ac 505 chapter 2 power point slides

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McGraw-Hill/Irwin Slide 1

TCO A - Given a trial balance of a manufacturing entity, prepare a schedule ofcost of goods manufactured and an income statement.

Key Concepts:•Construct and use a Cost of Goods Manufactured schedule.•Define and apply cost concepts classifications and behaviors.

TCO E - Given appropriate financial data, prepare income statements usingdirect/variable costing, full cost/absorption costing, and activity basedcosting, including a discussion of the uses of each.

Key Concepts:•Describe the uses and users of the Income Statement. Define and apply costconcepts classifications and behaviors.

Week 1



© 2010 The McGraw-Hill Companies, Inc.

2

The primary purpose of the Trial Balance is to prove themathematical equality of debits and credits.




3

Balance as Oct. 31 fromRetained Earnings Statement




Managerial Accounting

and Cost ConceptsChapter 2

•Differences and similarities between financial and managerial accounting•Explains how managers need to rely upon different classifications of costs for different purposes.•Emphasis include preparing external financial reports, predicting cost behavior, assigning coststo cost objects, and making business decisions.




Work of Management

Planning

Controlling

Directing andMotivating

Management focuses on planning and control to ensure that objectives arerealized. To carry out these planning and control responsibilities, managers needinformation about the organization. From an accounting point of view, thisinformation often relates to the costs of the organization.

Managers carry out three main activities – planning, directing andmotivating, and controlling.

Involves establishing a basic strategy, selectinga course of action, and specifying how the

action will be implemented.

Involves mobilizing people tocarry out plans and run routineoperations.

Involves ensuring that the plan is actuallycarried out and is appropriately modified as

circumstances change.




Learning Objective 1

Identify the majordifferences and similarities

between financial andmanagerial accounting.


http://slidepdf.com/reader/full/ac-505-chapter-2-power-point-slides 7/84McGraw-Hill/Irwin Slide 7

Comparison of Financial and ManagerialAccounting

Financial Accounting Managerial Accounting1. 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 relevanceversus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis ontimeliness 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 GAAPand prescribed formats or any prescribed format

7. Requirement Mandatory for Notexternal reports Mandatory

GAAP includes the standards, conventions, and rules accountants follow in recordingand summarizing transactions, and in the preparation of financial statements .

MA aids decisionmakers byproviding goodestimates ASAP

When reporting to external parties

Product lines, sales territories, divisions, departments

Data should be objective & verifiable Data should be appropriate at hand.

Based on estimates of what will happen.

http://en.wikipedia.org/wiki/Financial_statements

http://en.wikipedia.org/wiki/Financial_statements




Identify and give examplesof each of the three basic

manufacturing costcategories.



The Product

DirectMaterials

DirectLabor

ManufacturingOverhead

Manufacturing CostsManufacturing costs are usually grouped into three main categories: direct materials, direct labor, and

manufacturing overhead. These costs are incurred to make a product.



Direct Materials

Raw materials that become an integralpart of the product and that can beconveniently traced directly to it.

Example: A radio installed in an automobile, the seats that Airbus purchasesfrom subcontractors to install in its commercial aircraft.

Raw materials refer to any materials that are used in the final product; and the finished productof one company can become the raw material of another company. For example, the plasticsproduced by Du Pont are a raw material used by Compaq Computer in its personal computer.

Raw materials may include both direct materials and indirect materials. Direct materials are those materials thatbecome an integral part of the finished product and whose cost can be conveniently traced to the finishedproduct. Indirect materials are those not worth the effort of tracing the cost to a product because of relatively

insignificant materials to end products and should be included as part of manufacturing overhead .



Direct Labor

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

Example: Wages paid to automobile assembly workers

It is sometimes called touch labor because direct labor workers

typically touch the product while it is being made.

Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost andinconvenience, are termed indirect labor and should be treated as part of manufacturing overhead , e.g. Janitors, Night

Security.



Nonmanufacturing Costs

SellingCosts

Costs necessary to

secure the order anddeliver the product.

AdministrativeCosts

All executive,

organizational, andclerical costs.

Other costs incurred in addition tomanufacturing costs.

Examples include advertising, shipping, sales travel,sales commissions, sales salaries, and costs of finishedgoods warehouses .

Examples include executive compensation, generalaccounting, secretarial, public relations, and similarcosts involved in the overall general administration ofthe organization as a whole.




Distinguish betweenproduct costs and period

costs and give examplesof each.



Product Costs Versus Period Costs

Product costs includedirect materials, direct

labor, andmanufacturing

overhead .

Period costs include allselling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

Costs incurred to produce a product or service.

Inventoriable costs because it goesdirectly into inventory accounts asthey’re incurred. Hence, costs canend up on the B/S as assets if goodsare only partially completed or areunsold at the end of the period.

