Chapter 2
Chapter 2
Chapter 2
Session 1
Planning
Create
Strategic Directing and
Motivating
Plan
Implement
Plan Control
Measure
And
Evaluate
What is the difference between financial
and management accounting?
-External
-Internal
-Past
-Future
-Objectivity and
-Relevance
verifiability
-Timeliness
-IFRS
-No IFRS
-Mandatory
-Optional
-Summary of entire
-Detailed (segmented)
organization
Financial
Financialaccounting
accountingprepares
prepares Managerial
Managerialaccounting
accountingprepares
prepares
reports
reportsmost
mostfrequently
frequentlyused
usedbyby reports
reportsmost
mostfrequently
frequentlyused
usedbyby
decision
decisionmakers
makersexternal
externaltotothe
the decision
decisionmakers
makersinternal
internalto
tothe
the
organization.
organization. organization.
organization.
Cost
Costaccounting
accountingisisaa“method
“methodforformeasuring
measuringthe
thecost
costofofaaproject,
project,process,
process,or
or
thing”*.
thing”*.ItItincludes
includesboth
bothfinancial
financialand
andnonfinancial
nonfinancialinformation
informationand
andisisused
usedfor
for
both
bothfinancial
financialand
andmanagerial
managerialaccounting.
accounting.
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
Hyperstar
COST OBJECT
What are we trying to find cost of?
Period vs. Products Costs
Period costs: Costs are shown on the
income statement (i.e. they become
expenses) in the period in which they are
incurred.
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
Direct Materials
Those materials that become an integral part of the
product and that can be conveniently traced
directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labor
Those labor costs that can be easily traced to
individual units of product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Manufacturing costs that cannot be traced directly to
specific units produced.
Examples:
Examples: Indirect
Indirect labor
labor and
and indirect
indirect materials
materials
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead
Prime Conversion
Cost Cost
Nonmanufacturing/Period Costs
Product Cost DL
MOH
Admin
2. Factory air conditioning
costs…
DM
Product Cost DL
MOH
Admin
3. Factory equipment
maintenance costs…
DM
Product Cost DL
MOH
Admin
4. Training costs for new
administrative employees…
DM
Product Cost DL
MOH
Admin
5. The cost of the solder that is
used in assembling the audio
systems…
DM
Product Cost DL
MOH
Admin
6. The travel costs of the
company’s salespersons…
DM
Product Cost DL
MOH
Admin
7. Wages and salaries of
factory security personnel…
DM
Product Cost DL
MOH
Admin
8. The cost of air-conditioning
executive offices…
DM
Product Cost DL
MOH
Admin
9. Wages and salaries in the
department that handles
billing customers…
DM
Product Cost DL
MOH
Admin
10. Depreciation on the
equipment in the fitness room
used by factory workers…
DM
Product Cost DL
MOH
Admin
11. Telephone expenses
incurred by factory
management…
DM
Product Cost DL
MOH
Admin
12. The costs of shipping
completed audio systems to
customers…
DM
Product Cost DL
MOH
Admin
13. The wages of the workers
who assemble the audio
systems…
DM
Product Cost DL
MOH
Admin
14. The CEO’s salary…
DM
Product Cost DL
MOH
Admin
15. Health insurance premiums
for factory personnel…
DM
Product Cost DL
MOH
Admin
Direct and Indirect Costs
Direct costs Indirect costs
Costs that can be Costs that must be
easily and conveniently allocated in order to be
traced to a product or
assigned to a product or
department.
department.
Example: cost of wheels
in an automobile Example: salary of
assembly plant. design engineer in an
aircraft manufacturing firm
Fixed vs. Variable Costs
Minutes Talked
Variable Cost Per Unit
Telephone Charge
Per Minute
Minutes Talked
Cost Classifications for Predicting Cost
Behavior
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.
Which of the following costs would be variable with
respect to the number of cones sold at an ice cream
shop?