MANAGERIAL ACCOUNTING

COURSE CONTENT

Production, marketing and administrative costs

Accounting for materials, labor and overheads

Cost behavior and cost estimation

ABC

Job order costing

Joint products

Budgeting

Variance

Cost –volume –profit analysis

Ethical Issues in managerial Accounting

REFERENCES

-Cost Accounting a Managerial Emphasis

Horngren-Foster-Dater(10th edition)

- Introduction to Management Accounting

Horngren (10th edition)

-Managerial Accounting

Louderback- Holmen(10th edition)

WHAT IS COST?

There are different definitions for cost .They all revolve around Holmen definition

“Cost is the economic sacrifice made to achieve the organization goal.” Costs for goods are the resources used such as labor, materials and overheads. For services costs are the monetary sacrifices made to provide the service.

WHAT IS COST ACCOUNTING?

It is the discipline that identifies, measures reports and analyzes various elements of direct and indirect costs of goods and services associated with the production and marketing of goods and services..

MAIN OBJECTIVE

The main objective of cost accounting is communicating financial information to management for planning, controlling and evaluating performances.

Cost and financial accounting

Cost accounting provides us with cost information which helps in preparing financial statements. e.g. inventory and income determination

COST BEHAVIOR

Costs can be variable, fixed or semi variable.

Variable costs are costs that vary in direct proportion to change in the cost drive (units or machine hours). Direct labor is a good example only if workers are paid by piece.

Fixed costs are costs that that remain the same despite change in the cost drive e.g. Depreciation, rent and insurance.

Fixed costs are committed in the sense that management can not change them or they can be discretionary because management uses its professional judgment to decide on the amount of cost.

Semi-variable costs are costs that behave partly as fixed and partly as variable. e.g. indirect labor costs and indirect material.

PRODUCTION , MARKETING AND ADMINISTRATIVE COSTS

Terminology :

Prime costs: direct material and direct labor costs

Conversion costs: direct labor and overhead costs

Production costs: include direct materials direct labor and factory overhead.

Direct materials are any raw materials that become an identifiable part of the finished good. eg. fabric in clothes

Direct labor are the wages earned by workers who transform the material from its raw form to the finished good form.

Factory overhead are any production costs other than direct material or direct labor. E.g. indirect material and labor, depreciation on manufacturing facilities, light and heat.

Marketing costs: result from selling, delivering and costs for promoting sales retaining costumers as well as transportation, warehousing and other distribution costs.

Administrative costs: result from directing and controlling the company. They include rental fees, telephone costs and salaries.

COST OF GOODS SOLD STATEMENT

Where are production costs portrayed?

They appear in the statement of cost of goods sold. This statement has the following format

Company Name

Cost of Goods Sold Statement

Date

Direct materials Inventory1.1

+Purchases

- Purchase discount

-Purchase returns

Total material available for use

- Material 31.12

Materials used

+ Direct labor cost

Direct cost of manufacturing

+ Overhead cost

Add work in process 1.1

Less work in process 31.12

Cost of completed goods

Add finished goods inventory 1.1

Goods available for sale

Less finished goods inventory 31.12

Cost of goods sold

INCOME STATEMENT

Where are marketing and administrative costs portrayed?

Company name

Income statement

Date◦ Revenue◦ Less CGS

Gross income◦ Less Marketing costs ◦ Less Administrative costs

Profit before tax◦ Less tax

Net income

BOTTOM LINE

Production costs are treated as product costs and they are included in the work in process or finished goods inventory.

Marketing and administrative costs are treated as period costs and they are charged to revenues.

EXAMPLE

Jerry Manufacturing Company purchased $ 310000 of materials and had the following account balances for the year 2006

Account Balance

Direct labor 90000

Plant supervision 5000

Indirect labor 3000

Buildings 52000

Equipment 22000

Land 45000

Factory insurance 900

Manufacturing supplies 1500

Repairs and maintenance 1500

Advertising expenses 3000

Traveling cost administrative staff 4000

Circulation pieces distributed 2500

Materials inventory 1.1.2006 22000

Work in process 1.1.2006 11000

Finished goods inventory 1.1 2006 14000

Utilities 2500

Marketing manger salary 6000

Clerical Salaries 5000

Administrative staff salaries 7000

Depreciation on factory buildings 4500

Depreciation on factory equipments 4000

Materials inventory 31.12.2006 16000

Work in process 31.12.2006 9000

Finished goods inventory 31.12. 06 15000

Purchase returns 1500

Purchase discount 2500

1. Calculate the materials used during the year.

2. Develop an analysis to find the total manufacturing cost for the year.

3. Calculate the cost of manufactured goods.

4. Calculate the cost of goods sold

Solution Materials inventory 1.1.2006 22,000

+Purchase 310,000

-Purchase discount 2,500

-Purchase returns 1,500

Materials available for use 328,000 -Materials inventory 31.12 -16,000

Materials used 312,000

2. Manufacturing cost for the Year Direct Material 312,000

Direct Labor 90,000

Total direct cost of manufacturing 402,000

Add overhead costs Plant supervision 5,000

Indirect labor 3,000

Factory insurance 900

Manufacturing supplies 1,500

Repairs and maintenance 1,500

Utilities 2,500

Depreciation on factory buildings 4,500

Depreciation on factory equipment 4,000

Total cost for year424900

Cost of manufactured goods

Work in process 1.1 11,000

+ main cost for the period 424,900

- Work in process 31.12 9,000

Cost of completed goods 426,900

Cost of goods sold

Finished goods inventory 1.1 14,000

+cost of completed goods 426,900

- Finished goods 31.12 15,000

Cost of goods sold 425900