As goods are sold, their costsare transferred from FinishedGoods to COGS (expenseaccount) which is consistentwith Matching Principle – product costs are recognized asexpenses when the productsare sold.

Costs that go directly into expense account.

Costs can also be classified as -

The usual rules of accrual accounting apply toperiod costs. For example, administrative salary

costs are “incurred” when they are earned by theemployees and not necessarily when they are paid

to employees .

Matching principle is based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized . For example, if a company pays for liability

insurance in advance for two years, the entire amount is not considered an expense of the year in which payment ismade. Instead, one-half of the cost would be recognized an expense each year.



Quick Check

Which of the following costs would be considered aperiod rather than a product cost in a manufacturingcompany?

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

DirectMaterial

DirectLabor


PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:

Costs that are the directcosts of production.

Costs that are composed of itemsinvolved in the conversion of the

materials into the product.



Comparing Merchandising andManufacturing Companies

Merchandisers . . .Buy finishedgoods.Sell finishedgoods.

Manufacturers . . .Buy raw materials.Produce and sellfinished goods.

MegaLoMart

Cost Classifications onFinancial Statements.

Just one class of inventory Three classes of inventories



Balance Sheet

MerchandiserCurrent assets

Cash

ReceivablesMerchandise Inventory

ManufacturerCurrent Assets

Cash

ReceivablesInventories

• Raw Materials• Work in Process

• Finished Goods



MerchandiserCurrent assets

Cash

ReceivablesMerchandise Inventory

ManufacturerCurrent Assets

Cash

ReceivablesInventories

• Raw Materials• Work in Process

• Finished Goods

Balance Sheet

Partially completeproducts – somematerial, labor, or

overhead has beenadded.Completed products

awaiting sale.

Materials waiting tobe processed.




The Income Statement

Cost of goods sold for manufacturers differs onlyslightly from cost of goods sold for merchandisers.

Manufacturing Company

Cost of goods sold:Beg. finishedgoods inv. 14,200$

+ Cost of goodsmanufactured 234,150

Goods available

for sale 248,350$- Ending

finished goodsinventory (12,100)

= Cost of goodssold 236,250$

Merchandising Company

Cost of goods sold:Beg. merchandise

inventory 14,200$+ Purchases 234,150 Goods available

for sale 248,350$

- Endingmerchandiseinventory (12,100)

= Cost of goodssold 236,250$

Themanufacturing

costsassociated

with thegoods that

were finishedduring the

period.




Basic Equation for Inventory Accounts

Beginningbalance

Additionsto inventory+ =

Endingbalance

Withdrawalsfrom

inventory

+

The computation of Cost of Goods Sold relies on this basic equation forinventory accounts.

3 units 4 units

Total available = 7 units – 3 units of Withdrawals = 4 units Ending balance

3 units4 units




Quick Check

If your inventory balance at the beginning of themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what wouldbe 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 themonth was $1,000, you bought $100 during themonth, and sold $300 during the month, what wouldbe 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





Prepare a schedule of costof goods manufactured.




Schedule of Cost of Goods Manufactured

Calculates the cost of rawmaterial, direct labor, andmanufacturing overhead

used in production.

Calculates the manufacturingcosts associated with goodsthat were finished during the

period.




Manufacturing WorkRaw Materials Costs In Process

Beginning raw Direct materialsmaterials inventory

+ Raw materialspurchased= Raw materials

available for usein production

– Ending raw materials

inventory= Raw materials used

in production

As items are removed from rawmaterials inventory and placed into

the production process, they arecalled direct materials.

Product Cost FlowsTo create a schedule of cost of goods manufactured, as well as a balance sheet and income statement, it

is important to understand the flow of product costs.





Beginning raw Direct materialsmaterials inventory + Direct labor

+ Raw materials + Mfg. overheadpurchased = Total manufacturing= Raw materials costs

available for usein production



in production

Conversioncosts are costs

incurred toconvert the

direct materialinto a finished

product.

Product Cost Flows





Beginning raw Direct materials Beginning work inmaterials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturingpurchased = Total manufacturing costs= Raw materials costs = Total work in

available for use process for thein production period



in production

Product Cost Flows

All manufacturing costs incurredduring the period are added to thebeginning balance of work in

process.





Beginning raw Direct materials Beginning work inmaterials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturingpurchased = Total manufacturing costs= Raw materials costs = Total work in

available for use process for thein 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 thatare completed during the period are

transferred to finished goodsinventory.




WorkIn Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory+ Manufacturing costs + Cost of goodsfor the period manufactured

= Total work in process = Cost of goodsfor the period available for sale

– Ending work in - Ending finishedprocess inventory goods inventory

= Cost of goods Cost of goodsmanufactured sold

Product Cost Flows




Manufacturing Cost Flows

FinishedGoods

Cost ofGoods

Sold

Selling andAdministrative

Period CostsSelling andAdministrative


Work inProcess

Direct Labor

Balance SheetCosts Inventories

IncomeStatementExpenses

Material Purchases Raw Materials

At the end ofthe period.

