Managerial Accounting and Cost Concepts

Chapter 2

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Planning

Identifyalternatives.

Select alternative that does the best job of furtheringorganization’s objectives.

Develop budgets to guideprogress toward theselected alternative.

2-2

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.

2-3

Controlling

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.

2-4

Planning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Measuringperformance (Controlling)

Implementing plans (Directing and Motivating)

Comparing actualto planned

performance (Controlling)

Begin

2-5

Comparison of Financial and Managerial Accounting

2-6

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

2-7

Direct Labor

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

2-8

Manufacturing costs that cannot be traced directly to specific units produced.

Manufacturing Overhead

Examples: Indirect materials and indirect labor

2-9

Nonmanufacturing Costs

Administrative Costs

All executive, organizational, and

clerical costs.

2-10

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

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

2-11

Balance Sheet

Merchandiser Current assets

CashReceivablesMerchandise Inventory

Manufacturer Current Assets

Cash Receivables Inventories

• Raw Materials• Work in Process• Finished Goods

2-12

Merchandiser Current assets

CashReceivablesMerchandise Inventory

Manufacturer Current Assets

Cash Receivables Inventories

• Raw Materials• Work in Process• Finished Goods

Balance Sheet

2-13

The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Merchandising CompanyCost 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$

2-14

Basic Equation for Inventory Accounts

Beginningbalance

Additionsto inventory+ = Ending

balance

Withdrawalsfrom

inventory+

2-15

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.

2-16

Manufacturing Cost Flows

FinishedGoods

Cost of GoodsSold

Selling andAdministrative

Period CostsSelling andAdministrative

ManufacturingOverhead

Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpensesMaterial Purchases Raw Materials

2-17

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.

2-18

Variable Cost

Your total texting bill is based on how many texts you send.

Number of Texts Sent

Tota

l Tex

ting

Bill

2-19

Variable Cost Per Unit

Number of Texts Sent

Cos

t Per

Tex

t Sen

t

The cost per text sent is constant at 5 cents per text.

2-20

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 UsedWithin Monthly Plan

Mon

thly

Cel

l Pho

ne

Con

trac

t Fee

2-21

Fixed Cost Per Unit

Number of Minutes UsedWithin Monthly Plan

Mon

thly

Cel

l Pho

ne

Con

trac

t Fee

Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made.

2-22

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 remainsas activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goesthe same even when the down as activity level goes up.

activity level changes.

2-23

End of Chapter 2

2-24