class 03 -- terminology and premier topics
DESCRIPTION
termsTRANSCRIPT
Managerial Accounting
Terminologyand
Introduction to Premier Topics
myeducator.com
Today’s Agenda• Cost classification terminology
– Fixed and variable
– Product and period
– Budgeted and actual
– Relevant and sunk
– Out-of-pocket and opportunity
• Premier managerial accounting topics– Cost flows and product costing
– Breakeven analysis
– Budgeting
– Performance evaluation
– Relevant costs for decision making
– Balanced Scorecard
– Capital Budgetingmyeducator.com
What SHOULD You Have DoneBefore the Start of Class Today?
1. Done the MyEducatorpreparation for Quiz 3a.
2. Completed the pre-class Quiz (3a).
myeducator.com
Key Terms
Fixed and Variable Costs
Variable CostsCosts that INCREASE the more you make or sell.
Fixed CostsCosts that STAY THE SAME the more you make or sell.
myeducator.com
Key Terms
Fixed and Variable CostsWhich of these costs are fixed and which are variable?
a. Food cost in a restaurant
b. Wages paid to day laborers on a construction job
c. Wages paid to laborers in an automobile manufacturing plant
d. Commissions paid to salespersons
e. Depreciation on a factory building
f. Depreciation on factory machinery
g. Wages paid to factory foremen
h. Rent paid on a clothing store location in an expensive shopping mall
myeducator.com
Key Terms
Fixed and Variable Costs
Why do we care about Variable and Fixed Costs?
Breakeven Analysis•How many units do we need to sell, how many customers do we need to serve, in order to be able to pay our fixed costs (that is, break even)?•If our sales go up by 10%, how much will our profits increase?
myeducator.com
Key Terms
Product and Period Costs
Product CostsCosts incurred INSIDE the production facility
Period CostsCosts incurred OUTSIDE the production facility
myeducator.com
Key Terms
Product and Period CostsWhich of these costs are product costs and which are period costs?
a. Wages of production line employees
b. Wages of the corporate headquarters’ administrative staff
c. Raw materials used in the production of toys
d. Depreciation on the production equipment
e. Depreciation on copy machines in the corporate offices
f. Maintenance costs on the production equipment
g. Advertising costs
h. Pension benefits for factory workers
i. Salaries of factory supervisors
j. Property tax on the factory building
k. Property tax on the corporate offices
l. Commissions paid to sales personnel
myeducator.com
Key Terms
Product and Period Costs
Why do we care about Product and Period Costs?
•If you make and sell a PRODUCT, do you want to know how much it costs you to MAKE THAT PRODUCT?
•If you provide a SERVICE, do you want to know how much it costs you to PROVIDE THAT SERVICE?
•OF COURSE YOU DO!!!
myeducator.com
Key Terms
Product and Period Costs
Why do we care about Product and Period Costs?
For accounting purposes,
PRODUCT costs are considered to be part of the cost of creating the INVENTORY and become an expense(Cost of Goods Sold) when the inventory is sold.
PERIOD costs are considered to be the general cost of keeping the business open and become an expenseimmediately in the period in which they occur.
myeducator.com
Key Terms
3 Types of Product Costs
Direct MaterialsThe material out of which the product is made. Wood for a bookcase, metal for an oven.
Direct LaborThe wages paid to the skilled craftspeople who form the direct materials into the final product.
Manufacturing OverheadThe infrastructure needed to support the skilled craftspeople. Supervisors, maintenance people, machines, rent, electricity, etc.
myeducator.com
Key Terms
3 Types of Product Costs
Look at items (a) through (l) above. Which items are
•direct materials,
•direct labor, or
•manufacturing overhead?
myeducator.com
Key Terms
3 Types of Product Costs
Which items are direct materials, which are direct labor, and which are manufacturing overhead? [Period costs have been eliminated.]
a. Wages of production line employees
c. Raw materials used in the production of toys
d. Depreciation on the production equipment
f. Maintenance costs on the production equipment
h. Pension benefits for factory workers
i. Salaries of factory supervisors
j. Property tax on the factory building
myeducator.com
Key Terms
3 Types of Product Costs
Why do we care about which costs are
direct materials, direct labor, and manufacturing overhead?
As we will see,• Direct materials – EASY to trace to specific products
• Direct labor – EASY to trace to specific products
• Manufacturing overhead – DIFFICULT to trace to specific products
myeducator.com
Key Terms
Budgeted Costs and Actual CostsA famous movie producer has proposed an overall budget of $200 million for the production of a major Hollywood motion picture.
