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Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Managerial Accounting and the Business Environment
Chapter One
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Work of Management
PlanningPlanning
ControllingControlling
Directing and Motivating
Directing and Motivating
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Planning
Identifyalternatives.
Identifyalternatives.
Select alternative that does the best job of furtheringorganization’s objectives.
Select alternative that does the best job of furtheringorganization’s objectives.
Develop budgets to guideprogress toward theselected alternative.
Develop budgets to guideprogress toward theselected alternative.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Controlling
The control function ensuresthat plans are being followed. The control function ensuresthat plans are being followed.
Feedback in the form of performance reportsthat compare actual results with the budgetare an essential part of the control function.
Feedback in the form of performance reportsthat compare actual results with the budgetare an essential part of the control function.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Planning and Control Cycle
DecisionMaking
Formulating long-and short-term plans
(Planning)
Formulating long-and short-term plans
(Planning)
Measuringperformance (Controlling)
Measuringperformance (Controlling)
Implementing plans (Directing and Motivating)
Implementing plans (Directing and Motivating)
Comparing actualto planned
performance (Controlling)
Comparing actualto planned
performance (Controlling)
Begin
Exh.1-1
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Comparison of Financial and Managerial Accounting
Exh.1-2
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Costs Terms, Concepts and Classifications
Chapter Two
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement and balance sheet
• Product costs • Direct materials • Direct labor • Manufacturing overhead
• Period costs (non manufacturing costs) • Marketing and selling costs • Administrative costs
Predicting changes in cost due to changes in activity
• Variable costs • Fixed costs
Assigning costs • Direct costs • Indirect costs
Making decisions • Differential costs • Sunk costs • Opportunity costs
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
COST CLASSIFICATIONS IN MANUFACTURING COMPANIES
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing overhead.
Period costs include all marketing or selling
costs and administrative costs.
Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Balance Sheet
Merchandiser Current assets
CashReceivablesPrepaid ExpensesMerchandise
Inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Partially complete products – some material, labor, or
overhead has been added.
Completed products awaiting sale.
Materials waiting to be processed.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
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$
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing WorkRaw 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 arecalled direct materials.
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
Product Cost Flows
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing WorkRaw 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.
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Product Cost Flows
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing WorkRaw 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.
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing WorkRaw 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 work in process inventory
= Cost of goods
manufactured
Product Cost Flows
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Product Cost Flows
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Period CostsSelling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement and balance sheet
• Product costs • Direct materials • Direct labor • Manufacturing overhead
• Period costs (non manufacturing costs) • Marketing and selling costs • Administrative costs
Predicting changes in cost due to changes in activity
• Variable costs • Fixed costs
Assigning costs • Direct costs • Indirect costs
Making decisions • Differential costs • Sunk costs • Opportunity costs
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
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.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Variable Cost
Minutes Talked
Tot
al L
ong
Dis
tanc
eT
elep
hone
Bill
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
TOTAL PER UNIT
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Fixed Cost
Number of units sold
Mon
thly
Ren
t E
xpen
se
Number of Local Calls
Mon
thly
Ren
t Exp
ense
per
U
nits
sol
d
TOTAL PER UNIT
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement and balance sheet
• Product costs • Direct materials • Direct labor • Manufacturing overhead
• Period costs (non manufacturing costs) • Marketing and selling costs • Administrative costs
Predicting changes in cost due to changes in activity
• Variable costs • Fixed costs
Assigning costs • Direct costs • Indirect costs
Making decisions • Differential costs • Sunk costs • Opportunity costs
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
AN OVERVIEW OF COST TERMS
Purpose of classification
Cost classifications
Preparing an income statement and balance sheet
• Product costs • Direct materials • Direct labor • Manufacturing overhead
• Period costs (non manufacturing costs) • Marketing and selling costs • Administrative costs
Predicting changes in cost due to changes in activity
• Variable costs • Fixed costs
Assigning costs • Direct costs • Indirect costs
Making decisions • Differential costs • Sunk costs • Opportunity costs