1. Managerial Accounting and Cost Concepts Chapter 02

2. 2-2 Public Creditors Tax authorities Investors Board of managements Board of managements Middle managers Bottom line managers Bottom line managers Employees Company Users of accounting information

3. 2-3 Managerial Accounting vs. Financial Accounting Managerial accounting provides information for managers inside an organization who direct and control its operations. Financial accounting provides information to stockholders, creditors and others who are outside the organization.

4. 2-4 Financial Accounting vs. Managerial Accounting

5. 2-5 Work of Management Planning Controlling Directing and Motivating

6. 2-6 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

7. 2-7 Functions Behaviors Traceability Relevance Cost classifications by:

8. 2-8 Cost classification by functions A. Manufacturing costs (Product costs). B. Non-manufacturing costs (period costs).

9. 2-9 The Product Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs

10. 2-10 Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile

11. 2-11 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

12. 2-12 Manufacturing Overhead Manufacturing costs that cannot be easily traced directly to specific units produced. Examples: Indirect materials and indirect labor Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

13. 2-13 Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost

14. 2-14 Nonmanufacturing Costs Selling Costs Costs necessary to secure the order and deliver the product. Administrative Costs All executive, organizational, and clerical costs.

15. 2-15 Quick Check Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks. B. Sales commissions. C. The cost of a flight recorder in a Boeing 767. D. The wages of a production shift supervisor.

16. 2-16 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

17. 2-17 Quick Check Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

18. 2-18 Selling and Administrative Period Costs Manufacturing Cost Flows 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

19. 2-19 Quick Check Which of the following transactions would immediately result in an expense? (There may be more than one correct answer.) A. Work in process is completed. B. Finished goods are sold. C. Raw materials are placed into production. D. Administrative salaries are accrued and paid.

20. 2-20 Example 1 AQUAS is a bottled water producer. It was established on Oct. 1, 2013. Clever Man – the company’s accountant is required to prepare an income statement to report on the first quarter performance. 20

21. 2-21 Cost Classifications by Behaviors

22. 2-22 Variable Cost Your total texting bill is based on how many texts you send. Number of Texts Sent Total Texting Bill

23. 2-23 Variable Cost Per Unit The cost per text sent is constant at 5 cents per text message. Number of Texts Sent Cost Per Text Sent

24. 2-24 Fixed Cost Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

25. 2-25 Fixed Cost Per Unit Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

26. 2-26 Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Examples Depreciation on Buildings and Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short-term by current managerial decisions Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Committed Long-term, cannot be significantly reduced in the short term.

27. 2-27 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)

28. 2-28 Mixed Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Total mixed cost

29. 2-29 Quick Check Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

30. 2-30 Quick Check Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.) A. The cost of renting the film. B. Royalties on ticket sales. C. Wage and salary costs of theater employees. D. The cost of cleaning up after the show.

31. 2-31 Income statement under contribution format

32. 2-32 Income statement under contribution format The contribution format focuses on the relationship between costs and activity level. Contribution margin will cover fixed costs and generate income.

33. 2-33 Cost classification by traceability Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples: direct material and direct labor Indirect costs Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

34. 2-34 Cost classification by relevance 1. Differential cost. 2. Sunk cost. 3. Opportunity cost.

35. 2-35 Differential cost In 2013, Honda Vietnam established Asimo robots used for assembling motobikes. Their costs are VND 2.1 billions and their estimated useful life is 6 years. There is a new Asimo version which is much better than the old ones: if Honda Vietnam uses the new version, the company will save 70% annual operating expenses. The new version’s price is VND 4 billions and its useful life is 5 years. The current robots’s disposal value is VND 1 billion. Honda Vietnam’s current annual operating expenses are VND900 millions. Should Honda Vietnam buy the new version? Costs and revenues that differ among alternatives.

36. 2-36 Sunk Costs Sunk costs inccured in the past and cannot be changed by any decision. They are not differential costs and should be ignored when making decisions.

37. 2-37 Opportunity Costs The potential benefit that is given up when one alternative is selected over another.

38. 2-38 Example 2 Ennerdale Ltd has been asked to quote a price for a one-off contract. The company's management accountant has asked for your advice on the relevant costs for the contract. The following information is available:

39. 2-39 Materials The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of £19,600. Since then the price per kilogram for material K has increased by 5%. The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material L would be sold for £11 per kg.

40. 2-40 Labour The contract requires 800 hours of skilled labour. Skilled labour is paid £9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P: £ per unit Selling price 100 Less Skilled labour38 Other variable costs22

41. 2-41 End of Chapter 02