ch 1 slide deck

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Work of Management

Planning

Planning

Controlling

Controlling

Directing andMotivating

Directing andMotivating

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Planning

Identifyalternatives.

Identifyalternatives.

Select alternative that doesthe best job of furtheringorganization’s objectives.

Select alternative that doesthe best job of furtheringorganization’s objectives.

Develop budgets to guideprogress toward the

selected alternative.

Develop budgets to guideprogress toward the

selected alternative.

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Directing and MotivatingDirecting and motivating involves managing day-

to-day activities to keep the organization runningsmoothly.

▫ Employee work assignments.

▫

Routine problem solving.▫ Conflict resolution.

▫ Effective communications.

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ControllingThe control function ensures

that plans are being followed.

The control function ensures

that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budgetare an essential part of the control function.

Feedback in the form of performance reports

that compare actual results with the budgetare an essential part of the control function.

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Planning and Control Cycle

DecisionMaking

Formulating long-

and short-termplans (Planning)

Formulating long-and short-term

plans (Planning)

Measuringperformance(Controlling)

Measuringperformance

(Controlling)

Implementingplans (Directingand Motivating)

Implementingplans (Directingand Motivating)

Comparing actualto plannedperformance(Controlling)

Comparing actualto planned

performance(Controlling)

Begin

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Learning Objective 1

Identify the major differences

and similarities betweenfinancial and managerialaccounting.

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Comparison of Financial and Managerial

AccountingFinancial Accounting Managerial Accounting

1. Users External persons who Managers who plan for

make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focuses on segmentsthe whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format

7. Requirement Mandatory for Not

external reports Mandatory

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Identify and give examples of

each of the three basicmanufacturing costcategories.

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The ProductThe Product

DirectMaterials

Direct

MaterialsDirectLabor

Direct

LaborManufacturing

Overhead

Manufacturing

Overhead

Manufacturing Costs

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Direct Materials

Raw materials that become an integralpart of the product and that can beconveniently traced directly to it.

Example: A radio installed in an automobileExample: A radio installed in an automobile

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Direct Labor

Those labor costs that can be easilytraced to individual units of

product.

Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers

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Manufacturing Overhead

Manufacturing costs cannot be traceddirectly to specific units produced.

Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor

Wages paid to employees

who are not directlyinvolved in productionwork.

Examples: Maintenance

workers, janitors andsecurity guards.

Materials used to support

the production process.

Examples: Lubricants andcleaning supplies used in

the automobile assemblyplant.

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Classifications of

Nonmanufacturing Costs

Selling Costs

Costs necessary to getthe order and deliverthe product.

AdministrativeCosts

All executive,organizational, andclerical costs.

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Distinguish between

product costs and periodcosts and give examples

of each.

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Product Costs Versus Period Costs

Inventory

Cost ofGoods Sold

BalanceSheet

IncomeStatement

Sale

Product costs include

direct materials, directlabor, andmanufacturing

overhead.

Period costs are not

included in productcosts. They areexpensed on the

income statement.Expense

IncomeStatement

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Quick Check Which of the following costs would be

considered a period rather than a product costin a manufacturing company? (There may bemore than one correct answer.)

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.

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Which of the following costs would be

considered a period rather than a product costin a manufacturing company? (There may bemore than one correct answer.)

A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the productionfacility.

E. Sales commissions.

Quick Check

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Prime Cost and Conversion Cost

Direct

Material

Direct

Material

Direct

Labor

Direct

Labor

Manufacturing

Overhead

Manufacturing

Overhead

PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:

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Comparing Merchandising and

Manufacturing Activities

Merchandisers . . .

▫ Purchase finishedgoods from suppliersfor resale to

customers.

Manufacturers . . .

▫ Purchases rawmaterials fromsuppliers.

▫ Produce and sellfinished goods tocustomers.

