Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Managerial Accounting and the Business Environment Chapter One

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Work of Management Planning Controlling Directing and Motivating

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Directing and Motivating Directing and motivating involves managing day- to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Controlling The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Planning and Control Cycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin Exh. 1-1

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Comparison of Financial and Managerial Accounting Exh. 1-2

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Costs Terms, Concepts and Classifications Chapter Two

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin AN OVERVIEW OF COST TERMS Purpose of classificationCost classifications Preparing an income statement and balance sheet Product costs Direct materials Direct labor Manufacturing overhead Period costs (non manufacturing costs) Marketing and selling costs Administrative costs Predicting changes in cost due to changes in activity Variable costs Fixed costs Assigning costs Direct costs Indirect costs Making decisions Differential costs Sunk costs Opportunity costs

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin COST CLASSIFICATIONS IN MANUFACTURING COMPANIES

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all marketing or selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Conversion costs are costs incurred to convert the direct material into a finished product. Product Cost Flows

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Product Cost Flows All manufacturing costs incurred during the period are added to the beginning balance of work in process.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Product Cost Flows

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material PurchasesRaw Materials

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin AN OVERVIEW OF COST TERMS Purpose of classificationCost classifications Preparing an income statement and balance sheet Product costs Direct materials Direct labor Manufacturing overhead Period costs (non manufacturing costs) Marketing and selling costs Administrative costs Predicting changes in cost due to changes in activity Variable costs Fixed costs Assigning costs Direct costs Indirect costs Making decisions Differential costs Sunk costs Opportunity costs

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Classifications for Predicting Cost Behavior How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of activity within the relevant range.  Total variable costs change when activity changes.  Total fixed costs remain unchanged when activity changes.

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Variable Cost Minutes Talked Total Long Distance Telephone Bill Minutes Talked Per Minute Telephone Charge TOTAL PER UNIT

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Fixed Cost Number of units sold Monthly Rent Expense Number of Local Calls Monthly Rent Expense per Units sold TOTAL PER UNIT

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin AN OVERVIEW OF COST TERMS Purpose of classificationCost classifications Preparing an income statement and balance sheet Product costs Direct materials Direct labor Manufacturing overhead Period costs (non manufacturing costs) Marketing and selling costs Administrative costs Predicting changes in cost due to changes in activity Variable costs Fixed costs Assigning costs Direct costs Indirect costs Making decisions Differential costs Sunk costs Opportunity costs

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Assigning Costs to Cost Objects Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin AN OVERVIEW OF COST TERMS Purpose of classificationCost classifications Preparing an income statement and balance sheet Product costs Direct materials Direct labor Manufacturing overhead Period costs (non manufacturing costs) Marketing and selling costs Administrative costs Predicting changes in cost due to changes in activity Variable costs Fixed costs Assigning costs Direct costs Indirect costs Making decisions Differential costs Sunk costs Opportunity costs