1. How will this $200 million budget number be used?
2. The final actual cost of producing the movie is $267 million. What information is gained by comparing the $200 budget number to the $267 million actual number? Who will use this information? How will they use it?
myeducator.com
Key Terms
Budgeted Costs and Actual Costs1. How will this $200 million budget number be used?
– Deciding whether to make the movie or not
– Arranging financing
– Evaluating and controlling day-to-day spending
myeducator.com
Key Terms
Budgeted Costs and Actual Costs2. The final actual cost of producing the movie is $267 million.
What information is gained by comparing the $200 budget number to the $267 million actual number? Who will use this information? How will they use it?
– The producer can use the budget vs. actual information to identify which specific items cost more than budgeted.
• The producer can then make better budgets in the future.
– The people who provide financing for movies can re-evaluate the budgeting ability of the producer.
• Will the producer’s budgets be trusted in the future?
myeducator.com
Key Terms
Relevant Costs and Sunk Costs
I am at the top of Victoria Peak in Hong Kong. I traveled to the top on the Peak Tram. I have purchased a round-trip ticket on the Tram for HK$40. It is now 8:30 p.m. and the length of the line to catch the Tram going down indicates that I will have to wait for 2 hours. If I throw away my return Tram ticket and catch the bus right now, the cost to ride the bus down is HK$10.
What are the relevant costs here?
What is the sunk cost?
myeducator.com
Key Terms
Relevant Costs and Sunk CostsI am at the top of Victoria Peak in Hong Kong. I traveled to the top on the Peak Tram. I have purchased a round-trip ticket on the Tram for HK$40. It is now 8:30 p.m. and the length of the line to catch the Tram going down indicates that I will have to wait for 2 hours. If I throw away my return Tram ticket and catch the bus right now, the cost to ride the bus down is HK$10.
What are the relevant costs here?
•HK$10 for the bus
•The value of 2 hours of your time
What is the sunk cost?
•HK$40 for the return ticket
•NOTHING you do can recover the HK$40
myeducator.com
Key Terms
Out-of-Pocket Costs and Opportunity Costs
How much does it cost the city of Beijing each year to maintain Tiananmen Square?
How much could the city of Beijing (or the Chinese Central Government) earn each year by leasing large portions of Tiananmen Square to REAL ESTATE DEVELOPERS?
myeducator.com
Out-of-Pocket Costs and Opportunity Costs
Tiananmen Square is listed at 440,000 square meters.
•In 2014, a 150-square-meter apartment in central Beijing sold for about HK$8 million
•Assume that you could turn the ENTIRE Tiananmen Square into adjacent, one-story apartments. 440,000 ÷ 150 = 2,933 apartments
•2,933 apartments would be HK$23.5 billion
•But those are one story buildings. Let’s assume that we can build 10-story buildings but leaving space for roads and walkways we use only half the ground space.
•440,000 × 10 stories × 0.5 utilization = 2,200,000 floor space
•2,200,000 ÷ 150 = 14,667 apartments which would sell for HK$117 billion
•Figuring that the rental yield from these apartments would be about 10%, that is HK$11.7 billion in rent each year.
Brief Overview of the
Premier Managerial Accounting Topics
A. Cost flows and product costing
B. Breakeven analysis
C. Budgeting
D. Performance evaluation
E. Relevant costs for decision making
F. Balanced Scorecard
G. Capital Budgeting
myeducator.com
Brief Overview of the
Premier Managerial Accounting Topics
A. Cost flows and product costing• How much does it cost to make my product or service?
• What business activities create OVERHEAD costs?
B. Breakeven analysis• What volume of activity do I need in order to break even?
• What will be the impact on profits of a 10% sales increase? Decrease?
C. Budgeting• What is my PLAN for the coming week, month, quarter, or year?
• What can I do NOW in order to solve future problems revealed by my PLAN?
myeducator.com
Brief Overview of the
Premier Managerial Accounting Topics
D. Performance evaluation• Exactly what do I want my employees to do?
• Who in my organization is doing well and should be rewarded?
E. Relevant costs for decision making• Should I take this special order?
• Should I outsource my production?
• Should I shut down this division?
F. Balanced Scorecard• What are the key measures I need to run my business?
• In addition to financial measures, do I also use customer, process, and employee measures?
G. Capital Budgeting• What long-term resource commitments should I make?
• Have I properly considered risk and the time value of money?
myeducator.com
Example
Derrald’s Cash Budget
As of the end of September, Derrald Company has the following budgeted cash receipts
and cash payments.