MegaLoMart

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Balance SheetMerchandiser

Current Assets Cash

Receivables

Prepaid Expenses

Merchandise Inventory

Manufacturer

Current Assets Cash

Receivables

Prepaid Expenses

Inventories:

1. Raw Materials

2. Work in Process

3. Finished Goods

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Merchandiser

Current Assets Cash

Receivables

Prepaid Expenses

Merchandise Inventory

Manufacturer

Current Assets Cash

Receivables

Prepaid Expenses

Inventories:

1. Raw Materials

2. Work in Process

3. Finished Goods

Balance Sheet

Partially complete

products – somematerial, labor, oroverhead has been

added.

Completed productsawaiting sale.

Materials waiting tobe processed.

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Prepare an income

statement includingcalculation of the cost of

goods sold.



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Inventory Flows

Beginningbalance

Beginningbalance

Additionsto inventory

Additionsto inventory++ ==

Endingbalance

Endingbalance

Withdrawalsfrom

inventory

Withdrawalsfrom

inventory++

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Quick Check If your inventory balance at the beginning of

the month was $1,000, you bought $100during the month, and sold $300 during themonth, what would be the balance at the end

of the month?A. $1,000.

B. $ 800.

C. $1,200.D. $ 200.

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If your inventory balance at the beginning of

the month was $1,000, you bought $100during the month, and sold $300 during themonth, what would be the balance at the end

of the month?A. $1,000.

B. $ 800.

C. $1,200.D. $ 200.

Quick Check

$1,000 + $100 = $1,100$1,100 - $300 = $800

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Prepare a schedule of costof goods manufactured.

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Schedule of Cost of Goods

Manufactured

Calculates the cost of rawmaterials, direct labor andmanufacturing overhead

used in production.

Calculates the manufacturingcosts associated with goodsthat were finished during the

period.

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Manufacturing Work

Raw Materials Costs In Process

Beginning raw

materials inventory

+ Raw materials

purchased= Raw materials

available for use

in production

– Ending raw materials

inventory

= Raw materials used

in production

As items are removed from

raw materials inventory andplaced into the production

process, they are called directmaterials.

As items are removed from

raw materials inventory andplaced into the production

process, they are called direct

materials.


Manufactured

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Manufacturing Work


Beginning raw Direct materials

materials inventory + Direct labor

+ Raw materials + Mfg. overhead

purchased = Total manufacturing= Raw materials costs

available for use

in production

– Ending raw materials

inventory


in production

Conversion

costs are costsincurred toconvert the

direct materialsinto a finished

product.

Conversion

costs are costsincurred toconvert the

direct materialsinto a finishedproduct.

As items are removed from rawmaterials inventory and placed into

the production process, they arecalled direct materials.

As items are removed from rawmaterials inventory and placed into

the production process, they arecalled direct materials.


Manufactured

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Manufacturing Work


Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing

purchased = Total manufacturing costs= Raw materials costs = Total work in

available for use process for the

in production period

– Ending raw materials – Ending work in

inventory process inventory

= Raw materials used = Cost of goods

in production manufactured.

All manufacturing costs incurredduring the period are added to the

beginning balance of work in

process.

All manufacturing costs incurredduring the period are added to the

beginning balance of work in

process.


Manufactured

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Manufacturing Work


Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing

purchased = Total manufacturing costs= Raw materials costs = Total work in

available for use process for the

in production period

– Ending raw materials – Ending work in

inventory process inventory

= Raw materials used = Cost of goods

in production manufactured.

Costs associated with the goods thatare completed during the period are

transferred to finished goodsinventory.

Costs associated with the goods thatare completed during the period are

transferred to finished goods

inventory.


