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Building Blocks of Managerial Accounting
Chapter 2
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Objective 1Distinguish among service,
merchandising, and manufacturing companies
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Three types of companies
• Service
• Merchandisers
• Manufacturers
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Service Companies
• Provide a service only• No inventory• Examples
– Accountants– Banks– Doctors– Lawyers
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Merchandisers
• Resell products purchased from suppliers • One inventory account• Examples
– Amazon.com– J. C. Penney– Sears
• Retailers vs. Wholesalers
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Manufacturers
• Use labor and other inputs to convert raw materials into finished products
• Examples– Crayola Crayons– Dell Computers– Craftsman Tools
• 3 inventory accounts
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Manufacturers
• 3 inventory accounts
– Raw materials
– Work in process
– Finished goods
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Objective 2Describe the value chain
and its elements
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Value Chain• Activities that add value to products and
services and cost money.
R&D Production/Purchases
Marketing
Design
DistributionCustomer Service
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Now turn to E2-16A
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E2-16A
Research on selling satellite radio service
Purchases of merchandise
Rearranging store layout
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E2-16A
Research on selling satellite radio service R & D
Purchases of merchandise
Rearranging store layout
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E2-16A
Research on selling satellite radio service R & D
Purchases of merchandise Purchases
Rearranging store layout
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E2-16A
Research on selling satellite radio service R & D
Purchases of merchandise Purchases
Rearranging store layout Design
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E2-16A (cont.)
Newspaper advertisements
Deprec. expense on delivery trucksPayment to consultant for advice on location of new store
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E2-16A (cont.)
Newspaper advertisements Marketing
Deprec. expense on delivery trucksPayment to consultant for advice on location of new store
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E2-16A (cont.)
Newspaper advertisements Marketing
Deprec. expense on delivery trucks DistributionPayment to consultant for advice on location of new store
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E2-17A (cont.)
Newspaper advertisements Marketing
Deprec. expense on delivery trucks DistributionPayment to consultant for advice on location of new store R & D
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E2-16A (cont.)
Freight-in
Salespersons’ salaries
Customer complaint department
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E2-16A (cont.)
Freight-in Purchases
Salespersons’ salaries
Customer complaint department
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E2-16A (cont.)
Freight-in Purchases
Salespersons’ salaries Marketing
Customer complaint department
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E2-16A (cont.)
Freight-in Purchases
Salespersons’ salaries Marketing
Customer complaint departmentCustomer service
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Objective 3Distinguish between direct and
indirect costs
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Cost Object
• Anything for which managers want a separate measurement of cost– Direct cost
– Indirect cost
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Now turn to S2-4
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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
S2-4
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Direct
Direct
Indirect
Direct
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S2-4 (cont.)e. Store utilitiesf. The CEO’s salaryg. The cost of chainsaws
offered for renth. The cost of national
advertising
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Indirect
Direct
DirectIndirect
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Objective 4Identify the inventoriable product costs and period costs of merchandising and
manufacturing firms
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Two definitions of product cost
• Total costs – used internally only (will see this in later chapters)
• Inventoriable product costs – used for external reporting
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R&D Design
MarketingDistributionCustomer Service
Production/Purchases
Inventoriable Product Costs
Inventoriable product costs
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Period Costs: All costs incurred in the other stages of the value chain
Peri o d C os ts
MarketingDistributionCustomer Service
R&D Design
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Inventoriable Product Costs -- Merchandiser
• + Purchase price from suppliers • + Cost to get ready for sale• + Freight-in• + Import duties or tariffs
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Inventoriable Product Costs -- Manufacturer
• Direct materials• Direct labor• Manufacturing overhead
Direct Costs
Indirect Costs
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Manufacturing Overhead
• Indirect costs related to manufacturing that are not direct materials or direct labor– Indirect materials
– Indirect labor
– Other indirect manufacturing overhead
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Now turn to S2-7
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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
S2-7
Period
Period
Product, DM
Product, DL
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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
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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
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Prime and Conversion Costs
Manufacturing Overhead
Direct Materials
Prime Costs
Direct Labor
Conversion Costs
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Direct and indirect labor costs include
• Salaries and wages • Fringe benefits• Payroll taxes
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Objective 5Prepare the financial statements for
service, merchandising and manufacturing companies
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Income Statement – Service Company
• Simplest income statement• All costs are period costs
Service Revenues- Operating expenses Operating income
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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
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Now turn to S2-9
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S2-9
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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
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Income Statement – Merchandiser
+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income
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Now turn to S2-10
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S2-10
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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
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2010 Product
costs
2010 Balance
Sheet
2010 Income
Statement
2011 Income
Statement
Cost of goods sold
Cost of goods sold
Inventory
Inventory sold in 2010
Inventory sold in 2011
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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
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How to calculate
Beginning Inventory + Net Purchases =
Cost of Goods Sold + Ending Inventory
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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
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Now turn to E2-25A
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E2-25A (COGM)
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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
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E2-25A (cont.)
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*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
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Income Statement – Manufacturer
+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income
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Now turn to E2-26A
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E2-26A
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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
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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
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Now turn to S2-11
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S2-11
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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
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Product and Period Costs
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Type of Company
Inventoriable Product Costs
Period Costs
Service Company None All costs along the value chain
MerchandiserPurchases plus cost of freight, import duties,
etc.
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
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Manufacturing Companies’Inventory Accounts
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Raw Materials Inventory
+ Beginning inventory+ Purchases & freight
= Ending inventory
- Materials used in work in process
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Manufacturing Companies’Inventory Accounts
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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
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Manufacturing Companies’Inventory Accounts
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Finished Goods Inventory
+ Beginning inventory
+ Cost of goods manufactured
= Ending inventory
- Cost of goods sold
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Balance Sheet Differences
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Type of Company Inventory Accounts
Service Company None
Merchandiser Merchandise Inventory
Manufacturer Raw materials, work in process, and finished goods inventory
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Objective 6Describe costs that are relevant and
irrelevant for decision making
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Controllable and Uncontrollable Costs
Controllable Management can influence or change cost
Uncontrollable Management cannot change or influence cost in the short run
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Relevant and Irrelevant Costs
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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
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Objective 7Classify costs as fixed or variable and calculate total and average costs at
different volumes
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Cost Behavior
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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
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Total Variable Costs
$0
$500
$1,000
$1,500
$2,000
$2,500
$0 $10,000 $20,000 $30,000 $40,000
Total Sales
Tota
l Sal
es
Com
mis
sion
s
Assume we pay 5% sales commissions on all sales.The cost of sales commissions increases proportionately with increases in sales.
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Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels
$0
$500
$1,000
$1,500
$2,000
$2,500
$0 $10,000 $20,000 $30,000 $40,000
Total Sales
Tota
l Sal
es S
alar
ies
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Total Cost
• Total cost = Fixed costs + (Variable cost per unit x number of units)
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Example:Fixed costs = $20,000Variable cost per unit = $50 per unitNumber of units = 100
Total Cost = $20,000 + ($50 x 100) = $25,000
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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.
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Example:$25,000 = $250 per unit
100 units
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Marginal Cost
• Cost of making one more unit
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End of Chapter 2
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