1. 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 1-1 Exhibit 1-1

2. Comparison of Financial and Managerial Accounting 1-2 Exhibit 1-2

4. Manufacturing Cost Flows Selling and Administrative Period Costs Finished Goods Cost of Goods Sold Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material PurchasesRaw Materials

5. Summary of Cost Flow

6. End of Chapter 1 1-6

7. Chapter 2 Job-Order Costing

8. Job-Order Costing—An Overview Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Direct Materials Direct Labor 2-8

9. Job-Order Costing—An Overview Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead 2-9

10. Manufacturing Overhead Application POAR = $4.00 per DLH $640,000 160,000 direct labor hours (DLH) POAR = Estimated (Budgeted) total Manufacturing overhead cost Estimated (Budgeted) total allocation base POAR = Overhead Applied During the Period Applied Overhead = POAR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

11. Q1. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? A) $200. B) $350. C) $380. D) $730.

12. Q1. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? A) $200. B) $350. C) $380. D) $730.

13. Defining Under- and Overapplied Overhead Over/Under-applied overhead := The difference between the overhead cost applied to WIP and the actual overhead costs. Underapplied overhead : Actual > Applied Underapplied overhead : Actual > Applied Overapplied overhead: Actual < Applied Overapplied overhead: Actual < Applied 2-13

14. Disposition of Under- or Overapplied Overhead Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied Overhead applied to jobs $680,000 Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 2-14 ø

15. End of Chapter 2 2-15

16. Chapter 3 © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill /Irwin Systems Design: Activity- Based Costing

17. Activity-Based Costing (ABC) For each activity in isolation, this system works exactly like the job-order costing system described in Chapter 2. A POAR is computed for each activity (estimates) & then applied based on the actual amount of activity. A POAR is computed for each activity (estimates) & then applied based on the actual amount of activity.

18. Hierarchy of Activities

19. Activity rates are determined as = Estimated Total OH $ / Estimated Total Activity Activity rates are determined as = Estimated Total OH $ / Estimated Total Activity 3-19

20. Overhead is applied on the basis of actual activities during the year. Cost Flows in an ABC System

21. Note that the unit product cost of a CD unit decreased from $110 to $95.55.......... while the unit cost of a DVD unit increased from $150 to $207.80. ABC vs. Traditional Costing Comtek Example

22. When a company implements activity-based costing, overhead cost often shifts from high-volume to low- volume products with a higher unit product cost resulting for the low-volume products. Low-volume product Shifting of Overhead Cost

23. ABC vs. Traditional Costing The ABC system assigns $14.45 less overhead than the traditional system to each CD player.

24. ABC vs. Traditional Costing The ABC system assigns $57.80 more overhead than the traditional system to each DVD player.

25. End of Chapter 3 3-25

26. Chapter 4 Process Costing

27. Finished Goods Cost of Goods Sold Work in Process Direct Materials Direct Labor Manufacturing Overhead Flow of Materials, Labor, and Overhead Costs

28. Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead ProcessingDepartmentProcessingDepartment Costs are traced and applied to departments in a process cost system. Direct Materials Flow of Materials, Labor, and Overhead Costs

29. Work in Process Department B Work in Process Department A Direct Materials Direct Labor Applied Overhead Direct Materials Direct Labor Applied Overhead Transferred to Dept. B Transferred from Dept. A Assume Two Processing Departments: Partially Completed Units Transferred

30. Finished Goods Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Manufactured Transfer of Cost of Completed Units ( in T-Account form)

31. Equivalent Units of Production Equivalent units are the product of the number of partially completed units and the percentage of completion of those units. We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.

32. Two half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 complete units. + = 1 Equivalent Units – The Basic Idea

33. Learning Objective 2 Compute the equivalent units of production using the weighted-average method.

34. The weighted-average method... Makes no distinction between work done in prior or current periods. Blends together units and costs from prior and current periods. The weighted-average method... Makes no distinction between work done in prior or current periods. Blends together units and costs from prior and current periods. Characteristics of the Weighted Average Method

35. Direct labor costs may be small in comparison to other product costs in process costing systems. Direct labor costs may be small in comparison to other product costs in process costing systems. Direct Materials Type of Product Cost Dollar Amount Direct Labor Manufacturing Overhead Treatment of Direct Labor

36. Type of Product Cost Dollar Amount Conversion Direct labor and manufacturing overhead may be combined into one product cost called conversion. Direct Materials Treatment of Direct Labor Direct labor costs may be small in comparison to other product costs in process costing systems. Direct labor costs may be small in comparison to other product costs in process costing systems.

37. 1 st - identify the physical units completed and transferred out. 2 nd - identify the equivalent units of production in ending work in process with respect to materials (% Complete * Physical Units) and adding this to the units from step one. 3 rd - identify the equivalent units of production in ending Work in Process with respect to conversion (% Complete * Physical Units) and adding this to the units from step one. Weighted-Average – Equivalent Units Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in Work in Process Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in Work in Process

38. Weighted-Average Equivalent Units An Example

39. Cost per equivalent unit = Cost of beginning WIP Cost added during the period Equivalent units of production + Compute and Apply Costs

41. $124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00 Cost per equivalent unit = $21.00 + $15.00 = $36.00 Compute and Apply Costs

42. End of Chapter 4 3-42

43. Chapter 3 © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill /Irwin Cost Behavior: Analysis and Use Chapter 5

44. Types of Cost Behavior Patterns

46. Learning Objective LO3 To analyze a mixed cost using the high-low method.

47. Quick Check Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000

48. Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check

49. The Contribution Format Used primarily for external reporting. Used primarily by management.

50. Overview of Absorption and Variable Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs DEFINITIONS CHANGE!!!

51. Summary of Key Insights

52. End of Chapter 5 & End of Material For Midterm 1

53. Cost-Volume-Profit Relationships Using the Contribution Margin I/S Chapter 6

54. Key Assumptions of CVP Analysis  Selling price is constant.  Costs are linear.  In multi-product companies, the sales mix is constant.  In manufacturing companies, inventories do not change (units produced = units sold).

