Building Blocks of Managerial Accounting Chapter 2 Professor Debbie Garvin, JD; CPA – ACG2071

Three Types of Companies  Service Cos.  Merchandisers  Manufacturers 2

Service Companies  Provide a service only  No inventory  Examples  Accountants  Banks  Doctors  Lawyers 3

Merchandisers  Resell products purchased from suppliers  One inventory account  Examples  Amazon.com, J. C. Penney, Macys  Retailers vs. Wholesalers 4

Manufacturers 5  Use labor and other inputs to convert raw materials into finished products  Examples  Crayola Crayons; Dell Computers; Craftsman Tools  3 inventory accounts  Raw materials  Work in process  Finished goods

Value Chain Activities that add value to products and services and cost money R & DDesign Product Purchase MarketDistribution Customer Service 6

Classify Costs by Value Chain Function  Depreciation on manufacturing plant  Costs of a customer support center website  Transportation costs to deliver product to retailer  Depreciation on research lab  Cost of a prime-time TV ad featuring new product 7

Classify Costs by Value Chain Function  Salary of scientists at research lab developing new products  Purchase of raw materials used to produce products  Salary of engineers redesigning existing product component part  Depreciation on delivery vehicles  Manufacturing Plant Manager’s salary 8

Cost Object  Anything for which managers want a separate measurement of cost  Direct cost  Indirect cost 9

 Should cost be traced or allocated? A.Store utilities for individual store Direct, Trace B.The CEO’s salary Direct, Trace Indirect, Allocate C.The cost of the DVDs in individual store Direct, Trace 10 Classify Following as Direct or Indirect Costs of Local Blockbuster Store (Store is Cost Object)

D.The cost of national advertising Indirect, Allocate E.The wages of store employees Direct, Trace F.The cost of operating the corporate payroll department for all BB stores Indirect, Allocate Classify costs as Direct or Indirect 11

G.The cost of Xbox, PlayStation, and Nintendo games in individual store Direct, Trace H.The cost of popcorn and candy sold at the store Indirect, Allocate Classify costs as Direct or Indirect 12

Two Definitions of Product Cost  Total costs – used internally only (will see this in later chapters)  Inventoriable product costs – used for external reporting 13

R & DDesign Production/ Purchase MarketDistribution Customer Service Inventoriable Product Costs 14

Period Costs: All Costs Incurred in the Other Stages of the Value Chain R & D, Design Marketing, Distribution, Customer Service All Period Costs 15

 + Purchase price from suppliers  + Cost to get ready for sale  + Freight-in  + Import duties or tariffs Inventoriable Product Costs: Merchandiser 16

Inventoriable Product Costs: Manufacturer Direct Costs Direct materials Direct labor Indirect Costs Manufacturing overhead 17

Manufacturing Overhead  Indirect costs related to manufacturing that are not direct materials or direct labor  Indirect materials  Indirect labor  Other indirect manufacturing overhead 18

 Cost of milk purchased from farmers Product, DM  Lubricants used in bottling machines used in production process Product, MOH  Depreciation on refrigerated trucks to collect raw milk from local dairy farmers Product, MOH 19 Each Cost Pertains to Dairy Process Co. Classify as Period/Product (dm,dl,moh)

 Property tax on dairy processing plant Product, MOH  Television advertisements for DairyPlains’ products Period  Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores Period Classify Costs as Period/Product 20

 Company president’s annual bonus Period  Plastic gallon containers in which milk is packaged Product, DM  Depreciation on marketing department’s computers Period Classify Costs as Period/Product 21

 Wages and salaries paid to machine operators at dairy processing plant Product, DL  Research and Development on improving milk pasteurization process Period Classify Costs as Period/Product 22

Prime and Conversion Costs Direct Materials Prime CostDirect LaborPrime Cost Conversion Cost Manufacturing Overhead Conversion Cost 23

Direct and Indirect Labor Costs  Salaries and wages  Fringe benefits  Payroll taxes 24

Income Statement: Service Company  Simplest income statement  All costs are period costs Service Revenues - Operating expenses Operating income 25

Income Statement: Merchandiser Sales - Cost of goods sold = Gross profit - Operating expenses = Operating income 26

Cost of Goods Sold Calculation: Merchandiser Beginning inventory + Purchases of new inventory + Import duties or tariffs must pay + Freight-in must pay = Cost of goods available for sale - Cost of Ending inventory = Cost of goods sold 27

2012 Product Costs Inventory Sold in 2012 Cost of goods sold 2012 Income Statement Inventory sold in 2013 Inventory 2012 Balance Sheet Cost of goods sold 2013 Income Statement 28