October November December January
Cash Receipts $10,000 $10,000 $40,000 $120,000
Cash Payments 50,000 60,000 40,000 10,000
The cash balance at the end of September is $54,000.
myeducator.com
Example
Derrald’s Cash Budget
Questions
1. As of the end of October, Derrald’s cash balance is $23,000. Is this good news or bad news?
2. On November 17, Derrald was required to borrow $35,000 to avoid having a negative cash balance at the bank. Is Derrald in trouble?
3. As of September 30, could Derrald have foreseen the need for the loan on November 17? Using the budget data above, what conversation could Derrald have had with her banker on September 30?
myeducator.com
Example
Derrald’s Cash Budget
1. As of the end of October, Derrald’s cash balance is $23,000. Is this good news or bad news?
October
Beginning cash balance 54,000
Budgeted cash collections 10,000
Cash available 64,000
Total budgeted cash payments 50,000
Preliminary budgeted cash balance 14,000
Borrowing 0
Loan repayment (ignore interest) 0
Ending cash balance 14,000
myeducator.com
Example
Derrald’s Cash Budget
2. On November 17, Derrald was required to borrow $35,000 to avoid having a negative cash balance at the bank. Is Derrald in trouble?
October November
Beginning cash balance 54,000 14,000
Budgeted cash collections 10,000 10,000
Cash available 64,000 24,000
Total budgeted cash payments 50,000 60,000
Preliminary budgeted cash balance 14,000 (36,000)
Borrowing 0 36,000Loan repayment (ignore interest) 0 0
Ending cash balance 14,000 0
myeducator.com
Example
Derrald’s Cash Budget
3. As of September 30, could Derrald have foreseen the need for the loan on November 17? Using the budget data above, what conversation could Derrald have had with her banker on September 30?
October November December January
Beginning cash balance 54,000 14,000 0 0
Budgeted cash collections 10,000 10,000 40,000 120,000
Cash available 64,000 24,000 40,000 120,000
Total budgeted cash payments 50,000 60,000 40,000 10,000
Preliminary budgeted cash balance 14,000 (36,000) 0 110,000
Borrowing 0 36,000 0 0
Loan repayment (ignore interest) 0 0 0 (36,000)
Ending cash balance 14,000 0 0 74,000
myeducator.com
Example
Derrald’s Cash Budget
Benefits of a Cash Budget–Advance arrangements
–Realistic targets
–Hope
–Identify (and solve) problems before they happen
myeducator.com
Performance Evaluation
Soviet Oil-Drilling Contest• Oil drilling teams in competition with one another• The award-winning team never struck oil• The first 100 meters of drilling do not require as
much effort and expense• The winning team drilled an impressive number of
100-meter dry holes
Question: The drilling teams were being evaluated on number of meters drilled; what would have been a better basis for evaluating the performance of the drilling teams?
myeducator.com
RememberYou get EXACTLY
what you measure.
So, make sure you measure the right things.
myeducator.com
Capital Budgeting
A New Dumpling Machine– The cost of the machine is $100,000.
– Scrap value = $10,000 at end of 10 years
– Reduce operating costs by $7,000 per year.
– Increase in production of 10,000 dumplings per year.
– Franklin makes $1.00 on each dumpling it sells.
– Opportunity rate of return is 16 percent.
Question: Should Franklin Noodle Shop purchase the new dumpling machine?
myeducator.com
Capital Budgeting
A New Dumpling MachineOriginal cost (100,000)
Scrap value 10,000
↓ operating costs ($700 × 10 years) 70,000
↑ profits ($1,000 × 10 years) 100,000
Total + $80,000
Have we forgotten anything?
myeducator.com
Capital Budgeting
A New Dumpling MachineHave we forgotten anything?
What else could we have done with that $100,000 initial investment?
Opportunity cost
-what if 16%?
myeducator.com
Today’s Agenda• Cost classification terminology
– Fixed and variable
– Product and period
– Budgeted and actual
– Relevant and sunk
– Out-of-pocket and opportunity
• Premier managerial accounting topics– Cost flows and product costing
– Breakeven analysis
– Budgeting
– Performance evaluation
– Relevant costs for decision making
– Balanced Scorecard
– Capital Budgetingmyeducator.com
For Next Time
1. Launch QUIZ 3b in MyEducator by Friday at 11:59 p.m.
2. Study MyEducator modules for Class 03 in preparation for Quiz 3.
3. Decide whether you need/want to come to class on Tuesday.
4. Launch QUIZ 4 in MyEducator by Wednesday at 11:59 p.m. (And then Quiz 5a )
myeducator.com