Fundamental Managerial Accounting Concepts Chapter 11 Fundamental Managerial Accounting Concepts

Chapter 11: Objectives Differentiate between financial and managerial accounting. Distinguish between product and period costs, direct and indirect costs, controllable and noncontrollable costs, and variable, fixed, and mixed costs. Discuss the different costing systems and valuation methods used by organizations. Calculate and use a predetermined overhead rate. Classify product costs as direct material, direct labor, and overhead. Record the flow of costs through the accounting system. Prepare a statement of cost of goods manufactured. Chapter 11

Financial or Managerial? External Users Rigid Rules Historical Perspective Aggregate Information Quantitative Information Monthly/Annually Internal Users Flexible Format Future Perspective Detailed Information Quantitative and Qualitative information As needed Chapter 11

Managerial Accounting Managerial Accounting is designed to: --provide information to internal parties for planning and controlling operations; and --estimate an organization's product or service cost. Chapter 11

Product or Period Cost? Product Costs relate to the items that generate organizational revenues : Inventory Direct Materials Direct Labor Factory Overhead (become part of COGS) Period costs relate to an organization's selling and administrative functions: Certain Salaries Insurance Freight Out Administrative Overhead (are expensed in period consumed) Chapter 11

Direct and Indirect Costs A direct cost is one that is clearly and easily traceable to, and a monetarily important part of, a specified cost object. An indirect cost is one that is not clearly and easily traceable, or is not a monetarily important part of, a specified cost object. Chapter 11

Controllable & Noncontrollable Costs Any cost that a manager can authorize or directly influence in terms of dollar size is a controllable cost. Chapter 11

Examples include: Direct Materials, Direct Labor, Some Overhead Variable Costs A variable cost changes in total in direct proportion to changes in activity. Total Variable Costs = Variable Cost per unit × Units of Activity Examples include: Direct Materials, Direct Labor, Some Overhead Chapter 11

Fixed Costs A fixed cost remains constant in total with changes in activity, within a Relevant Range. Examples include: factory depreciation, insurance, property taxes. Mixed costs have both a fixed and variable component. Total Costs =( Variable Cost per unit × Units of Activity )+ Fixed Chapter 11

Manufacturing Costs Direct Materials: any readily clearly identifiable and conveniently traceable item that becomes a part of a manufactured product; the cost of a direct material must be monetarily significant to total product cost. Direct Labor: the people who manufacture company products. Overhead: any cost incurred in the manufacturing area that cannot or is not directly traced a product. Overhead consists of indirect labor, indirect materials, and other indirect costs that cannot be associated with a particular product. Chapter 11

Inventory Costing Systems Manufacturers that are producing goods in relatively small quantities, often to customer specifications, use a job order costing system. Service companies will generally use a job order costing system. Manufacturers that produce mass quantities of similar goods (such as breakfast cereals, gasoline, or dog food) use a process costing system to accumulate costs. Because the goods are all the same and may flow through many production departments, costs are accumulated by batches of goods . Chapter 11

Inventory Valuation Methods In an actual cost system, the actual costs of materials, labor, and overhead are used to compute product cost. In a normal cost system, the actual costs of materials and labor as well as an estimated cost for overhead are used to compute product cost. In a standard cost system, estimated "norms" for materials, labor, and overhead are used to compute product costs. Chapter 11

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Conclusions There are significant differences between managerial and financial accounting. Costs may take many forms – product, period, direct, indirect, controllable, noncontrollable, fixed, variable, and mixed. Job order and process costing systems are used to accumulate costs. There are actual, normal, and standard costing systems. Chapter 11