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

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 30

Cost of Goods Manufactured Calculation: Manufacturer Beginning work in process inventory + Direct materials added this year + Direct labor added this year + Manufacturing overhead allocated this year = Total manufacturing costs to account for - Ending work in process inventory = Cost of goods manufactured this year 31

Product and Period Costs Type of Company Inventoriable Product Costs Period Costs Service CompanyNone All costs along the value chain Merchandiser Purchases plus cost of freight, import duties, etc. All costs except total purchases ManufacturerDM, DL, MOH All costs except DM, DL, MOH Accounting Treatment Inventory on balance sheet until sold Expensed on I/S in period incurred 32

Manufacturing Companies’ Inventory Accounts Raw Materials Inventory Beginning inventory + Purchases & freight Less: Ending inventory → Materials used In work in process 33

Work in Process Inventory Beginning inventory + Materials used from raw materials + Direct labor added + Manufacturing O/H added Less: Ending inventory Cost of goods Manufactured and sent to finished goods Manufacturing Companies’ Inventory Accounts 34

Finished Goods Inventory Beginning inventory + Cost of goods manufactured Less: Ending inventory Cost of goods sold Income Statement Manufacturing Companies’ Inventory Accounts 35

Balance Sheet Differences Type of CompanyInventory Accounts Service CompanyNone MerchandiserMerchandise Inventory Manufacturer Raw materials, work in process, and finished goods inventory 36

Controllable and Uncontrollable Costs  Controllable – management can influence or change cost  Uncontrollable – management cannot change or influence cost in the short-run 37

Relevant and Irrelevant Costs  Relevant – costs that differ between alternatives  Differential costs  Irrelevant – costs that do not differ  Sunk costs 38

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 39

Total Variable Costs Assume we pay 5% sales commissions on all sales. The total cost of sales commissions increase proportionately with increases in sales. y axis x axis 40

Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels 41

Total Cost  Total cost = Fixed costs + (Variable cost per unit x number of units)  Example Fixed costs = $20,000 Variable cost per unit = $50 per unit Estimated Number of units = 100 units Estimated Total Cost = $20,000 + ($50 x 100) = $25,000 42

Average Cost  Total cost ÷ number of units = Average cost  Example $25,000 = $250 average cost per unit 100 units Note: The average cost per unit is NOT appropriate for predicting total costs at different levels of output in future 43

Marginal Cost  Cost of making one more unit, one additional unit  Since total fixed costs will not change, marginal cost is same as the variable cost 44

A. Administrative costs B. Cost of shipping cars to dealers C. Salaries of engineers who update car design D. Cost of print ads and television commercials 1. Which is NOT an element of Toyota’s value chain? 45

A. Depreciation on plant and equipment B. Cost of vehicle engine C. Salary of engineer who rearranges plant layout D. Cost of customer hotline 2. For Toyota, which is a direct cost with respect to the Prius? 46

A. The salary of the restaurant manager B. The depreciation on the restaurant building C. The cost of the hamburger patty in the sandwich the customer ordered D. The cost of heating the restaurant 3. Which one of the following costs would be considered a direct cost of serving a particular customer at a McDonald’s restaurant? 47

A. Insurance on plant and equipment B. Depreciation on its North American corporate headquarters C. Plant property taxes D. Plant utilities 4. Which of the following is NOT part of Toyota’s manufacturing overhead? 48

A. Cost of goods manufactured B. Manufacturing overhead C. Cost of goods sold D. Work in proc ess 5. The 3 basic components of inventoriable product costs are direct materials, direct labor, and: 49

A. Differential costs B. Sunk costs C. Variable costs D. Qualitative factors 6. Which of the following is irrelevant to business decisions? 50

A.Total fixed costs increase as production volume increases B.Total fixed costs decrease as production volume decreases C.Total variable costs increase as production volume increases D.Total variable costs stay constant as production volume increases 7. Which of the following is TRUE? 51

Gator Co. Schedule of COGM Month Ended 6/30/12 Beg. WIP Inventory $27,000 Add: Direct Materials used: Beginning RM Inv $ x + Purchases of RM $56,000 =Available for use $80,000 - Ending RM Inv $(28,000) = Direct materials used $ x + Direct Labor + x + Manufacturing O/H + 43,000 = Total Manuf. costs incurred in June$174,000 = Ttl Manuf costs to accnt for (TMC June + BB) x Less: Ending WIP Inv. (21,000) = Cost of goods manufactured this period$ x 52

END OF SEGMENT Professor Debbie Garvin, JD; CPA – ACG2071