Managerial accounting by garrison noreen13th chap002

Managerial Accounting
and Cost Concepts
Chapter 2

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.


Planning
Identify
Identify
alternatives.
alternatives.
Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.
Develop
Develop budgets
budgets to

to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
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Directing and Motivating
Directing and motivating involves managing
day-to-day activities to keep the organization running
smoothly.





Employee work assignments.
Routine problem solving.
Conflict resolution.
Effective communications.

2-3


Controlling

The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.
Feedback
Feedback in
in the
the form
form of
of performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential

essential part
part of
of the
the control
control function.
function.

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Planning and Control Cycle
Formulating
Formulatinglonglongand
andshort-term
short-termplans
plans
(Planning)
(Planning)
Comparing
Comparingactual
actual
to
toplanned
planned
performance
performance
(Controlling)
(Controlling)

Decision

Making

Begin

Implementing
Implementing
plans
plans(Directing
(Directing
and
andMotivating)
Motivating)

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
2-5


Comparison of Financial and Managerial
Accounting

2-6


Direct Materials
Raw 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

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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

2-8

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

2-9


Nonmanufacturing Costs
Administrative
Costs

All executive,
organizational, and
clerical costs.

2-10


Product Costs Versus Period Costs
Product costs
include direct
materials, direct

labor, and
manufacturing
overhead.

Inventory

Cost of Good Sold

Period costs include
all selling costs and
administrative
costs.
Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement
2-11


Balance Sheet
Merchandiser
Current assets

Manufacturer
Current Assets

 Cash

◆ Cash

 Receivables

◆ Receivables

 Merchandise Inventory

◆ Inventories
• Raw Materials
• Work in Process
• Finished Goods

2-12


Balance Sheet
Merchandiser
Current assets

Manufacturer
Current Assets

 Cash

◆ Cash

 Receivables

◆ Receivables

 Merchandise Inventory

◆ Inventories
• Raw Materials
• Work in Process
• Finished Goods

2-13


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
+ Purchases
Goods available
for sale
- Ending
merchandise
inventory

= Cost of goods
sold

$ 14,200
234,150
$ 248,350

(12,100)
$ 236,250

2-14


Basic Equation for Inventory Accounts

Beginning
Beginning
balance
balance

+

Additions
Additions
to
to inventory
inventory

=

Ending
Ending
balance
balance

+

Withdrawals
Withdrawals
from
from
inventory
inventory

2-15


Schedule of Cost of Goods Manufactured
Calculates the cost of raw
material, direct labor, and
manufacturing overhead used
in production.

Calculates the manufacturing
costs associated with goods
that were finished during the
period.
2-16

Manufacturing Cost Flows
Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative
2-17


Cost Classifications for Predicting Cost
Behavior
How
How aa cost
cost will
will react
react
to
to changes
changes in
in the
the
level
level of
of activity
activity within
within
the
the relevant
relevant range.
range.
 Total variable costs

Total variable costs

change
change when
when activity
activity
changes.
changes.
 Total fixed costs
Total fixed costs
remain
remain unchanged
unchanged
when
when activity
activity changes.
changes.

2-18


Variable Cost

Total Texting Bill

Your total texting bill is based on how
many texts you send.

Number of Texts Sent
2-19

Variable Cost Per Unit

Cost Per Text Sent

The cost per text sent is constant at
5 cents per text.

Number of Texts Sent
2-20


Fixed Cost

Monthly Cell Phone
Contract Fee

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
2-21


Fixed Cost Per Unit

Monthly Cell Phone
Contract Fee

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
2-22


Cost Classifications for Predicting Cost
Behavior
Behavior of Cost (within the relevant range)
Cost

In Total

Per Unit

Variable

Total variable cost changes
as activity level changes.

Variable cost per unit remains
the same over wide ranges
of activity.

Fixed

Total fixed cost remains
the same even when the
activity level changes.

Average fixed cost per unit goes
down as activity level goes up.

2-23


End of Chapter 2

2-24