,100

-Freight in 3,600 46,700Cost of goods avail for sale 50,900Ending inventory (5,400 )Cost of goods sold $45,500

Income Statement – Merchandiser

+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income

Now turn to S2-10

Salon SecretsIncome Statement

Sales revenue $39,330,000Cost of goods sold:

Beginning inventory $ 3,350,000Purchases 23,975,000Cost of goods avail. 27,325,000Ending inventory (4,315,000 )

Cost of goods sold (23,010,000 )Gross profit 16,290,000Operating expenses (6,150,000 )Operating income $ 10,140,000

2010 Product

2010 Balance

2010 Income

Statement

2011 Income

Statement

Cost of goods sold

Inventory

Inventory sold in 2010

Inventory sold in 2011

Cost of Goods Manufactured Calculation – Manufacturer

+ Beginning work in process inventory+ Direct materials used+ Direct labor+ Manufacturing overhead= Total manufacturing costs to account for- Ending work in process inventory= Cost of goods manufactured

How to calculate

Beginning Inventory + Net Purchases =

Cost of Goods Sold + Ending Inventory

Cost of Goods Sold Calculation –Manufacturer

+ Beginning finished goods inventory+ Cost of goods manufactured= Cost of goods available for sale- Ending finished goods inventory= Cost of goods sold

Now turn to E2-25A

E2-25A (COGM)

Beginning work in process inventory $ 36,000Add: Direct materials used:Beginning raw materials inventory $ 29,000Purchases of direct materials 73,000Available for use 102,000Ending raw materials inventory (31,000 )

Direct materials used $71,000Direct labor 89,000Manufacturing overhead:

Indirect labor $ 42,000Insurance on plant 10,500

Deprec- plant bldg & equip 13,000Repairs and mtnce – plant 4,000 69,500

Total manufacturing costs incurred 229,500Total manufacturing costs to acct for 265,500Less: Ending work in process inventory (30,000 )

Cost of goods manufactured $235,500

E2-25A (cont.)

*From schedule of cost of goods manufactured.

Quality Aquatic CompanySchedule of Cost of Goods Sold

Beginning finished goods inventory $ 22,000Cost of goods manufactured* 235,500Cost of goods available for sale 257,500Ending finished goods inventory (28,000)Cost of goods sold $229,500

Income Statement – Manufacturer

+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income

Now turn to E2-26A

E2-26A

Quality Aquatic Company

Income Statement

For Last Year

Sales revenue (33,000 ×$14) $462,000

Cost of goods sold 229,500

Gross profit 232,500

Operating expenses:

Marketing expenses $ 83,000

General and administrative expenses 26,500 109,500

Operating income $ 123,000

Direct Materials Used Calculation –Manufacturer

+ Beginning raw materials inventory+ Purchases of raw materials+ Freight in= Materials available for use- Ending raw materials inventory= Direct materials used

Now turn to S2-11

AllterrainComputation of Direct Materials Used

Direct materials used:Beginning raw materials inventory $ 3,900

Purchases of direct materials $15,600Import duties 900

Freight-in 600 17,100Direct materials available for use 21,000Ending raw materials inventory (2,000 )Direct materials used $19,000

Product and Period Costs

Type of Company

Inventoriable Product Costs

Period Costs

Service Company None All costs along the value chain

MerchandiserPurchases plus cost of freight, import duties,

All costs except total purchases

Manufacturer DM, DL, MOH All costs except DM, DL, MOH

Accounting Treatment

Inventory on balance sheet until sold

Immediately expense

Manufacturing Companies’Inventory Accounts

Raw Materials Inventory

+ Beginning inventory+ Purchases & freight

= Ending inventory

- Materials used in work in process

Work in Process Inventory

+ Beginning inventory

+ Matls used from raw matls

= Ending inventory

- Cost of goods manufactured and sent to finished goods

+ Direct Labor

+ Manufacturing overhead

Finished Goods Inventory

+ Beginning inventory

+ Cost of goods manufactured

= Ending inventory

- Cost of goods sold

Balance Sheet Differences

Type of Company Inventory Accounts

Service Company None

Merchandiser Merchandise Inventory

Manufacturer Raw materials, work in process, and finished goods inventory

Objective 6Describe costs that are relevant and

irrelevant for decision making

Controllable and Uncontrollable Costs

Controllable Management can influence or change cost

Uncontrollable Management cannot change or influence cost in the short run

Relevant and Irrelevant Costs

Relevant Differential costs, which are costs that differ between alternatives

Irrelevant

Costs which do not differ between alternatives-or-Sunk costs – costs incurred in the past which cannot be changed

Objective 7Classify costs as fixed or variable and calculate total and average costs at

different volumes

Cost Behavior

Variable costs Change in total cost in direct proportion to changes in volume

Fixed costs Stay constant in total cost over a wide range of activity levels

Total Variable Costs

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

Assume we pay 5% sales commissions on all sales.The cost of sales commissions increases proportionately with increases in sales.

Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

Total Cost

• Total cost = Fixed costs + (Variable cost per unit x number of units)

Example:Fixed costs = $20,000Variable cost per unit = $50 per unitNumber of units = 100

Total Cost = $20,000 + ($50 x 100) = $25,000

Average Cost

• Total cost ÷ number of units = Average cost

• The average cost per unit is NOT appropriate for predicting total costs at different levels of output.

Example:$25,000 = $250 per unit

100 units

Marginal Cost

• Cost of making one more unit

End of Chapter 2

Building Blocks of Managerial Accounting

Documents