Managerial Accounting and Cost Concepts Chapter McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc All rights reserved Planning Identify Identify alternatives alternatives Select Select alternative alternative that that does does the the best best job job of of furthering furthering organization’s organization’s objectives objectives Develop Develop budgets budgets to to guide guide progress progress toward toward the the selected selected alternative 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 The control control function function ensures ensures that that plans plans are are being being followed followed Feedback Feedback in in the the form form of of performance performance reports reports that that compare compare actual actual results results with with the the budget budget are are an an essential essential part part of of the the control control function function 2-4 Planning and Control Cycle Formulating Formulatinglonglongand andshort-term short-termplans plans (Planning) (Planning) Comparing Comparingactual actual to toplanned planned performance performance (Controlling) (Controlling) Decision Making Begin Implementing Implementing plans plans(Directing (Directing and andMotivating) Motivating) Measuring Measuring performance performance (Controlling) (Controlling) 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: Example: A A radio radio installed installed in in an an automobile automobile 2-7 Direct Labor Those labor costs that can be easily traced to individual units of product Example: Example: Wages Wages paid paid to to automobile automobile assembly assembly workers workers 2-8 Manufacturing Overhead Manufacturing costs that cannot be traced directly to specific units produced Examples: Examples: Indirect Indirect materials materials and and indirect indirect labor 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 Inventory Cost of Good Sold Period costs include all selling costs and administrative costs Expense Sale Balance Sheet Income Statement Income Statement 2-11 Balance Sheet Merchandiser Current assets Manufacturer Current Assets Cash ◆ Cash Receivables ◆ Receivables Merchandise Inventory ◆ Inventories • Raw Materials • Work in Process • Finished Goods 2-12 Balance Sheet Merchandiser Current assets Manufacturer Current Assets Cash ◆ Cash Receivables ◆ Receivables Merchandise Inventory ◆ Inventories • Raw Materials • Work in Process • Finished Goods 2-13 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 + Purchases Goods available for sale - Ending merchandise inventory = Cost of goods sold $ 14,200 234,150 $ 248,350 (12,100) $ 236,250 2-14 Basic Equation for Inventory Accounts Beginning Beginning balance balance + Additions Additions to to inventory inventory = Ending Ending balance balance + Withdrawals Withdrawals from from inventory 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 Costs Balance Sheet Inventories Material Purchases Raw Materials Direct Labor Work in Process Manufacturing Overhead Selling and Administrative Finished Goods Period Costs Income Statement Expenses Cost of Goods Sold Selling and Administrative 2-17 Cost Classifications for Predicting Cost Behavior How How aa cost cost will will react react to to changes changes in in the the level level of of activity activity within within the the relevant relevant range range Total variable costs Total variable costs change change when when activity activity changes changes Total fixed costs Total fixed costs remain remain unchanged unchanged when when activity activity changes changes 2-18 Variable Cost Total Texting Bill Your total texting bill is based on how many texts you send Number of Texts Sent 2-19 Variable Cost Per Unit Cost Per Text Sent The cost per text sent is constant at cents per text Number of Texts Sent 2-20 Fixed Cost Monthly Cell Phone Contract Fee 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 2-21 Fixed Cost Per Unit 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 Number of Minutes Used Within Monthly Plan 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 as activity level changes Variable cost per unit remains the same over wide ranges of activity Fixed Total fixed cost remains the same even when the activity level changes Average fixed cost per unit goes down as activity level goes up 2-23 End of Chapter 2-24 ... Measuring performance performance (Controlling) (Controlling) 2-5 Comparison of Financial and Managerial Accounting 2-6 Direct Materials Raw materials that become an integral part of the product