Managerial Accounting and Cost Concepts

1-2

Outline

§ The work of management and the need for MA information

§ Financial Accounting vs MA
§ Cost classification
1-3

Work of Management

Planning
Directing &
Motivating

Controlling
1-4

Comparison of Financial and Managerial Accounting

Financial Accounting Managerial Accounting
1. Users

2. Time focus

3. Verifiability
versus relevance
4. Precision versus
timeliness

5. Subject

6. GAAP

7. Requirement
1-5

GENERAL COST CLASSIFICATION

• Manufacturing vs nonmanufacturing costs

• Product cost vs period costs
• Prime Cost and Conversion Cost
• Assign cost to cost subjects
• For making decision
• For predicting cost behavior
1-6

Classifications of manufacturing Costs

• Direct material cost: Raw materials that become an integral part of the product
and that can be conveniently traced directly to it.
• Direct labor cost: Those labor costs that can be easily …….. to individual units of
product.
• Manufacturing overhead cost: all manufacturing costs ……… direct material and
direct labor
1-7

Classifications of Nonmanufacturing Costs

Selling Costs Administrative Costs

Costs necessary to get the order All executive, organizational, and

and deliver the product. clerical costs.
1-8

Product Costs Versus Period Costs

Product costs include direct Period costs are not included in
materials, direct labor, and product costs. They are expensed on
manufacturing overhead. the ……………….

Cost of Expense
Inventory Goods Sold

Sale

Income
Balance Income Statement
Sheet Statement
1-9

Product Costs Versus Period Costs

Income
Balance Sheet
Statement
Costs Inventories
Expenses

Direct Material
Revenue
Direct Labor Work in
Process Cost of
Manufacturing Goods
Overhead Sold
Finished
Goods
Selling and
Administrative

Profit/loss
1-10

Prime Cost and Conversion Cost

Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
1-11

Assigning Costs to Cost Objects

Direct costs Indirect costs
• Costs that can be • Costs that cannot be easily and
easily and conveniently traced to a conveniently traced to a unit of
unit of product or other cost product or other cost object.
object.
• Example:
• Examples:
1-12

Cost Classifications for Decision Making

Every decision involves a choice between at least …………...

Only those costs and benefits that differ

between alternatives are relevant to the
decision. All other costs and benefits can
and should be ignored.
1-13

Differential Costs and Revenues

Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your hometown. You have a job
offer in a neighboring city that pays $2,000 per month. The commuting cost to the city
is $300 per month.

Differential revenue is: Differential cost is:

Net Differential Benefit is:

1-14

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

Example: If you were

not attending college,
you could be earning
24.0000.000 per year.
Your opportunity cost
of attending college for one year is ………..
1-15

Sunk Costs
Cannot be changed by any decision. They are not differential costs and should be
ignored when making decisions.

Example: You bought an hand phone that cost 2.000.000 two years ago. The
2.000.000 cost is sunk because whether you use it, trade it, or sell it, you
cannot change the 2.000.000 cost.
1-16

Prepare an income statement including calculation of the cost

of goods sold.
1-17

The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods
sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:

Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $236,250
1-18

Inventory Flows

Withdrawals
Beginning Additions Ending +
+ = from
balance to inventory balance
inventory
1-19

Cost Classifications for Predicting Cost Behavior

How a cost will react to changes in the level of

business activity.
v variable cost
v fixed cost
v mixed cost
5-20

True Variable Cost Example

A variable cost is a cost whose total dollar amount varies in direct proportion to
changes in the activity level (units produced, units sold, hours worked, machine
hours, kms driven)

Y = ax

Y: total variable cost

a: variable cost per unit
x: activity level
x
5-21

Extent of Variable Costs

The proportion of variable costs differs across organizations. For example . . .

A public utility with

large investments in A manufacturing company
equipment will tend will often have many
to have fewer variable costs.
variable costs.

