Managerial Accounting and Cost ConceptsChapter 02

2-2

Public

Creditors

Tax authorities

Investors Board ofmanagements

Middle managers

Bottom line managers

Employees

Company

Users of accounting information

2-3

Managerial Accounting vs. Financial Accounting

Managerial accountingprovides information

for managers inside anorganization whodirect and control

its operations.

Financial accountingprovides information

to stockholders,creditors and others

who are outsidethe organization.

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Financial Accounting vs. Managerial Accounting

2-5

Work of Management

Planning

Controlling

Directing and Motivating

2-6

Planning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Measuringperformance (Controlling)

Implementing plans (Directing and Motivating)

Comparing actualto planned

performance (Controlling)

Begin

Exh.1-1

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Functions

Behaviors

Traceability

Relevance

Cost classifications by:

2-8

Cost classification by functions

A. Manufacturing costs (Product costs).B. Non-manufacturing costs (period

costs).

2-9

The ProductThe Product

DirectMaterials

DirectLabor

ManufacturingOverhead

Classifications of Manufacturing Costs

2-10

Direct Materials Raw materials that become an integral

part of the product and that can be conveniently traced directly to it.

Example: A radio installed in an automobile

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Direct Labor

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

Example: Wages paid to automobile assembly workers

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Manufacturing OverheadManufacturing costs that cannot be easily traced directly to specific units produced.

Examples: Indirect materials and indirect labor

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Classifications of CostsManufacturing costs are often

classified as follows:

DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

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Nonmanufacturing Costs

Administrative Costs

All executive, organizational, and

clerical costs.

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Quick Check Which of the following costs would be

considered manufacturing overhead at Boeing? (More than one answer may be correct.)A. Depreciation on factory forklift trucks.B. Sales commissions.C. The cost of a flight recorder in a Boeing

767.D. The wages of a production shift

supervisor.

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Product Costs Versus Period Costs

Product costs include direct materials, direct

labor, and manufacturing

overhead.

Period costs include all selling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

2-17

Quick Check Which of the following costs would be

considered a period rather than a product cost in a manufacturing company?A. Manufacturing equipment depreciation.B. Property taxes on corporate

headquarters.C. Direct materials costs.D. Electrical costs to light the production

facility.

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Selling andAdministrative

Period Costs

Manufacturing Cost Flows

FinishedGoods

Cost of GoodsSold

Selling andAdministrative

ManufacturingOverhead

Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

Material Purchases Raw Materials

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Quick Check Which of the following transactions would

immediately result in an expense? (There may be more than one correct answer.)A. Work in process is completed.B. Finished goods are sold.C. Raw materials are placed into production.D. Administrative salaries are accrued and

paid.

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Example 1AQUAS is a bottled water producer. It was established on Oct. 1,

2013. Clever Man – the company’s accountant is required to prepare an income statement to report on the first quarter

performance.

20

1. Sales 8002. Expenses

Materials purchased 200Wages for workers 100Wages for marketing staff 50Salaries for office clerks 60Payment for Advertising 150Plant rent 55Office rent 65Payment for office utility 120Payment for plant utility 180Total expenses 980

3. Loss (180)

AQUASIncome Statement

For the quarter ended Dec. 31, 2013(in VND mil.)

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Cost Classifications by Behaviors

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 Fixed cost per unit goesthe same even when the down as activity level goes up. activity level changes.

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Variable Cost Your total texting bill is based on how

many texts you send.

Number of Texts Sent

Tota

l Tex

ting

Bill

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Variable Cost Per Unit

The cost per text sent is constant at 5 cents per text message.

Number of Texts Sent

Cos

t Per

Tex

t Sen

t

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Fixed Cost 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 UsedWithin Monthly Plan

Mon

thly

Cel

l Pho

ne

Con

trac

t Fee

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Fixed Cost Per UnitWithin the monthly contract allotment, the average fixed cost per

cell phone call made decreases as more calls are made.

Number of Minutes UsedWithin Monthly Plan

Mon

thly

Cel

l Pho

ne

Con

trac

t Fee

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ExamplesAdvertising and Research and Development

ExamplesDepreciation on Buildings and Equipment and Real

Estate Taxes

Types of Fixed Costs

DiscretionaryMay be altered in the short-term by current managerial decisions

CommittedLong-term, cannot be

significantly reduced in the short term.

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RelevantRange

A straight line closely

approximates a curvilinear

variable cost line within the

relevant range.

Activity

Tota

l Cos

t

Economist’sCurvilinear Cost

Function

The Linearity Assumption and the Relevant Range

Accountant’s Straight-Line Approximation (constant

unit variable cost)

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Mixed Costs

Fixed MonthlyUtility Charge

Variable Cost per KW

Activity (Kilowatt Hours)

Tota

l Util

ity C

ost

X

Y

Total mixed cost

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Quick Check Which of the following costs would be

variable with respect to the number of cones sold at a Baskins & 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.

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Quick Check Which of the following costs would be

variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)A. The cost of renting the film.B. Royalties on ticket sales.C. Wage and salary costs of theater

employees.D. The cost of cleaning up after the show.

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Income statement under contribution format

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Income statement under contribution format

Total per unitSales 100,000$ 50$ Variable costs 60,000 30 Contribution margin 40,000$ 20$ Fixed costs 30,000 Net Income 10,000$

The contribution format focuses on the relationship between costs and activity level. Contribution margin

will cover fixed costs and generate income.

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Cost classification by traceabilityDirect costs• Costs that can be

easily and conveniently traced to a unit of product or other cost objective.

• Examples: direct material and direct labor

Indirect costs• Costs cannot be

easily and conveniently traced to a unit of product or other cost object.

• Example: manufacturing overhead

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Cost classification by relevance

1. Differential cost.2. Sunk cost.3. Opportunity cost.

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Differential cost

• In 2013, Honda Vietnam established Asimo robots used for assembling motobikes. Their costs are VND 2.1 billions and their estimated useful life is 6 years.

• There is a new Asimo version which is much better than the old ones: if Honda Vietnam uses the new version, the company will save 70% annual operating expenses.

• The new version’s price is VND 4 billions and its useful life is 5 years.

• The current robots’s disposal value is VND 1 billion. • Honda Vietnam’s current annual operating expenses are VND900

millions. Should Honda Vietnam buy the new version?

Costs and revenues that differ among alternatives.

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Sunk Costs Sunk costs inccured in the past and cannot be

changed by any decision. They are not differential costs and should be ignored when making decisions.

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Opportunity Costs

The potential benefit that is given up when one alternative is selected over another.

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Example 2•Ennerdale Ltd has been asked to quote a

price for a one-off contract. The company's management accountant has asked for your advice on the relevant costs for the contract.

•The following information is available:

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Materials• The contract requires 3,000 kg of material K,

which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of £19,600. Since then the price per kilogram for material K has increased by 5%.

• The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material L would be sold for £11 per kg.

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Labour• The contract requires 800 hours of skilled labour.

Skilled labour is paid £9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P.

• The following information relates to product P:£ per unit

Selling price 100Less Skilled labour 38Other variable costs 22

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End of Chapter 02