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Managerial Accounting and Cost Concepts Chapter 1

This chapter provides an introduction to managerial accounting and cost concepts, including cost classifications, assigning costs to cost objects, and predicting cost behavior. It also covers the different types of manufacturing costs and the distinction between product costs and period costs.

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Managerial Accounting and Cost Concepts Chapter 1

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  1. Managerial Accounting and Cost ConceptsChapter 1 Introduction to ManagerialAccounting, Brewer, Garrison,Noreen Power Points fromwebsite - adapted by Cynthia Fortin, CPA, CMA http://highered.mheducation.com/sites/0078025419/student_view0/chapter1/index.html

  2. Summary of cost classifications

  3. Purposes of Cost Classification Assigning costs to cost objects Accounting for costs in manufacturing companies Preparing financial statements Predicting cost behavior in response to changes in activity Making decisions

  4. Like different knives different purposes Types of costsvarydepending on situation Different costs Different purposes

  5. Classifications of Manufacturing Costs DirectMaterials DirectLabor ManufacturingOverhead

  6. Manufacturingcostcategories Direct Materials (DM) Raw materials • Teardown image of Apple’s iPhone X

  7. Direct materials Plastic Steel Wood

  8. Manufacturingcostcategories Direct Labor(DL) • Assembly line workers

  9. Manufacturing cost categories Manufacturing overhead Also known as burden • Electricity • Depreciation • Property taxes • Materials - minor parts / material – solder, washers, grease

  10. Manufacturing overhead Indirect Labor examples • Forklift truck operators • Janitors • Security • Rework labor (fix defects) • Overtime premium paid to ALL workers • Manager’s salaries

  11. Trace Direct Cost Easily traced to it. Inner lining (Cotton and polyester Football

  12. IndirectCosts (manufacturing overhead) • Cannot be easily traced to the cost object. • Allocated to cost objects

  13. Selling Costs AdministrativeCosts All executive, organizational, and clerical costs. Costs to secure order and deliver product. NonmanufacturingCosts

  14. ProductCosts • Capitalized on the balance sheet (inventory) • Expensedonlywhen the productsold For example: • Directlabor • Directmaterials • Overhead

  15. Period Costs • Expensed on the income statement as they are incurred Selling, general and administrative costs

  16. Productcosts Period costs Inventory Cost of Good Sold Expense Sale BalanceSheet IncomeStatement IncomeStatement Product Costs Versus Period Costs

  17. 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. E. Sales commissions. Quick Check 

  18. 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. E. Sales commissions. Quick Check 

  19. Manufacturing costs are oftenclassified as follows: PrimeCost ConversionCost Classifications of Costs DirectMaterial DirectLabor ManufacturingOverhead

  20. Changes in activity create a reaction Variable costs -> Change 1. Fixed costs => same 2. Mixed costs => change 3. Predicting Cost Behavior how a cost will react to changes such as sales volume, production volume, or orders processed.

  21. Fixed cost example What would be the cost per student if two students bought this delicious fish dish? ¥45 45 RMB What if four students ordered the dish?

  22. Variable costs example a beverage costs 10 RMB and each student eating the fish has one beverage Fixed cost: Fish 45 Variable costs: 4 drinks @ 10 RMB 40

  23. Cost behavior patterns VariableCost • Constant per unit (beverage) but changes in total in proportion to changes in the cost driver (activity) within the relevant range • Examples Materials (parts), fuel costs for a trucking company, line employee wages $ Volume

  24. Fixed Cost • A cost which constant in total as volume changes • but changes on a per-unit(fish) basis as the cost driver increases and decreases within the relevant range • Such as depreciation, insurance, real estate taxes, supervisor salary $ Volume Cost behavior patterns

  25. Activity Base (Cost Driver) Unitsproduced Machine- hours What drives cost to change? Kilometers driven Labor- hours

  26. Types of Fixed Costs Committed Long term, cannot be significantly reduced in the short term. Depreciation

  27. Types of Fixed Costs Discretionary May be altered in the shortterm by current managerial decisions Advertising Research and Development

  28. Relevant RangeMajor Assumptions • Costs => variable and fixed • Specific Time Span • Linear Total Cost Relationship • Only one cost driver • Variations of the cost driver are within the relevant range

  29. Relevant RangeMajor Assumptions • Costs => variable and fixed • Specific Time Span • Linear Total Cost Relationship • Only one cost driver • Variations of the cost driver are within the relevant range

  30. Relevant Range The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.

  31. Relevant Range and Cost Behavior Relevant Range Relevant Range Variable Cost Fixed Cost $ $ Volume Volume

  32. Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet. Fixed Costs and the Relevant Range Assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet.

  33. Fixed Costs and the Relevant Range 90 Range of activity over which the graph of the cost is flat. Relevant Range 60 Rent Cost in Thousands of Dollars 30 0 0 1,000 2,000 3,000 Rented Area (Square Feet)

  34. Predicting Cost Behavior

  35. Which of these costs change (variable) with the number of ice cream 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. Quick Check 

  36. 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.

  37. Y X Mixed Costs(or semivariable costs) Contains both variable and fixed elements Total mixed cost Total Utility Cost Variable Cost per KW Fixed MonthlyUtility Charge Activity (Kilowatt Hours)

  38. Y X Mixed Costs Total mixed cost Total Utility Cost Variable Cost per KW Fixed MonthlyUtility Charge Activity (Kilowatt Hours)

  39. Y = a +bX Y = $40 + ($0.03 × 2,000) Y = $100 Mixed Costs – An Example If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?

  40. Cost behaviour pattern • Cost behavior patterns refer to how business and operating expenses change or remain stable through different events. • Patterns can change especially during varying production levels or sales volume within the company. • Cost behavior patterns occur in fixed, variable and mixed expenses.

  41. Different Types of Profit Firms • Merchandising-sector companies • Product resellers • Manufacturing-sector companies • Create and sell their own products - BMW • Service-sector companies • Provide services / intangible products For ex.: legal advice, auditors.

  42. Used primarily forexternal reporting. Used primarily bymanagement. Income statement formats

  43. Uses of the Contribution Format • The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for: • Cost-volume-profit analysis (Chapter 5). • Budgeting (Chapter 7). • Segmented reporting of profit data (Chapter 6). • Special decisions such as pricing and make-or- buy analysis (Chapter 10).

  44. Every decision choice between at least two alternatives. Costs for Decision Making

  45. Only consider costs that differ between alternatives

  46. Differential Cost and Revenue Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300

  47. Benefit given up when one alternative is selected over another. Opportunity Cost Example: If you were not attending college,you could be earning $15,000 per year. Your opportunity costof attending college for one year is $15,000. Cost of not enjoying the benefit of earning a salary

  48. Already incurred and cannot be changed now or in the future. Ignore when making decisions. Sunk Costs

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