Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Building Blocks of Managerial Accounting Chapter 2 1

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 1 Distinguish among service, merchandising, and manufacturing companies 2

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Three types of companies Service Merchandisers Manufacturers 3

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Service Companies Provide a service only No inventory Examples – Accountants – Banks – Doctors – Lawyers 4

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Merchandisers Resell products purchased from suppliers One inventory account Examples – Amazon.com – J. C. Penney – Sears Retailers vs. Wholesalers 5

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturers Use labor and other inputs to convert raw materials into finished products Examples – Crayola Crayons – Dell Computers – Craftsman Tools 3 inventory accounts 6

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturers 3 inventory accounts – Raw materials – Work in process – Finished goods 7

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 2 Describe the value chain and its elements 8

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Value Chain Activities that add value to products and services and cost money. R&D Production/ Purchases Marketing DesignDistribution Customer Service 9

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to E2-16A 10

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A Research on selling satellite radio service Purchases of merchandise Rearranging store layout 11

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A Research on selling satellite radio serviceR & D Purchases of merchandise Rearranging store layout 12

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A Research on selling satellite radio serviceR & D Purchases of merchandisePurchases Rearranging store layout 13

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A Research on selling satellite radio serviceR & D Purchases of merchandisePurchases Rearranging store layoutDesign 14

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Newspaper advertisements Deprec. expense on delivery trucks Payment to consultant for advice on location of new store 15

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Newspaper advertisementsMarketing Deprec. expense on delivery trucks Payment to consultant for advice on location of new store 16

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Newspaper advertisementsMarketing Deprec. expense on delivery trucksDistribution Payment to consultant for advice on location of new store 17

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-17A (cont.) Newspaper advertisementsMarketing Deprec. expense on delivery trucksDistribution Payment to consultant for advice on location of new storeR & D 18

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Freight-in Salespersons’ salaries Customer complaint department 19

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Freight-inPurchases Salespersons’ salaries Customer complaint department 20

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Freight-inPurchases Salespersons’ salariesMarketing Customer complaint department 21

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-16A (cont.) Freight-inPurchases Salespersons’ salariesMarketing Customer complaint department Customer service 22

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 3 Distinguish between direct and indirect costs 23

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Cost Object Anything for which managers want a separate measurement of cost – Direct cost – Indirect cost 24

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S2-4 25

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. a.The wages of store employees b.The cost of operating the corporate payroll department c.The cost of carpet steamers offered for rent d.The cost of gas and oil sold at the store S Direct Indirect Direct

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S2-4 (cont.) e.Store utilities f.The CEO’s salary g.The cost of chainsaws offered for rent h.The cost of national advertising 27 Indirect Direct Indirect

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 4 Identify the inventoriable product costs and period costs of merchandising and manufacturing firms 28

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Two definitions of product cost Total costs – used internally only (will see this in later chapters) Inventoriable product costs – used for external reporting 29

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. R&D Design Marketing Distribution Customer Service Production/ Purchases Inventoriable Product Costs Inventoriable product costs 30

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Period Costs: All costs incurred in the other stages of the value chain Period Costs MarketingDistribution Customer Service R&DDesign 31

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Inventoriable Product Costs -- Merchandiser + Purchase price from suppliers + Cost to get ready for sale + Freight-in + Import duties or tariffs 32

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Inventoriable Product Costs -- Manufacturer Direct materials Direct labor Manufacturing overhead Direct Costs Indirect Costs 33

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead Indirect costs related to manufacturing that are not direct materials or direct labor – Indirect materials – Indirect labor – Other indirect manufacturing overhead 34

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S2-7 35

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 1.Company president’s annual bonus 2.Plastic gallon containers in which milk is packaged 3.Depreciation on marketing department’s computers 4.Wages and salaries paid to machine operators at dairy processing plant S2-7 Period Product, DM Product, DL 36

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 5.Research and Development on improving milk pasteurization process 6. Cost of milk purchased from dairy farmers Product, DM 7.Lubricants used in running bottling machines 8.Depreciation on refrigerated trucks used to collect raw milk from dairy farms S2-7 (cont.) Product,MOH Period Product,MOH 37

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 9.Property tax on dairy processing plant 10. Television advertisements for DairyPlains’ products 11.Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores S2-7 (cont.) Period Product,MOH Period 38

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Prime and Conversion Costs Manufacturing Overhead Direct Materials Prime Costs Direct Labor Conversion Costs 39

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Direct and indirect labor costs include Salaries and wages Fringe benefits Payroll taxes 40

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 5 Prepare the financial statements for service, merchandising and manufacturing companies 41

