cost accounting 1 for student Uitm

1. Introduction to
Managerial Accounting
and Cost Concepts
MAF 220 – COST
ACCOUNTING I

2. 2
Management Accounting
Relates to the provision of appropriate
information for decision making, planning,
control and performance evaluation.
What is Management Accounting?

3. 3
Differences Between Financial and
Managerial Accounting
Financial Managerial
Accounting Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. Requirements Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format

4. 4
Planning and Controlling
It is the purposeful choice from among
a set of alternative courses of action
designed to achieve some objective.
What is decision making?
This is the core of the management process.

5. 5
Work of Management
Planning
Controlling
Directing and
Motivating

6. 6
Planning and Control Cycle
Formulating Long-and
Short-Term Plans
(Planning)
Measuring
Performance
(Controlling)
Comparing Actual
to
Planned Performance
(Controlling)
Implementing
the Plans
(Directing and
Motivating)
Begin
Decision
Making

7. 7
Planning and Controlling
The Management Process Internal Accounting System
Planning
•Increase
Productivity
Controlling
•Actions
•Evaluations
Correct
ofPlansan
Budgets,
Special Reports
Financial
Accounting
System
Performance
Reports
Customer
surveys
Competitor
analysis
Advertising
impact
New items
report

8. 8
Role of Budgets
A budget is a quantitative expression of a
plan of action and is an aid to
coordinating and implementing the plan.
Budgets are the chief devices for
compelling and disciplining management
planning.

9. 9
Role of
Performance Reports
Performance reports formalize controls and
provide feedback by comparing results with
plans and by highlighting variances.
Variances are deviations from the plan.

10. 10
Performance Report
Budgeted Actual
Variance
Amount Amount Amount
Revenues 25,000 19,000 6,000 U
Expenses 20,000 15,000 5,000 F
Net Income 5,000 4,000 1,000 U
F = Favorable
U= Unfavorable

11. 11
Cost and Cost Terminology
Cost is a resource sacrificed or forgone to achieve
a specific objective.
An actual cost is the cost incurred (a historical cost)
as distinguished from budgeted costs.
A cost object is anything for which a separate
measurement of costs is desired.

12. 12
Cost and Cost Terminology
Cost
Accumulation
Cost Object
Cost Object
Cost Object
Cost
Assignment
Tracing
Allocating

13. 13
Direct Costs and Indirect Costs
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

14. 14
Direct and Indirect Costs
Direct Costs
Example: Paper on which
Sports Illustrated magazine
is printed
Indirect Costs
Example: Lease cost for
Time-Warner building
housing the senior editors
of its magazine
COST OBJECT
Example: Sports
Illustrated magazine
COST OBJECT
Example: Sports
Illustrated magazine

15. 15
Direct and Indirect Costs
Example
Direct Costs:
Maintenance Department $40,000
Personnel Department $20,600
Assembly Department $75,000
Finishing Department $55,000
Assume that Maintenance Department costs are
allocated equally among the production departments.
How much is allocated to each department?

16. 16
Direct and Indirect Costs Example
Allocated
$20,000
Maintenance
$40,000
Assembly
Direct Costs
$75,000
Finishing
Direct Costs
$55,000
$20,000

17. 17
MegaLoMart
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . .
Buy finished goods.
Sell finished goods.
Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.

18. 18
The ProductThe Product
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor
Manufacturing
Overhead
Manufacturing
Overhead
Manufacturing Costs

19. 19
Direct Materials
Those materials that become an integral part
of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobileExample: A radio installed in an automobile

20. 20
Direct Labor
Those labor costs that can be easily traced to
individual units of product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers

21. 21
Manufacturing costs that cannot be traced
directly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials
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.

22. 22
Classifications of Costs
Direct
Material
Direct
Material
Direct
Labor
Direct
Labor
Manufacturing
Overhead
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
Manufacturing costs are often
classified as follows:

23. 23
Nonmanufacturing Costs
Marketing and selling costs . . .
Costs necessary to get the order and deliver the
product.
Administrative costs . . .
All executive, organizational, and clerical costs.

24. 24
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.

25. 26
Product Costs Versus Period Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement

26. 27
Inventoriable Costs
Inventoriable costs (assets)…
become cost of goods sold…
after a sale takes place.

27. 28
Period Costs
Period costs are all costs in the income
statement other than cost of goods sold.
Period costs are recorded as expenses of the
accounting period in which they are incurred.

28. 29
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.

29. 31
Merchandiser
Current assets
Cash
Receivables
Prepaid expenses
Merchandise inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet

30. 32
Merchandiser
Current assets
Cash
Receivables
Prepaid expenses
Merchandise inventory
Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Partially complete
products – some
material, labor, or
overhead has been
added.
Completed products
awaiting sale.
Materials waiting to
be processed.