Manufactured

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Work

In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory

+ Manufacturing costs + Cost of goodsfor the period manufactured

= Total work in process = Cost of goods

for the period available for sale

– Ending work in - Ending finishedprocess inventory goods inventory

= Cost of goods Cost of goods

manufactured sold

Cost of Goods Sold

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Manufacturing Cost Flows

Selling andAdministrative

Period Costs

FinishedGoods

Cost of

GoodsSold

Selling andAdministrative

ManufacturingOverhead

Work in

Process

Direct Labor

Balance SheetCosts Inventories

IncomeStatement

ExpensesMaterial Purchases Raw Materials

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Quick Check Beginning raw materials inventory was

$32,000. During the month, $276,000 of rawmaterial was purchased. A count at the end ofthe month revealed that $28,000 of rawmaterial was still present. What is the cost ofdirect material used?

A. $276,000

B. $272,000C. $280,000

D. $ 2,000

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Beginning raw materials inventory was

$32,000. During the month, $276,000 of rawmaterial was purchased. A count at the end ofthe month revealed that $28,000 of rawmaterial was still present. What is the cost ofdirect material used?

A. $276,000

B. $272,000C. $280,000

D. $ 2,000

Quick Check

Beg. raw materials 32,000$+ Raw materials

purchased 276,000

= Raw materials available

for use in production 308,000$ – Ending raw materials

inventory 28,000


in production 280,000$

Beg. raw materials 32,000$+ Raw materials

purchased 276,000

= Raw materials available

for use in production 308,000$ – Ending raw materials

inventory 28,000


in production 280,000$

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Quick Check Direct materials used in production totaled

$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What weretotal manufacturing costs incurred for the

month?A. $555,000

B. $835,000

C. $655,000

D. Cannot be determined.

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Direct materials used in production totaled

$280,000. Direct labor was $375,000 andfactory overhead was $180,000. What weretotal manufacturing costs incurred for the

month?A. $555,000

B. $835,000

C. $655,000

D. Cannot be determined.

Quick Check

Direct Materials 280,000$

+ Direct Labor 375,000 + Mfg. Overhead 180,000

= Mfg. Costs Incurredfor the Month 835,000$

Direct Materials 280,000$

+ Direct Labor 375,000

+ Mfg. Overhead 180,000

= Mfg. Costs Incurredfor the Month 835,000$

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Quick Check Beginning work in process was $125,000.

Manufacturing costs incurred for the monthwere $835,000. There were $200,000 ofpartially finished goods remaining in work in

process inventory at the end of the month.What was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

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Beginning work in process was $125,000.

Manufacturing costs incurred for the monthwere $835,000. There were $200,000 ofpartially finished goods remaining in work inprocess inventory at the end of the month.What was the cost of goods manufacturedduring the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

Quick Check

Beginning work in

process inventory 125,000$+ Mfg. costs incurredfor the period 835,000

= Total work in processduring the period 960,000$

– Ending work inprocess inventory 200,000

= Cost of goodsmanufactured 760,000$

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Quick Check

Beginning finished goods inventory was

$130,000. The cost of goods manufactured forthe month was $760,000. The ending finishedgoods inventory was $150,000. What was the

cost of goods sold for the month?A. $ 20,000.

B. $740,000.

C. $780,000.

D. $760,000.

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Beginning finished goods inventory was

$130,000. The cost of goods manufactured forthe month was $760,000. The ending finishedgoods inventory was $150,000. What was the

cost of goods sold for the month?A. $ 20,000.

B. $740,000.

C. $780,000.

D. $760,000.

Quick Check

$130,000 + $760,000 = $890,000

$890,000 - $150,000 = $740,000

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Understand thedifferences between

variable costs and fixed

costs.

C t Cl ifi ti f P di ti g

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Cost Classifications for Predicting

Cost Behavior

How a cost will react tochanges in the level of

business activity.

Total variable costs changewhen activity changes.

Total fixed costs remainunchanged when activity

changes.

How a cost will react tochanges in the level of

business activity.

Total variable costs changewhen activity changes.

Total fixed costs remainunchanged when activitychanges.

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Variable CostYour total texting bill is based on how

many texts you send.

