Ch 2 Basic Managerial Acctg Concepts

Ch 2 Basic Managerial Acctg Concepts - Chapter 2: Basic...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 2: Basic Management Accounting Concepts Please pickup handout in the back of the room Differentiate: Chapter 2 Basic Managerial Accounting Concepts Define: Between Product costs and Period expenses. Between direct and indirect costs Relevant / Irrelevant costs Direct Materials, direct labor, and manufacturing overhead. Fixed, and Variable Calculate and Understand: Material, labor, and overhead costs and how these costs are assigned and flow through the company Cost Vs. Expense Cost is the value of what you trade to get what you want. Cost is called an Asset if: Cost is called an Expense if Benefit exceeds one accounting period Benefit is consumed within one accounting period. Cost vs. Price Be careful! Cost & Price are not the same thing Cost What we pay for something Price Amount we charge our customers for our products or services Major Cost Classifications: Cost Objects Cost object: Any activity or item for which a separate cost measurement is desired. Cost Object An Activity Examples Repairing equipment, testing products manufactured for quality Paper towels, computers, automobiles (purchased or manufactured) Performing surgery, accounting, legal Designing a house, constructing a bridge A Product A Service A Project A Geographic Region A Department A state, a city, a county Marketing, operations, accounting Comparing Merchandising and Manufacturing Activities Merchandisers . . . Manufacturers . . . Buy finished goods. Sell finished goods. Buy raw materials. Produce and sell finished goods. SaleMart Assigning Costs Costs can be assigned in a number of ways Some methods are more accurate, but time consuming While others are quite simple but not as precise These methods will be discussed in the succeeding chapters. 7 Major Cost Classifications: Direct Costs and Indirect Costs Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Indirect costs Costs that supports more than one cost object must be allocated to be assigned to a unit of product or other cost object. Output One of the most important cost objects of a company is its output. Two types of output: Tangible Products Services 9 Major Cost Classifications: Product Costs vs Period Costs 3 Product Costs Costs associated with making the products available and ready to sell. Included as part of inventory (balance sheet) until the product is sold. Then expensed on income statement as cost of goods sold. 3 Period Costs Costs that are not product costs: Selling Costs Administrative Generally, expensed on income statement when incurred. Classifications of Product Costs in Manufacturing Companies Direct Material Direct Labor Manufacturing Overhead (Indirect) The Product Cost Object Classifications of Costs in Manufacturing Companies Manufacturing costs are often combined as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Total Product Cost Direct Materials + Direct Labor + Overhead Per Unit Cost Total Product Cost Number of Units Produced 13 Let's work a problem. Cost Classifications on Financial Statements Balance Sheet Merchandiser Current Assets Manufacturer Current Assets y Cash y Receivables y Prepaid Expenses y Inventories Raw Materials Work in Process Finished Goods Cash Receivables Prepaid Expenses Merchandise Inventory Inventory Relationships Costs of raw materials are transferred to work in process as materials are used. Materials Work in process Finished goods As units are completed, costs of completed units are transferred to finished goods. The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise inventory + Purchases Goods available for sale - Ending merchandise inventory = Cost of goods sold Manufacturing Company Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold $ 14,200 234,150 $ 248,350 $ 14,200 234,150 $ 248,350 (12,100) $ 236,250 (12,100) $ 236,250 Product Cost Flows Costs Material Purchases Direct Labor Manufacturing Overhead Balance Sheet Inventories Raw Material Work in Process Finished Goods Income Statement Expenses Cost of Goods Sold Selling and Administrative Selling and Administrative Period Expenses Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production Manufacturing Costs Work In Process Beginning inventory is the inventory carried over from the prior period. Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Work In Process + = = Ending raw materials inventory is the cost of raw materials awaiting processing at the end of the period. This amount is reported in the current assets portion of the balance sheet. Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials Work In Process + = = As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead + = = Conversion costs are costs incurred to convert the direct material into a finished product. Work In Process Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Manufacturing costs for the period Work In Process + = = Flows of Resources Through the Inventories Raw Materials Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production Manufacturing Costs Direct materials + Direct labor + Mfg. overhead = Manufacturing costs for the period Work In Process Beginning work in process inventory + Manufacturing costs for the period = Total work in process for the period + = = All manufacturing costs incurred during the period are added to the beginning balance of work in process. Flows of Resources Through the Inventories Raw Materials Manufacturing Costs Work In Process Beginning work in process inventory Manufacturing costs for the period Total work in process for the period Ending work in process inventory Cost of goods manufactured. Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Manufacturing = Raw materials costs for the available for use period in production Ending work in process inventory Ending raw materials inventory contains the cost of unfinished = Raw materials used goods, and is reported in the current in production + = = assets section of the balance sheet. Flows of Resources Through the Inventories Raw Materials Manufacturing Costs Work In Process Beginning work in process inventory Manufacturing costs for the period Total work in process for the period Ending work in process inventory Cost of goods manufactured. Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Manufacturing = Raw materials costs for the available for use period in production Ending raw materials inventory Costs materials used with the goods that associated = Raw are completed during the period are in production + = = transferred to finished goods inventory. Continue Flows of Resources Through the Inventories Flows of Resources Through the Inventories BlueDenim Company Income Statement For the Month of May Sales revenue Cost of goods sold Gross margin Less: Selling expense: Commissions Fixed selling expense Administrative expense Operating income % $792,000 100.0 495,000 62.5 $297,000 37.5 $ 79,200 120,000 199,200 85,000 $ 12,800 25.2 10.7 1.6 29 Cost Classifications for Predicting Cost Behavior Cost behavior means how a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes. ...
View Full Document

This note was uploaded on 04/10/2008 for the course CIS 220 taught by Professor Soper during the Spring '08 term at ASU.

Ask a homework question - tutors are online