55. Contribution Margin Method The contribution margin method has two key equations. Fixed expenses Unit contribution margin = Break-even point in units sold Fixed expenses CM ratio = Break-even point in total sales dollars

56. The Contribution Margin Approach These methods can be used with target profit. Fixed expenses + Target profit Unit contribution margin = Unit sales to attain the target profit Fixed expenses + Target profit CM ratio = Sales dollars to attain the target profit

57. Margin of safety = Total sales - Break-even sales Operating Leverage = Contribution Margin / NOI

58. End of Chapter 6

59. Chapter 7 Profit Planning AKA …BUDGETING

60. The Master Budget: An Overview Sales budget Budgeted income statement Budgeted balance sheet Selling and administrative expense budget Ending inventory budget Production budget Cash budget Direct labor budge t Direct materials budget Manufacturing overhead budget Start

61. Budgets have “rules” that affect how each budget is calculated There are a few features unique to each budget – Labor: guaranteed hours, overtime, etc. – MOH: Total budgeted MOH, non-cash expenses, etc. – Cash: Cash on hand, Interest expense & borrowing, etc.

62. Expected Cash Collections All sales are on account. Royal’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full. All sales are on account. Royal’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full. 7-62

63. Expected Cash Collections 7-63

64. The Production Budget 7-64

65. The Cash Budget 7-65

66. End of Chapter 7 7-66

67. Chapter 8 Flexible Budgets and Performance Analysis 7-67

68. We want to explain the difference between the Budgeted and Actual Results – i.e., the Variances 8-68

69. We break the Total Variance up by inserting a Flexible budget. We end up with a Performance Report showing Activity and Revenue and Spending Variances 8-69

70. End of Chapter 8 8-70

71. Chapter 9 Standard Costs or “How to look at the Spending Variances from Ch 8” 8-71

72. In a standard costing system, inventories are recorded using standard prices and standard quantities. The differences between what is actually used and what is recorded at standard is found in the “Quantity” and “Price” variances. 8-72 Big Idea in Ch 9

73. Price and Quantity Variances: DM, DL, & VOH (AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity* × × × Actual Price Standard Price Standard Price * Standard Quantity allowed for Actual Production = (Std/unit * Units produced)

74. Inventories are recorded at standard cost. Variances are recorded as follows:  Favorable variances are credits, representing savings in production costs.  Unfavorable variances are debits, representing excess production costs. Variances closed out to cost of goods sold.  Favorable variances decrease cost of goods sold.  Unfavorable variances increase cost of goods sold. Inventories are recorded at standard cost. Variances are recorded as follows:  Favorable variances are credits, representing savings in production costs.  Unfavorable variances are debits, representing excess production costs. Variances closed out to cost of goods sold.  Favorable variances decrease cost of goods sold.  Unfavorable variances increase cost of goods sold. 9-74

75. Budget variance Fixed Overhead Budget Variance Actual Fixed Overhead Applied Fixed Overhead Budgeted Fixed Overhead Budget variance Budgeted fixed overhead Actual fixed overhead =– 9-75

76. Volume variance Fixed Overhead Volume Variance Volume variance Fixed overhead applied to work in process Budgeted fixed overhead =– Actual Fixed Overhead Applied Fixed Overhead Budgeted Fixed Overhead 9-76

77. Reconciling Overhead Variances and Underapplied or Overapplied Overhead In a standard cost system: Unfavorable OH variances are equivalent to underapplied overhead. Favorable OH variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for the period. 9-77

78. End of Chapter 9 & Midterm 2 Material 8-78

79. Responsibility Centers: Cost, Profit, and Investments Centers Responsibility Center Responsibility Center Cost Center Cost Center Profit Center Profit Center Investment Center Investment Center

80. Traceable costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. No computer division means... No computer division manager. Identifying Traceable Fixed Costs

81. Common costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. No computer division but... We still have a company president. Identifying Common Fixed Costs

82. ROI = Net operating income Average operating assets Margin = Net operating income Sales ROI = Margin  Turnover Return on Investment (ROI) Formula Turnover = Sales Average operating assets

83. There are three ways to increase ROI...  Increase Sales  Reduce Expenses  Reduce Assets Increasing ROI

84. Calculating Residual Income () This computation differs from ROI. ROI measures net operating income earned relative to the investment in average operating assets. Residual income measures net operating income earned less the minimum required return on average operating assets.

85. End of Chapter 10 8-85

86. Chapter 11 8-86

87. Cost Concepts for Decision Making A relevant cost is a cost that differs between alternatives. 1 2

88. An avoidable cost can be eliminated (in whole or in part) by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision and include:  Sunk costs.  Future costs that do not differ between the alternatives. An avoidable cost can be eliminated (in whole or in part) by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision and include:  Sunk costs.  Future costs that do not differ between the alternatives. Identifying Relevant Costs