RM used in production WP can be viewed asproduct on an assembly line.

The RM, DL, and MO areadded to WP are the costsneeded to complete these

products as they move alongthe assembly line.

Product costs are often called inventoriable costs because thesecosts go directly into inventory as they are incurred, rather than

expense accounts. This is a key concept because such costs can end up on the balance sheet as asset if good are partially

completed or are unsold at the end of a period .




Quick Check

Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the month

revealed that $28,000 of raw material was stillpresent. What is the cost of direct materialused?

A. $276,000B. $272,000C. $280,000D. $ 2,000




Quick Check

Beginning raw materials inventory was $32,000.During the month, $276,000 of raw material waspurchased. A count at the end of the month

revealed that $28,000 of raw material was stillpresent. What is the cost of direct materialused?

A. $276,000B. $272,000C. $280,000D. $ 2,000

Beg. raw materials 32,000$+ Raw materials

purchased 276,000 = Raw materials available

for use in production 308,000$ – Ending raw materialsinventory 28,000

= Raw materials usedin production 280,000$




Quick Check

Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were totalmanufacturing costs incurred for the month?

A. $555,000B. $835,000C. $655,000

D. Cannot be determined.




Direct materials used in production totaled$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What were totalmanufacturing costs incurred for the month?

A. $555,000B. $835,000C. $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




Beginning work in process was $125,000.Manufacturing costs incurred for the monthwere $835,000. There were $200,000 ofpartially finished goods remaining in work inprocess inventory at the end of the month.What was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

Quick Check

Beginning work inprocess inventory 125,000$

+ Mfg. costs incurredfor the period 835,000

= Total work in processduring the period 960,000$

– Ending work inprocess inventory 200,000

= Cost of goodsmanufactured 760,000$




Quick Check

Beginning finished goods inventory was$130,000. The cost of goods manufactured forthe month was $760,000. And the endingfinished goods inventory was $150,000. Whatwas 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 forthe month was $760,000. And the endingfinished goods inventory was $150,000. Whatwas 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





Understand thedifferences between

variable costs and fixedcosts.

Cost Classifications for Predicting Cost




Cost Classifications for Predicting CostBehavior

How a cost will react tochanges in the level ofactivity within therelevant range.

Total variable costs change when activitychanges.

Total fixed costs remainunchanged when activitychanges.




Variable Cost

Your total texting bill is based on howmany texts you send.

Number of Texts Sent

T o

t a l T e x

t i n g

B i l l

Varies in direct proportion to changes in the level of activity.

The activity can be expressed in many ways, such as units purchased, units sold, miles driven, beds occupied, lines ofprint, hours worked, etc. A good example of a variable cost is direct materials. The cost of direct materials used during a

period will vary, in total, in direct proportion to the number of units produced.




Variable Cost Per Unit

Number of Texts Sent

C o s

t P

e r

T e x

t S e n

t

The cost per text sent is constant at5 cents per text.




Fixed Cost

Your monthly contract fee for your cell phone is fixed forthe number of monthly minutes in your contract. The

monthly contract fee does not change based on the numberof calls you make.

Number of Minutes Used

Within Monthly Plan

M o n

t h l y C e

l l P h o n e

C o n

t r a c

t F e e

A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Unlike variable costs, fixedcosts are not affected by changes in activity. It doesn’t change for changes in activity that fall within the “ relevant range ”.

The relevant range is the range of activitywithin which the assumptions about variableand fixed costs are valid. See page 49 for

the sample problem.




Fixed Cost Per Unit

Number of Minutes Used

Within Monthly Plan

M o n t h

l y C e

l l P h o n e

C o n

t r a c

t F e e

Within the monthly contract allotment, the averagefixed cost per cell phone call made decreases as

more calls are made.

Cost Classifications for Predicting Cost




Cost Classifications for Predicting CostBehavior

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.




Quick Check

Which of the following costs would be variablewith respect to the number of cones sold at aBaskins & 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.





Understand thedifferences between direct

and indirect costs.

A cost object is anything for which costdata are desired including products,



Assigning Costs to Cost ObjectsDirect costs

Costs that can beeasily andconveniently traced

to a unit of productor other cost object.Examples: directmaterial and directlabor

Indirect costsCosts that cannot beeasily andconveniently traced

to a unit of productor other cost object.Example:manufacturingoverhead

customers, jobs, organizationalsubunits, etc. For purposes ofassigning costs to cost objects, costsare classified in two ways:





Define and give examplesof cost classifications usedin making decisions:

differential costs,opportunity costs, andsunk costs.




