Managerial Accounting Concepts

1. Chapter Two Managerial Accounting Concepts

2. COSTS • Cost – the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization • Cost categories • Direct costs • Indirect costs

3. Accumulating Cost • The way that costs are measured and recorded. • Once accounted for, cost is assigned to a cost object. • Cost object – products; services; customers/clients; departments; project; area/territory • Cost assignment--Costs are assigned to cost object either through direct tracing or allocation.

4. Assigning Costs to Cost Objects • Direct Cost • Cost that can be easily & accurately traced to cost object • e.g. – Direct Material & Direct Labor • Indirect Cost • Cost that cannot be easily traced to cost object so has to be allocated, using a reasonable and convenient method • e.g. – Overhead

5. Types of Costs • Service Cost – cost to provide a service • Examples – dentist ; accountant ; attorney • Have no inventory on the balance sheet

6. Types of Costs • Product Cost – cost to produce a product • Used by manufacturing and merchandising businesses • Recorded in the inventory account • Product cost is made up of: Direct Materials + Direct Labor + Manufacturing Overhead

7. Direct Materials • Materials that are part of the final product and can be directly traced to the goods begin produced.

8. Direct Labor Labor that can be directly traced to the goods being produced. i.e. People working on the products directly

9. Manufacturing Overhead Costs that cannot be traced to products and services directly – INDIRECT COSTS INDIRECT MATERIALS INDIRECT LABOR FACTORY UTILITIES RENT ON FACTORY DEPRECIATION ON MANUFACTUTING ASSETS

10. Important Equations Total Product Cost = Direct materials + Direct labor + Manufacturing overhead Product Cost per Unit = Total product cost / # of units produced

11. Example • BlueDenim Co. makes jeans. Last week, direct materials costing $48,000 were put into production. Direct labor of $30,000 was incurred. Overhead equaled $72,000. By the end of the week, BlueDenim had manufactured 30,000 pairs of jeans. • Calculate total product for last week. • Calculate cost to make one pair of jeans.

12. Types of Costs • Prime Cost = DM + DL • Conversion Cost = DL + MOH • Remember: DL is in both! • Look back at previous slide and • Calculate total prime cost. • Calculate total conversion cost.

13. Types of Costs • Period Costs – Selling, general & administrative costs • Costs incurred in a business not needed to produce product. • Expensed in the period in which they are incurred.

14. Product vs. Period Costs

15. Production Cost Flows Raw Materials (Used in making WIP) Work in Process (Finished as Cost of Goods Manufactured) Finished Goods (Sold to customers to become CGS) Cost of Goods Sold

16. Raw Materials Beginning Balance + Materials Purchased - Materials Used = Ending Balance ALSO:----------------------------------------- Beginning Balance + Purchases • Ending Balance = Materials Used

17. Example • On May 1, BlueDenim had $68,000 of materials in inventory. During the month of May, BlueDenim purchased $210,000 of materials. On May 31, materials inventory equaled $22,000. • How much material was used in production for the month of May?

18. Example Beginning Inventory $ 68,000 +Material Purchased 210,000 (Ending Inventory) (22,000) Materials Used $256,000

19. Work in Process Beginning Balance + Materials Used + Direct Labor + Manufacturing Overhead • Cost of Goods Manufactured Ending Balance

20. Example • In addition to the materials purchased, BlueDenim Co. incurred direct labor cost of $135,000 and manufacturing overhead of $150,000 during May. On May 1, the WIP balance was $50,000 and the balance was $16,000 on May 31. • What is the company’s cost of goods manufactured for May?

21. Example Beginning balance, WIP $ 50,000 Materials Used 256,000 Direct Labor 135,000 Manufacturing Overhead 150,000 (Cost of Goods Manufactured) ?????? Ending balance, WIP $ 16,000 COGM = $575,000

22. Finished Goods Beginning Balance + Cost of Goods Manufactured • Cost of Goods Sold Ending Balance COGS – presents the cost of the good that were sold during the period COGS =Product cost per unit *# of units sold

23. Example • During the month of May, 115,000 pairs of jeans were completed at a cost of goods manufactured of $575,000. On May 1, BlueDenim had 10,000 units in finished goods inventory costing $50,000. The company sold 99,000 pairs of jeans during the month. • What is the company’s COGS and ending Finished Goods balancefor May?

24. Example Beginning balance, FG $50,000 COGM 575,000 (COGS) (?????) Ending balance, FG ????? COGS = Cost per unit * # of units sold Cost per unit = $575,000 / 115,000 = $5 COGS = $5 * 99,000 = $495,000 Ending Balance = $130,000

25. Income Statement Sales Revenue • COGS Gross Margin • Selling Expense • Administrative Expense • General Expense Operating Income

26. Example • Recall that BlueDemin Co. sold 99,000 pairs of jeans during the month of May at a total cost of $495,000. Each pair sold at a price of $8. The company also incurred two types of selling costs: commissions equaled 10% of sales price and fixed selling expenses of $120,000. Administrative expense totaled $85,000. • Prepare an income statement for the month of may.

27. Example Sales revenue (99,000 * $8) $ 792,000 (Cost of goods sold) ( 495,000) Gross margin $ 297,000 Selling expenses Commission (10% * $792,000) (79,200) Fixed selling expense (120,000) Administrative expense ( 85,000) Operating income $ 12,800

28. End of Chapter Two