A merchandising company
A service company
usually will have a high
will normally have a high
proportion of variable costs
proportion of variable costs.
like cost of sales.
5-22

Examples of Variable Costs

1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labor, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs, and
clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
5-23

True Variable Cost

Direct materials is a true or proportionately variable cost because the amount used
during a period will vary in direct proportion to the level of production activity.
Cost

Volume
5-24

Step-Variable Costs
A resource that is obtainable only in large chunks (such as maintenance workers) and
whose costs increase or decrease only in response to fairly wide changes in activity.

Ex: fee for money transfer

Cost

- from 3m to 5m: 57.200đ

- from 5m to 10m: 66.000đ
- from 10m to 15m: 72.600đ

Volume
5-25

Step-Variable Costs
Small changes in the amount transferred are not likely to have any effect on the fee

Only fairly wide changes in the activity

level will cause a change in the number
of maintenance workers employed.
Cost

Volume
5-26

The Linearity Assumption and the Relevant Range

Economist’s A straight line

Curvilinear Cost closely
Function approximates a
curvilinear variable
Relevant cost line within the
Range relevant range.
Total
Cost

Accountant’s Straight-Line
Approximation (constant unit variable
cost)

Activity
5-27

Total Fixed Cost

A fixed cost is a cost whose total dollar amount remains constant as the activity level
changes.

Y = b

Y: total fixed cost

x
5-28

Fixed Cost Per Unit Example

Average fixed costs per unit decrease as the activity level increases.

x
5-29

Fixed Costs and Relevant Range

The relevant range of activity for a fixed cost is the range of activity over which the
graph of the cost is flat.

Example: Office space is available at a rental

rate of 30.000.000 per year in increments of
1.000m2. As the business grows, more space is
rented, increasing the total cost.
5-30

Fixed Costs and Relevant Range

90
Total cost doesn’t change
Relevant for a wide range of activity,
Rent Cost

60
Range and then jumps to a new
higher cost for the next
30 higher range of activity.

0
0 1,000 2,000 3,000
Rented Area (m2)
5-31

Types of Fixed Costs

Committed Discretionary
Long-term, cannot be significantly May be altered in the short-term
reduced in the short-term. by current managerial decisions

Examples Examples
Depreciation on Buildings Advertising and Research
and Equipment and Real and Development
Estate Taxes
5-32

The Trend Toward Fixed Costs

The trend in many industries is toward greater fixed costs relative to
variable costs.

As machines take over Knowledge workers

many mundane tasks tend to be salaried,
previously performed highly-trained, and
by humans, difficult to replace. The
“knowledge workers” cost to compensate
are demanded for these valued employees
their minds rather is relatively fixed
than their muscles. rather than variable.
5-33

Is Labor a Variable or a Fixed Cost?

The behavior of wage and salary costs can differ across countries, depending on
……………………………………

In France, Germany, China, and Japan,

management has little flexibility in adjusting
the size of the labor force.
Labor costs are more fixed in nature.

Most companies in the United States continue

to view direct labor as a variable cost.
5-34

Fixed Costs and Relevant Range

How does this type of fixed cost

differ from a step-variable cost?
5-35

Summary of variable and fixed cost behavior

Cost In total Per unit

Variable

Fixed
5-36

Mixed Costs
A mixed cost has both fixed and variable
components.

Y
Total Cost

Variable
Cost
X Fixed Cost
Activity
5-37

Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX

Where: Y = the total mixed cost

a = the total fixed cost (the
Total Cost

Y vertical intercept of the line)

b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity

Variable
Cost
X Fixed Cost
Activity
5-38

Mixed Costs Example

If your fixed monthly home phone charge is

30.000 plus 150/minute. This month, your call
minute is 100. The total amount of your bill is:
 For example: Maintenance cost of one freight
company of previous year as following:
Month Cost (1.000 đ) distance (km) Month Cost (1.000 đ) distance (km)

1 410 2.000 7 500 4.200

2 375 1.500 8 460 3.000
3 430 2.500 9 470 3.500
4 450 3.200 10 435 2.600
5 495 4.000 11 480 3.700
6 490 3.800 12 570 5.400
5-40