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Income Statement – Service Company Simplest income statement All costs are period costs Service Revenues - Operating expenses Operating income 42

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 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 43

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S2-9 44

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S Cost of Goods Sold Computation Beginninginventory $ 4,200 Purchases$42,000 Importduties1,100 -Freightin3,60046,700 Costof goodsavailfor sale50,900 Endinginventory(5,400) Cost of goods sold$45,500

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Income Statement – Merchandiser + Sales - Cost of goods sold = Gross profit - Operating expenses = Operating income 46

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S Salon Secrets Income Statement Sales revenue$39,330,000 Cost of goods sold: Beginning inventory$ 3,350,000 Purchases23,975,000 Costofgoods avail. 27,325,000 Ending inventory(4,315,000) Cost of goods sold(23,010,000) Gross profit16,290,000 Operating expenses(6,150,000) Operating income $ 10,140,000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Product costs 2010 Balance Sheet 2010 Income Statement 2011 Income Statement Cost of goods sold Inventory Inventory sold in 2010 Inventory sold in 2011 Product costs 49

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 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 50

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. How to calculate Beginning Inventory + Net Purchases = Cost of Goods Sold + Ending Inventory 51

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 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 52

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to E2-25A 53

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-25A (COGM) 54 Beginning work in process inventory$ 36,000 Add:Direct materials used: Beginningraw materials inventory$ 29,000 Purchasesof direct materials73,000 Availablefor use102,000 Endingraw materials inventory(31,000) Direct materials used$71,000 Direct labor89,000 Manufacturing overhead: Indirect labor$ 42,000 Insurance on plant 10,500 Deprec-plant bldg & equip13,000 Repairs andmtnce–plant4,00069,500 Total manufacturing costs incurred229,500 Total manufacturing costs to acct for265,500 Less: Ending work in process inventory(30,000) Cost of goods manufactured $235,500

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-25A (cont.) 55 *From schedule of cost of goods manufactured. Quality Aquatic Company Schedule of Cost of Goods Sold Beginning finished goods inventory$ 22,000 Cost of goods manufactured* 235,500 Cost of goods available for sale257,500 Ending finished goods inventory (28,000) Cost of goods sold$229,500

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Income Statement – Manufacturer + Sales - Cost of goods sold = Gross profit - Operating expenses = Operating income 56

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to E2-26A 57

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E2-26A 58 Quality Aquatic Company Income Statement For Last Year Sales revenue (33,000 × $14)$462,000 Cost of goods sold229,500 Gross profit232,500 Operating expenses: Marketingexpenses$ 83,000 General and administrative expenses26,500109,500 Operating income$ 123,000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 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 59

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S Allterrain Computation of Direct Materials Used Direct materials used: Beginningraw materials inventory $ 3,900 Purchases of direct materials$15,600 Importduties 900 Freight-in60017,100 Directmaterials available for use21,000 Endingraw materials inventory(2,000) Direct materials used$19,000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Product and Period Costs 62 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 Immediately expense

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Companies’ Inventory Accounts 63 Raw Materials Inventory + Beginning inventory + Purchases & freight = Ending inventory - Materials used in work in process

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Companies’ Inventory Accounts 64 Work in Process Inventory + Beginning inventory + Matls used from raw matls = Ending inventory - Cost of goods manufactured and sent to finished goods + Direct Labor + Manufacturing overhead

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Companies’ Inventory Accounts 65 Finished Goods Inventory + Beginning inventory + Cost of goods manufactured = Ending inventory - Cost of goods sold

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Balance Sheet Differences 66 Type of CompanyInventory Accounts Service CompanyNone MerchandiserMerchandise Inventory Manufacturer Raw materials, work in process, and finished goods inventory

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 6 Describe costs that are relevant and irrelevant for decision making 67

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Controllable and Uncontrollable Costs 68

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Relevant and Irrelevant Costs 69

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 7 Classify costs as fixed or variable and calculate total and average costs at different volumes 70

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Cost Behavior 71

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Total Variable Costs Assume we pay 5% sales commissions on all sales. The cost of sales commissions increases proportionately with increases in sales. 72

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels 73

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Total Cost Total cost = Fixed costs + (Variable cost per unit x number of units) 74 Example: Fixed costs = $20,000 Variable cost per unit = $50 per unit Number of units = 100 Total Cost = $20,000 + ($50 x 100) = $25,000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Average Cost Total cost ÷ number of units = Average cost The average cost per unit is NOT appropriate for predicting total costs at different levels of output. 75 Example: $25,000 = $250 per unit 100 units

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Marginal Cost Cost of making one more unit 76

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. End of Chapter 2 77