31. 33
The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory 14,200$
+ Purchases 234,150
Goods available
for sale 248,350$
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold 236,250$

32. 34
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 Purchases Raw Materials

33. 35
Manufacturing Company
Materials
Inventory
Finished
Goods
Inventory
Revenues
Cost of
Goods Sold
INCOME STATEMENT
Period
Costs
Inventoriable
Costs
BALANCE SHEET
Equals Operating Income
when
sales
occur
deduct
Equals Gross Margin
deduct
Work in
Process
Inventory

34. 36
Merchandising Company
INCOME STATEMENTBALANCE SHEET
when
sales
occur
Inventoriable
Costs
Merchandise
Purchases
Inventory
Revenues
deduct
Cost of
Goods Sold
Equals Gross Margin
deduct
Period
Costs
Equals Operating Income

35. 37
Many Meanings of Product Cost
A product cost is the sum of the costs
assigned to a product for a specific purpose.
1. Pricing and product emphasis decisions
2. Contracting with government agencies
3. Preparing financial statements for external
reporting under generally accepted
accounting principles

36. 38
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.

37. 40
Inventory Flows
Beginning
balance
$$
Beginning
balance
$$
Additions
$$$
Additions
$$$+ Available
$$$$$
Available
$$$$$=
Ending
balance
$$
Ending
balance
$$
=Withdrawals
$$$
Withdrawals
$$$
_Available
$$$$$
Available
$$$$$

38. 41
Quick Check 
If your bank balance at the beginning of the
month was $1,000, you deposited $100 during
the month, and withdrew $300 during the
month, what would be the balance at the end of
the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

39. 43
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
Product Costs - A Closer Look
Beginning inventory
is the inventory
carried over from
the prior period.
Beginning inventory
is the inventory
carried over from
the prior period.

40. 44
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
Product Costs - A Closer Look

41. 45
Quick Check 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

42. 47
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
Product Costs - A Closer Look

43. 48
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Product Costs - A Closer Look

44. 49
Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

45. 51
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory
= Raw materials used
in production
Product Costs - A Closer Look
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.

46. 52
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending work in
process inventory
= Cost of goods
manufactured.
Product Costs - A Closer Look
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.

47. 53
Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

48. 55
Product Costs - A Closer Look

49. 56
Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

50. 58
Cost Drivers
Output measures of resources and
activities are called cost drivers.
What are cost drivers?

51. 59
Cost Behavior
It is how costs are related to, and affected
by, the activities of an organization.
What is cost behavior?

52. 60
Production Example
Example costs:
Labor wages
Supervisory salaries
Maintenance wages
Depreciation
Energy
Example cost drivers:
Labor hours
No. of people supervised
No. of mechanic hours
No. of machine hours
Kilowatt hours
Cost Drivers

53. 61
Cost Drivers
How well the accountant does at identifying
the most appropriate cost drivers determines
how well managers understand cost behavior
and how well costs are controlled.

54. 62
Cost Classifications for Predicting
Cost Behavior
How a cost will react to
changes in the level of
business activity.
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
business activity.
Total variable costs
change when activity
changes.
Total fixed costs
remain unchanged
when activity changes.

55. 63
Comparison of
Variable and Fixed Costs
A variable cost is a cost that changes in direct
proportion to changes in the cost driver.
A fixed cost is not immediately affected
by changes in the cost driver.

56. 64
Rules of Thumb
Total fixed costs remain unchanged
regardless of changes in cost-driver activity.
Think of fixed costs as a total.

57. 65
Rules of Thumb
The per-unit variable cost remains
unchanged regardless of changes
in the cost-driver activity.
Think of variable costs on a per-unit basis.

58. 66
Relevant Range
This rule of thumb holds true only within
reasonable limits.
The relevant range is the limit of cost-
driver activity within which a specific
relationship between costs and the cost
driver is valid.

59. 67
FixedCosts
Volume in Units
$16,000 –
$12,000 –
$8,000 –
$4,000
0 500 1,000 1,500 2,000 2,500
–
–
–
Relevant Range
Relevant Range

60. 68
Total Variable Cost
Your total long distance telephone bill is
based on how many minutes you talk.
Minutes Talked
TotalLongDistance
TelephoneBill

61. 69
Variable Cost Per Unit
Minutes Talked
PerMinute
TelephoneCharge
The cost per long distance minute talked is
constant. For example, 10 cents per minute.

62. 70
Total Fixed Cost
Your monthly basic telephone bill probably
does not change when you make more local
calls.
Number of Local Calls
MonthlyBasic
TelephoneBill

63. 71
Fixed Cost Per Unit
Number of Local Calls
MonthlyBasicTelephone
BillperLocalCall
The average cost per local call decreases as
more local calls are made.

