18-1

Managerial
Chapter Accounting

18
Concepts and
Principles

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 18-2

Managerial
Managerial and
and Financial
Financial Accounting
Accounting
Managerial accounting Financial accounting
provides information provides information
for managers of an to stockholders,
organization who creditors and others
plan and control who are outside
its operations. the organization.

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 18-3

Planning
Planning and
and Control
Control
Planning Begin
BACK Formulating Long- and
FEED

Short-Term Plans

Controlling Implementing Plans

2. Evaluating Actual Directing
Performance versus and
Planned Performance Motivating

TORING
Controlling
1. Measuring Actual
Performance MONI
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-4

Nature
Nature of
of Managerial
Managerial Accounting
Accounting Exh.
18-2

Financial Accounting Managerial Accounting

1. Users Investors, creditors and Managers, employees and
other external users other internal users
2. Purpose of Making investment, credit Planning, decision
information and other decisions making and control
3. Flexibility Structured and often Relatively flexible
of practice controlled by IFRS (no IFRS)
4. Timeliness of Often available only Available quickly without
information after audit is complete need to wait for audit
5. Time dimension Historical information Many projections
with some predictions and estimates
6. Focus of Emphasis on Projects, processes and
information whole organization segments of an organization
7. Nature of Monetary Monetary and
information information nonmonetary information
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 18-5

Cost
Cost Accounting
Accounting Concepts
Concepts
Behavior
Traceability
Controllability
Relevance
Function
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 18-6

Classification
Classification by
by Behavior
Behavior

Cost behavior means

how a cost will react to
changes in the level of
business activity.
 Total fixed costs do
not change when
activity changes.
 Total variable costs
change in proportion
to activity changes.

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 18-7

Classification
Classification by
by Behavior
Behavior

Cost behavior means

how a cost will react to
Cost

changes in the level of

business activity.
Activity  Total fixed costs do
not change when
activity changes.
 Total variable costs
Cost

change in proportion
to activity changes.

Activity
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 18-8

Classification
Classification by
by Traceability
Traceability
Direct costs Indirect costs
 Costs incurred for the  Costs incurred for the
benefit of one specific benefit of more than
cost object. one cost object.
 Examples: material and  Example: maintenance
labor cost for a product. expenditures benefiting
two or more
departments.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-9

Classification
Classification by
by Relevance:
Relevance:
Opportunity
Opportunity Costs
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
$20,000 per year.
Your opportunity cost
of attending college
for one year is
$20,000.

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 18-10

Classification
Classification by
by Relevance:
Relevance:
Sunk
Sunk Costs
Costs
All costs incurred in the past that cannot be changed by
any decision made now or in the future.

Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost

$15,000 two years ago. The $15,000 cost is sunk
because whether you drive it, park it, trade it, or sell
it, you cannot change the $15,000 cost.

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 18-11

Classification
Classification by
by Function:
Function:
Product
Product Costs
Costs

Direct Direct Manufacturing

Labor Material Overhead

The
Product

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 18-12

Classification
Classification by
by Function:
Function:
Period
Period Costs
Costs

Period costs are expenses

not charged to the product.

Administrative Costs
Selling Costs
Nonmanufacturing costs
Costs incurred to obtain
of staff support and
customer orders and to
administrative functions –
deliver finished goods
accounting, data processing,
to customers –
personnel, research
advertising and shipping.
and development.

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 18-13

Period
Period and
and Product
Product Costs
Costs
in
in Financial
Financial Statements
Statements Exh.
18-8

2005 Income
Statement
Period Costs Operating
(Expenses) Expenses

2005 Costs Cost of

Incurred Goods Sold
Inventory
Sold in 2005
Product Costs 2005 Balance 2006 Income
(Inventory) Sheet Inventory Statement
Raw Materials
Inventory Not Cost of
Goods in Process
Sold in 2005 Goods Sold
Finished Goods
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 18-14

Potential
Potential Multiple
Multiple Cost
Cost Classifications
Classifications Exh.
18-9

