umst-mba batch 8 m anagerial a ccounting. c ourse content production, marketing and administrative...
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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