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Building Blocks of Managerial Accounting

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Building Blocks of Managerial Accounting

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  1. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

  2. Building Blocks of Managerial Accounting Chapter 2

  3. Learning Objective 1 Distinguish among service, merchandising, and manufacturing companies

  4. Three Types of Companies • Service • Merchandisers • Manufacturers

  5. Service Companies • Provide a service only • No inventory • Examples • Accountants • Banks • Doctors • Lawyers

  6. Merchandisers • Resell products purchased from suppliers • One inventory account • Examples • Amazon.com • J. C. Penney • Sears • Retailers vs. Wholesalers

  7. Manufacturers • Use labor and other inputs to convert raw materials into finished products • Examples • Crayola Crayons • Dell Computers • Craftsman Tools • 3 inventory accounts

  8. Manufacturers • Three inventory accounts • Raw materials • Work in process • Finished goods

  9. Learning Objective 2 Describe the value chain and its elements

  10. Value Chain Activities that add value to products and services and cost money R&D Design Production/ Purchases Customer Service Distribution Marketing

  11. Learning Objective 3 Distinguish between direct and indirect costs

  12. Cost Object Anything for which managers want a separate measurement of cost • Direct cost • Indirect cost

  13. Direct; trace S2-5 Indirect; allocate Direct; trace Store utilities The CEO’s salary The cost of the DVDs The cost of national advertising Indirect; allocate

  14. Direct; trace S2-5 (continued) Indirect; allocate Direct; trace The wages of store employees The cost of operating the corporate payroll dept The cost of Xbox, PlayStation, and Nintendo games The cost of popcorn and candy sold at the store Direct; trace

  15. Learning Objective 4 Identify the inventoriable product costs and period costs of merchandising and manufacturing firms

  16. Two Definitions of Product Cost • Total costs –used internally only (will see this in later chapters) • Inventoriable product costs –used forexternal reporting

  17. Inventoriable Product Costs Production/ Purchases R&D Design Inventoriable Product Costs Marketing Customer Service Distribution

  18. Period Costs: All Costs Incurred in the Other Stages of the Value Chain R&D Design Period Costs Marketing Customer Service Distribution

  19. Inventoriable Product Costs: Merchandiser • + Purchase price from suppliers • + Cost to get ready for sale • + Freight-in • + Import duties or tariffs

  20. Inventoriable Product Costs: Manufacturer • Direct materials • Direct labor • Manufacturing overhead Direct Costs Indirect Costs

  21. Manufacturing Overhead Indirect costs related to manufacturing that are not direct materials or direct labor • Indirect materials • Indirect labor • Other indirect manufacturing overhead

  22. Product, DM S2-8 Product, MOH Cost of milk purchased from farmers Lubricants used in bottling machines Depreciation on refrigerated trucks to collect raw milk from local dairy farmers Property tax on dairy processing plant Product, MOH Product, MOH

  23. Period S2-8 (continued) Period Television advertisements for Dairy Plains’ products Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores Company president’s annual bonus Plastic gallon containers in which milk is packaged Period Product, DM

  24. Period S2-8 (continued) Product, DL Depreciation on marketing department’s computers Wages and salaries paid to machine operators at dairy processing plant 11. Research and Development on improving milk pasteurization process Period

  25. Prime and Conversion Costs Direct Materials Direct Labor Manufacturing Overhead Prime Costs Conversion Costs

  26. Direct and Indirect Labor Costs • Salaries and wages • Fringe benefits • Payroll taxes

  27. Learning Objective 5 Prepare the financial statements for service, merchandising and manufacturing companies

  28. Income Statement: Service Company • Simplest income statement • All costs are period costs Service Revenues - Operating expenses Operating income

  29. Income Statement:Merchandiser + Sales - Cost of goods sold = Gross profit - Operating expenses = Operating income

  30. Cost of Goods Sold Calculation: Merchandiser +Beginning inventory + Purchases + Import duties or tariffs + Freight-in =Cost of goods available for sale - Ending inventory = Cost of goods sold

  31. 2010 Income Statement Cost of goods sold Inventory sold in 2010 2010 Balance Sheet 2010 Product costs Inventory Inventory sold in 2011 2011 Income Statement Cost of goods sold

  32. Income Statement: Manufacturer + Sales - Cost of goods sold = Gross profit - Operating expenses = Operating income

  33. Cost of Goods Sold Calculation:Manufacturer + Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold

  34. Cost of Goods Manufactured Calculation: Manufacturer + Beginning work in process inventory + Direct materials used + Direct labor + Manufacturing overhead = Total manufacturing costs to account for - Ending work in process inventory = Cost of goods manufactured

  35. Direct Materials Used Calculation:Manufacturer + Beginning raw materials inventory + Purchases of raw materials + Freight in = Materials available for use - Ending raw materials inventory = Direct materials used

  36. Product and Period Costs 37

  37. Manufacturing Companies’Inventory Accounts Raw Materials Inventory Materials used In work in process Beginning inventory Purchases & freight Ending inventory

  38. Manufacturing Companies’Inventory Accounts Work in Process Inventory Beginning inventory Cost of goods Manufactured and sent to finished goods Materials used from raw materials Direct labor Manufacturing overhead Ending inventory

  39. Manufacturing Companies’Inventory Accounts Finished Goods Inventory Income Statement Beginning inventory Cost of goods sold Cost of goods manufactured Ending inventory

  40. Balance Sheet Differences

  41. E2-20A • __________ can be traced to cost objects. • ____________ are expensed when incurred. • __________ are the combination of direct materials and direct labor. • Compensation includes wages, salaries, and _________________. Direct costs Period costs Prime costs fringe benefits

  42. E2-20A • ________________________ are treated as _______until sold. • ________________________ include costs from only the production or purchases element of the value chain. • _____________are allocated to cost objects. • Both direct and indirect costs are ________ to ___________. Inventoriable product costs assets Inventoriable product costs Indirect costs assigned cost objects

  43. E2-20A • __________________ include costs from every element of the value chain. • __________________ are the combination of direct labor and manufacturing overhead. • _________________________ are expensed as __________________ when sold. Total costs Conversion costs Inventoriable product costs cost of goods sold

  44. E2-20A l. Manufacturing overhead includes all ______________ of production. indirect costs

  45. Learning Objective 6 Describe costs that are relevant and irrelevant for decision making

  46. Controllable and Uncontrollable Costs • Controllable – management can influence or change cost • Uncontrollable – management cannot change or influence cost in the short-run

  47. Relevant and Irrelevant Costs • Relevant – costs that differ between alternatives • Differential costs • Irrelevant – costs that do not differ • Sunk costs

  48. Learning Objective 7 Classify costs as fixed or variable and calculate total and average costs at different volumes

  49. Cost Behavior • Variable costs – change in total cost in direct proportion to changes in volume • Fixed costs – stay constant in total cost over a wide range of activity levels

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