64. 72
Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

65. 73
Cost Behavior
Merchandisers
Cost of Goods Sold
Manufacturers
Direct Material, Direct
Labor, and Variable
Manufacturing Overhead
Merchandisers and
Manufacturers
Sales commissions and
shipping costs
Service Organizations
Supplies and travel
Examples of normally variable costs
Examples of normally fixed costs
Merchandisers, manufacturers, and
service organizations
Real estate taxes, Insurance, Sales salaries
Depreciation, Advertising

66. 74
The Activity Base
Machine
hours
Labor
hours
Miles
driven
A measure of the event
causing the incurrence of a
variable cost – a cost driver
Units
produced

67. 75
Examples
Advertising and
Research and
Development
Examples
Depreciation on
Buildings and
Equipment
Types of Fixed Costs
Fixed Costs
Discretionary
May be altered in the
short-term by current
managerial decisions
Committed
Long-term, cannot be
reduced in the short
term.

68. 76
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.

69. 78
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.

70. 80
Example: Office space
is available at a rental
rate of $30,000 per
year in increments of
1,000 square feet. As
the business grows
more space is rented,
increasing the total
cost.
Fixed Costs and Relevant Range
Continue

71. 81
RentCostin
ThousandsofDollars
0 1,000 2,000 3,000
Rented Area (Square Feet)
0
30
60
Fixed Costs and Relevant Range
90
Relevant
Range
Total cost doesn’t
change for a wide
range of activity,
and then jumps to a
new higher cost for
the next higher
range of activity.

72. 82
Quick Check 
Which of the following statements about cost
behavior are true?
a. Fixed costs per unit vary with the level of
activity.
b. Variable costs per unit are constant within
the relevant range.
c. Total fixed costs are constant within the
relevant range.
d. Total variable costs are constant within the
relevant range.

73. 84
Cost Behavior Patterns Example
Bicycles by the Sea buys a handlebar
at $52 for each of its bicycles.
What is the total handlebar cost when
1,000 bicycles are assembled?

74. 85
Cost Behavior Patterns Example
1,000 units × $52 = $52,000
What is the total handlebar cost
when 3,500 bicycles are assembled?
3,500 units × $52 = $182,000

75. 86
Cost Behavior Patterns Example
Bicycles by the Sea incurred $94,500 in
a given year for the leasing of its plant.
This is an example of fixed costs with
respect to the number of bicycles assembled.

76. 87
Cost Behavior Patterns Example
What is the leasing (fixed) cost per bicycle
when Bicycles assembles 1,000 bicycles?
$94,500 ÷ 1,000 = $94.50
What is the leasing (fixed) cost per bicycle
when Bicycles assembles 3,500 bicycles?
$94,500 ÷ 3,500 = $27

77. 88
Cost Drivers
The cost driver of variable costs is the level
of activity or volume whose change causes
the (variable) costs to change proportionately.
The number of bicycles assembled is a
cost driver of the cost of handlebars.

78. 89
Relevant Range Example
Assume that fixed (leasing) costs are $94,500
for a year and that they remain the same for a
certain volume range (1,000 to 5,000 bicycles).
1,000 to 5,000 bicycles is the relevant range.

79. 90
Relevant Range Example
0
20000
40000
60000
80000
100000
120000
0 1000 2000 3000 4000 5000 6000
Volume
FixedCosts
$94,500

80. 91
Relationships of Types of Costs
Direct
Indirect
Variable Fixed

81. 92
Interpret unit costs
cautiously.

82. 93
Total Costs and Unit Costs
Example
What is the unit cost (leasing and handlebars)
when Bicycles assembles 1,000 bicycles?
Total fixed cost $94,500
+ Total variable cost $52,000 = $146,500
$146,500 ÷ 1,000 = $146.50

83. 94
Total Costs and Unit Costs
Example
0
50000
100000
150000
200000
0 500 1000 1500
Volume
TotalCosts
$94,500
$94,500 + $52x
$146,500

84. 95
Use Unit Costs Cautiously
Assume that Bicycles management uses a
unit cost of $146.50 (leasing and wheels).
Management is budgeting costs for
different levels of production.
What is their budgeted cost for an
estimated production of 600 bicycles?
600 × $146.50 = $87,900

85. 96
Use Unit Costs Cautiously
What is their budgeted cost for an estimated
production of 3,500 bicycles?
3,500 × $146.50 = $512,750
What should the budgeted cost be for an
estimated production of 600 bicycles?

86. 97
Use Unit Costs Cautiously
Total fixed cost $ 94,500
Total variable cost ($52 × 600) 31,200
Total $125,700
$125,700 ÷ 600 = $209.50
Using a cost of $146.50 per unit would
underestimate actual total costs if output
is below 1,000 units.

87. 98
Use Unit Costs Cautiously
What should the budgeted cost be for an
estimated production of 3,500 bicycles?
Total fixed cost $ 94,500
Total variable cost (52 × 3,500) 182,000
Total $276,500
$276,500 ÷ 3,500 = $79.00

88. 99
Prime Costs
Direct
Materials
Direct
Labor
Prime
Costs+ =

89. 100
Conversion Costs
Direct
Labor
Manufacturing
Overhead+ =
Conversion
Costs
Indirect
Labor
Indirect
Materials Other

90. 101
Sunk Costs
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.

91. 102
Quick Check 
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.