1. Overview of Managerial Accounting

2. Environment of Accounting
Managerial reports
Managerial decisions
Direct cash flow
Tax return
Operations of the business entity
Financial statements
Capital market resource allocation
GAAP
Audit
Contractual payoffs 11

3. Accounting Systems Financial accounting systems
For external users (investors, creditors)
Comparability/reliability important
Rules (GAAP, IFRS), imposed externally
Managerial accounting systems
For internal users (managers)
Guided by economic principles
Not constrained by rules

4. Agenda Brief Introduction to the Course
Fundamentals of Cost Accounting
Ross Railroad Company
Basics of overhead cost allocation

5. Resource Costs vs. Product Costs
Costs arise from resources:
Labor, buildings, energy, machinery, raw material, etc.
Management often requires an estimate of product costs:
Pricing, investments, outsourcing, product mix decisions
Estimating product costs requires mapping of resources to products.

6. Dedicated vs. Shared Resources
Resources dedicated to product line A
Resources dedicated to product line B
Resources shared across product lines
Product A
Product B 19

7. Allocating Costs of Shared Resources
Costs of shared resources are allocated to the different products using allocation bases 19

8. Example – Overhead Cost Allocation
Ross Jewels has two product lines: A silver ring (“Zephyr”) and a gold necklace (“Kate”). Three types of resources are used in producing the jewelry:
Direct material (silver, gold)
Direct labor (skilled jewelry makers)
Overhead costs (supervisors, work space, tools, electricity)
“Zephyr”
“Kate”
Total
Direct material
$20,000
$60,000
$80,000
Direct labor
$50,000
$100,000
$150,000
Overhead costs
$300,000

9. Example – Overhead Cost Allocation
Overhead Allocation Rate =
Budgeted Overhead Costs
Budgeted Allocation Base
Let’s assume that Ross Jewelry allocates overhead costs based on direct labor costs:
Budgeted overhead cost
÷ Budgeted allocation base (Direct labor costs)
Overhead rate
$300,000
$150,000
200%

10. Example – Overhead Cost Allocation
What is the reported product cost of “Zephyr”?
Direct material
$20,000
Direct labor
$50,000
Allocated Overhead costs
200% of $50,000
$100,000
Total
$170,000

11. Example – Overhead Cost Allocation
Overhead Allocation Rate =
Budgeted Overhead Costs
Budgeted Allocation Base
Let’s assume that Ross Jewelry allocates overhead costs based on direct material costs:
Budgeted overhead cost
÷ Budgeted allocation base (Direct material)
Overhead rate
$300,000
$80,000
3.75

12. Example – Overhead Cost Allocation
What is the reported product cost of “Zephyr”?
Direct material
$20,000
Direct labor
$50,000
Allocated Overhead costs
3.75 X 20,000
$75,000
Total
$145,000

13. Management Accounting Systems
Variance Analysis
Cost Accounting Systems
Budgeting Systems
Transfer Pricing
Performance Measurement Systems