Every decision involves a choicebetween at least twoalternatives.

Only those costs and benefitsthat differ between alternativesare relevant in a decision. Allother costs and benefits canand should be ignored.

Cost Classifications for Decision Making




Differential Cost and Revenue

Costs and revenues that differamong alternatives.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in a neighboringcity that pays $2,000 per month. The commuting costto the city is $300 per month.

Differential revenue is: $2,000 – $1,500 = $500

Differential cost is: $300

A difference in revenues between twoalternatives.

A difference in costs between twoalternatives.




Opportunity Cost

The potential benefit that is givenup when one alternative is selectedover another.

Example: If you werenot attending college,you could be earning$15,000 per year.Your opportunity costof attending college forone year is $15,000.




Sunk Costs

Sunk costs have already been incurred and cannotbe 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 sunkbecause whether you drive it, park it, trade it, or sellit, you cannot change the $10,000 cost.




Quick Check

Suppose you are trying to decide whether todrive or take the train to Portland to attend aconcert. You have ample cash to do either, but

you don’t want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain 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


you don’t want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain 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


you don’t want to waste money needlessly. Isthe annual cost of licensing your car relevant inthis 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




Summary of the Types of CostClassifications

FinancialReporting

Predicting CostBehavior

Assigning Coststo Cost Objects

Making BusinessDecisions

Variable and Fixed Costs.

Direct and Indirect Costs. Differential, Opportunity and Sunk Costs.

Product and Period Costs




Further Classification of Labor Costs

Appendix 2A





(Appendix 2A)Properly account for laborcosts associated with idletime, overtime, and fringe

benefits.




Idle Time

The labor costs incurredduring idle time are ordinarily

treated as manufacturingoverhead.

MachineBreakdowns

MaterialShortages

PowerFailures




Overtime

The overtime premiums for all factoryworkers are usually considered to be part

of manufacturing overhead.




Labor Fringe Benefits

Fringe benefits include employer paidcosts for insurance programs, retirement

plans, supplemental unemployment

programs, Social Security, Medicare,workers’ compensation, andunemployment taxes.

Some companiesinclude all of these

costs inmanufacturing

overhead.

Other companies treatfringe benefit

expenses of directlaborers as additional

direct labor costs.




Cost of Quality

Appendix 2B





(Appendix 2B)Identify the four types ofquality costs and explain

how they interact.




Quality of Conformance

When the overwhelming majority of productsproduced conform to design specifications

and are free from defects.There are four broadcategories of quality costs:prevention costs, appraisalcosts, internal failure costs,and external failure costs.




Prevention and Appraisal Costs

PreventionCosts

Support activitieswhose purpose is toreduce the number of

defects

Appraisal CostsIncurred to identifydefective products

before the products areshipped to customers




Internal and External Failure Costs

Internal FailureCosts

Incurred as a result ofidentifying defects

before they are shipped

External FailureCosts

Incurred as a result ofdefective productsbeing 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 andhandling complaints• Warranty repairs• Lost sales




Distribution of Quality Costs





(Appendix 2B)Prepare and interpret a

quality cost report.

Year 2 Year 1

Quality Cost ReportFor Years 1 and 2




Quality costreports providean estimate ofthe financial

consequencesof the

company’s

current defectrate.

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.




Quality Cost Reports in Graphic Form

$10

9

8

7

6

5

4

3

2

1 Appraisal

0 Prevention Prevention

1 2

Year

Q u a

l i t y C o s

t ( i n m

i l l i o n s

)

Appraisal

Internal

Failure

ExternalFailure

InternalFailure

ExternalFailure

20

18

16

14

12

10

8

6

4

2 Appraisal

0 Prevention Prevention

1 2

Year

Q u a l

i t y C o s

t a s a

P e r c e n

t a g e o

f S a

l e s

Appraisal

Internal

Failure

ExternalFailure

InternalFailure

ExternalFailure

Qualityreports

can alsobe

preparedin

graphicform.




Uses of Quality Cost Information

Help managers see thefinancial significance of

defects.

Help managers identifythe relative importanceof the quality problems.

Help managers seewhether their quality

costs are poorlydistributed.




Limitations of Quality Cost InformationSimply measuring andreporting quality cost

problems does not solvequality problems.

Results usually lagbehind quality

improvement programs.

The most importantquality cost, lost sales, is

often omitted fromquality cost reports.




ISO 9000 StandardsISO 9000 standards have becomeinternational measures of quality.

To become ISO 9000 certified, acompany must demonstrate:

1. A quality control system is in use, and thesystem clearly defines an expected level ofquality.

2. The system is fully operational and is

backed up with detailed documentation ofquality control procedures.

3. The intended level of quality is beingachieved on a sustained basis.



End of Chapter 2

ac 505 chapter 2 power point slides

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