Cost
CostItem
Item Behavior
Behavior Traceability
Traceability Function
Function
Material
Material Variable
Variable Direct
Direct Product
Product
Assembly
AssemblyWages
Wages Variable
Variable Direct
Direct Product
Product
Advertising
Advertising Fixed
Fixed Indirect
Indirect Period
Period
Production
ProductionManager's
Manager'sSalary
Salary Fixed
Fixed Indirect
Indirect Product
Product
Office
Office Depreciation
Depreciation Fixed
Fixed Indirect
Indirect Period
Period

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 18-15

Reporting
Reporting Manufacturing
Manufacturing Activities
Activities
 Merchandisers . . .  Manufacturers . . .
 Buy finished goods.  Buy raw materials.
 Sell finished goods.  Produce and sell
finished goods.

SaleMart

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 18-16

Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

Goods in
Raw Process Finished
Materials Goods

Manufacturing
Inventory
Classifications

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 18-17

Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

Goods in
Raw Process Finished
Materials Goods

Partially complete
Materials products. Completed
waiting to be products
processed. Material to which for sale.
some labor and/or
overhead have
been added.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-18

Balance
Balance Sheet
Sheet of
of aa Manufacturer
Manufacturer

MERCHANDISER MANUFACTURER

Current Assets Current Assets

 Cash  Cash
 Receivables  Receivables
 Merchandise  Inventories
Inventory Raw Materials
Goods in Process
Finished Goods

The only difference is inventory.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-19

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer Exh.
18-11

Merchandiser Manufacturer

Beginning Beginning
Merchandise Finished Goods
Inventory Inventory
+ +
Cost of Goods The major Cost of Goods
Purchased difference Manufactured
_ _
Ending Ending
Merchandise Finished Goods
Inventory Inventory
Cost of Goods
= Sold =
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 18-20

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer Exh.
18-12

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-21

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Direct
Direct Materials
Materials
Materials
Materials that
that are
are clearly
clearly and
and easily
easily
identified
identified with
with aa particular
particular product.
product.
Example:
Example:
Steel
Steel used
usedto
to
manufacture
manufacture
the
theautomobile.
automobile.

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 18-22

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Direct
Direct Labor
Labor
Labor
Labor costs
costs that
that are
are clearly
clearly traceable
traceable
to,
to, or
or readily
readily identifiable
identifiable with,
with, the
the
finished
finished product.
product.

Example:
Example:
Wages
Wagespaid
paidto
toan
an
automobile
automobileassembly
assembly
worker.
worker.

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 18-23

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer
Factory
Factory Overhead
Overhead
All
All factory
factory costs
costs except
except
direct
direct material
material and
and direct
direct labor.
labor.
Factory
Factory costs
costs that
that cannot
cannot bebe
traced
traced directly
directly toto specific
specific units
units produced.
produced.
Examples:
Indirect labor – maintenance
Indirect material – cleaning supplies
Factory utility costs
Supervisory costs

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-24

Income
Income Statement
Statement of
of aa Manufacturer
Manufacturer

Manufacturing costs are often

combined as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

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 18-25

Question
Question
What
What type
type of
of account
account is
is the
the manufacturing
manufacturing
goods
goods in
in process
process account?
account?

a.
a. Income
Income statement
statement expense
expense account.
account.
b.
b. Balance
Balance sheet
sheet inventory
inventory account.
account.
c.
c. Temporary
Temporary clearing
clearing account
account for
for direct
direct
material
material and
and direct
direct labor.
labor.
d.
d. Holding
Holding account
account for
for manufacturing
manufacturing
overhead
overhead and
and direct
direct labor.
labor.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-26

Question
Question
Question
What
What type
type of
of account
account is
is the
the manufacturing
manufacturing
goods
goods in
in process
process account?
account?

a.
a. Income
Income statement
statement expense
expense account.
account.
b.
b. Balance
Balance sheet
sheet inventory
inventory account.
account.
c.
c. Temporary
Temporary clearing
clearing account
account for
for direct
direct
material
material and
and direct
direct labor.
labor.
d.
d. Holding
Holding account
account for
for manufacturing
manufacturing
overhead
overhead and
and direct
direct labor.
labor.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-27

Question
Question
The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..