Learning Objective

Prepare an income statement

using the contribution format.
5-41

The Contribution Format Income Statement

Let’s put our knowledge
of cost behavior to work
by preparing a
contribution format
income statement.
5-42

The Contribution Format

Total Unit
Sales Revenue $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net operating income $ 10,000

The contribution margin format emphasizes cost behavior, by separating

costs into fixed and variable categories. Contribution margin covers fixed
costs and provides for income.
5-43

The Contribution Format

Used primarily for Used primarily by

external reporting. management.
 Appendix 5A
Variable Costing
5-45

Learning Objective

Explain how variable costing differs from absorption costing and

compute unit product costs under each method.
5-46

Overview of Absorption and Variable Costing

Absorption Variable
Costing Costing
Direct Materials
Product
Product Direct Labor
Costs
Costs Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Period
Period Variable Selling and Administrative Expenses
Costs
Costs Fixed Selling and Administrative Expenses
5-47

Unit Cost Computations

Harvey Company produces a single product with the following information
available:
5-48

Unit Cost Computations

Unit product cost is determined as follows:

Selling and administrative expenses are always treated as period expenses and
deducted from revenue as incurred.
5-49

Learning Objective

Prepare income statements using both variable and absorption costing.

5-50

Income Comparison of
Absorption and Variable Costing
Let’s assume the following additional information for Harvey Company.
• 20,000 units were sold during the year at a price of $30 each.
• There is no beginning inventory.

Now, let’s compute net operating income using both

absorption and variable costing.
5-51

Absorption Costing
5-52

Variable Costing
Variable Costing
Sales
Less variable expenses:
Beginning inventory
Add COGM
Goods available for sale -
Less ending inventory
Variable cost of goods sold -
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses -
Net operating income
5-53

Variable Costing
Variable
manufacturing Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
costs only.
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000 All fixed
Goods available for sale 250,000 manufacturing
Less ending inventory (5,000 × $10) 50,000
Variable cost of goods sold 200,000 overhead is
Variable selling & administrative expensed.
expenses (20,000 × $3) 60,000 260,000
Contribution margin 340,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net operating income $ 90,000
5-54

Reconcile variable costing and absorption costing

net operating incomes

Absorption costing net operating income

Add: Fixed manufacturing overhead costs of beginning inventory (released from
inventory)
Deduct: Fixed mfg. overhead costs of ending inventory (deferred in inventory )
= Variable costing net operating income
5-55

Extended Comparison of Income Data

Here is information about the operation
of Harvey Company for the second year.
5-56

Unit Cost Computations

Since there was no change in the variable costs

per unit, total fixed costs, or the number of
units produced, the unit costs remain unchanged.
5-57

Absorption Costing
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 × $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale 480,000
Less ending inventory - 480,000
Gross margin 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net operating income $ 230,000

These are the 25,000 units

produced in the current period.
5-58

Variable
Variable Costing
manufacturing
costs only.

All fixed
manufacturing
overhead is
expensed.
5-59

Learning Objective

Reconcile variable costing and absorption costing net operating

incomes and explain why the two amounts differ.
5-60

Comparing Absorption and

Variable Costing: Year 1
Let’s compare the methods.
5-61

Comparing Absorption and

Variable Costing: Year 1
We can reconcile the difference between absorption
and variable net operating income as follows:

Variable costing net operating income $ 90.000

Add: Fixed mfg. overhead costs
deferred in inventory
(5,000 units × $6 per unit) 30.000
Absorption costing net operating income $ 120.000

Fixed mfg. overhead $150,000

= = $6.00 per unit
Units produced 25,000 units
5-62

Comparing Absorption and

Variable Costing: Year 2
We can reconcile the difference between absorption
and variable net operating income as follows:

Variable costing net operating income $ 260.000

Deduct: Fixed manufacturing overhead
costs released from inventory
(5,000 units × $6 per unit) 30.000
Absorption costing net operating income $ 230.000

Fixed mfg. overhead $150,000

= = $6.00 per unit
Units produced 25,000 units
5-63

Comparing Absorption and

Variable Costing: Years 1 and 2
5-64

Summary of Key Insights

NOI = net operating income