Number of Texts Sent

T o t a

l T e x t i n g

B i l l

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Variable Cost Per Unit

Number of Texts Sent

C o s t P

e r T e x t S

e n t

The cost per text sent is constant at

5 cents per text.

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Fixed CostYour 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 thenumber of calls you make.

Number of Minutes UsedWithin Monthly Plan

M o n t h l y

C e l l P h o n

e

C o n t r a c t F e e

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Fixed Cost Per Unit

Number of Minutes UsedWithin Monthly Plan

M o n t h l y C e l l P h o

n e

C o n

t r a c t F e e

Within the monthly contract allotment, the averagefixed cost per cell phone call made decreases as

more calls are made.


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Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains

as activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goes

the same even when the down as activity level goes up.

activity level changes.

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Quick Check

Which of the following costs would be variable

with respect to the number of cones sold at aBaskins & Robbins shop? (There may bemore 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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Which of the following costs would be variable

with respect to the number of cones sold at aBaskins & Robbins shop? (There may bemore 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.

Quick Check

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Understand the

differences betweendirect and indirect costs.

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Assigning Costs to Cost ObjectsDirect costs

•

Costs that can beeasily and convenientlytraced to a unit ofproduct or other cost

object.

• Examples: Directmaterial and direct labor

Indirect costs

•

Costs that cannot beeasily and convenientlytraced to a unit ofproduct or other costobject.

• Example: Manufacturingoverhead

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Understand costclassifications used in making

decisions: differential costs,opportunity costs, and sunk

costs.

Cost Classifications for Decision

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Cost Classifications for Decision

MakingEvery decision involves a choice

between at least two alternatives.

Only those costs andbenefits that differ

between alternatives

are relevant to thedecision. All other

costs and benefits canand should be ignored.

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Differential Costs and RevenuesCosts and revenues that differ

among alternatives.Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in aneighboring city that pays $2,000 per month. Thecommuting cost to the city is $300 per month.

Example: You have a job paying $1,500 per month inyour hometown. You have a job offer in aneighboring city that pays $2,000 per month. Thecommuting cost to the city is $300 per month.

Differential revenue is:$2,000 – $1,500 = $500

Differential cost is:$300

Net Differential Benefit is:$200

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Opportunity CostsThe potential benefit that is given up

when one alternative is selectedover another.

Example: If you werenot attending college,you could be earning

$15,000 per year.Your opportunity costof attending college for

one year is $15,000.

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Sunk CostsCannot be changed by any decision. They

are not differential costs and should beignored when making decisions.

Example: You bought an automobile that cost$10,000 two years ago. The $10,000 cost is

sunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $10,000 cost.

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Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend aconcert. You have ample cash to do either, butyou don’t want to waste money needlessly. Is

the cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether youdrive or take the train to Portland?

A. Yes, the cost of the train ticket is relevant.

B. No, the cost of the train ticket is not

relevant.

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drive or take the train to Portland to attend aconcert. You have ample cash to do either, butyou don’t want to waste money needlessly. Is

the cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether youdrive or take the train to Portland?

A. Yes, the cost of the train ticket is relevant.

B. No, the cost of the train ticket is not

relevant.

Quick Check

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Quick Check


drive or take the train to Portland to attend aconcert. You have ample cash to do either,but you don’t want to waste money

needlessly. Is the annual cost of licensing yourcar relevant in this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

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drive or take the train to Portland to attend aconcert. You have ample cash to do either,but you don’t want to waste money

needlessly. Is the annual cost of licensing yourcar relevant in this decision?

A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

Quick Check

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Quick Check

Suppose that your car could be sold now for

$5,000. Is this a sunk cost?A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

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Suppose that your car could be sold now for

$5,000. Is this a sunk cost?A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

Quick Check

Summary of the Types of Cost

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y yp

Classifications

Financial

Reporting

Predicting

Cost Behavior

Assigning

Costs to CostObjects

Decision

Making

1-67



End of Chapter 1

ch 1 slide deck

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