a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-28

Question
Question
Question
The
The primary
primary distinction
distinction between
between product product
and
and period
period costs
costs is
is .. .. ..

a.
a. Product
Product costs
costs are
are expensed
expensed in in the
the period
period
incurred.
incurred.
b.
b. Product
Product costs
costs are
are directly
directly traceable
traceable to to
product
product units.
units.
c.
c. Product
Product costs
costs are
are inventoriable.
inventoriable.
d.
d. Period
Period costs
costs are
are inventoriable.
inventoriable.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 18-29

Flow
Flow of
of Manufacturing
Manufacturing Activities
Activities Exh.
18-15

Materials Production activity Sales activity

activity
Goods in Process Finished Goods
Raw Beginning Inventory Beginning Inventory
Materials
Beginning Cost of Goods
Inventory Direct Labor
Manufactured

Raw Factory
Materials Overhead Finished Cost
Purchases Goods of
Raw Materials
Used Ending Goods
Inventory Sold

Raw Materials Goods in Process

Ending Inventory Ending Inventory
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 18-30

Manufacturing
Manufacturing Statement
Statement
Cost of all goods completed and transferred from
goods in process to finished goods during a
reporting period.

Direct Materials Used

+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
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 18-31

Manufacturing
Manufacturing Statement
Statement

Let’s take a look

at Rocky
Mountain Bikes’
Manufacturing
Statement.

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 18-32

Manufacturing
Manufacturing Statement
Statement Exh.
18-16

ROCKY MOUNTAIN BIKES

Manufacturing Statement
For Year Ended December 31, 2005
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

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 18-33

Computation of Cost of Direct Material Used

Manufacturing
Manufacturing Statement
Statement
Beginning raw materials inventory
Add: Purchases of raw materials
$ 8,000Exh.
86,500
18-16

Cost of raw materials available for use $ 94,500

Deduct: Ending raw materials inventory 9,000
ROCKY MOUNTAIN
Cost of direct materials BIKES
used in production $ 85,500
Manufacturing Statement
For Year Ended December 31, 2005
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

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 18-34

Manufacturing
Manufacturing Statement
Statement Exh.
18-16

Include all direct labor

costs incurred
ROCKY during
MOUNTAIN the
BIKES
current period.
Manufacturing Statement
For Year Ended December 31, 2005
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-35

Computation of Total Manufacturing Overhead

Indirect labor $ 9,000
Manufacturing
Manufacturing
Factory supervision Statement
Statement 6,000
Exh.
18-16

Factory utilities 2,600

Property taxes, factory building 1,900
Factory supplies usedROCKY MOUNTAIN BIKES 600
Factory insurance expired 1,100
Manufacturing Statement
Depreciation, building and equipment 5,300
For Year Ended December 31, 2005
Other factory overhead 3,500
Direct materials
Total factory usedcosts
overhead in production $ 30,000 $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

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 18-36

Manufacturing
Manufacturing Statement
Statement Exh.
18-16

Beginning work in
process inventory is
ROCKY MOUNTAIN BIKES
carried over from the
Manufacturing Statement
prior period.
For Year Ended December 31, 2005
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-37

Manufacturing
Manufacturing Statement
Statement Exh.
18-16

Ending work in process inventory

contains
ROCKY the cost
MOUNTAIN of unfinished
BIKES
goods, and is reported
Manufacturing Statementin the current
For assets section
Year Ended of the31,
December balance
2005 sheet.
Direct materials used in production $ 85,500
Direct labor 60,000
Total factory overhead costs 30,000
Total manufacturing costs for the period $ 175,500
Add: Beginning goods in process inventory 2,500
Total cost of goods in process $ 178,000
Deduct: Ending goods in process inventory 7,500
Cost of goods manufactured $ 170,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-38

Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin contributes to covering

fixed costs and generating profits.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 18-39

Unit
Unit Contribution
Contribution Margin
Margin

Total Per Unit Percent

Sales (500 units) $ 250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $ 100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Contribution margin ratio is the portion

of each sales dollar remaining after
deducting total unit variable cost.
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 18-40

End of Chapter 18

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005