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l01-introduction_and_cost_terms_edited.pptTopic 1:
Introduction and cost terms
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Introduction
- Managment accounting provides key information to managers for their decision making process.
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Structure of lecture
- Differences between management and financial accounting.
- How management accounting adds value to the organisation
- Costs and terminologies
- Product costs
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Cost Accounting ...
Provides information for both management accounting and financial accounting.
- It measures and reports financial and non-financial data that relates to the cost of acquiring or consuming resources by an organisation.
- The impact of Information Technology in virtually every aspect of accounting.
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Cost Management Systems
Determine efficiency and effectiveness of major activities.
Identify and evaluate new activities that can improve performance.
Objectives
Measure the cost of resources consumed.
Identify and eliminate non-value-added costs.
Improvements in the area of IT has greatly enhanced the achievement of these objectives
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Product
Design
Research
and
Development
Strategic Cost Management and the Value Chain
Securing raw
materials and
other resources
Production
Marketing
Distribution
Customer
Service
Start
IT plays an important role in these linkages
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Differences Between Financial and Management Accounting
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Sheet1
| 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 |
How Managerial Accounting Adds Value to the Organization
Providing information for decision making and planning.
Assisting managers in directing and controlling activities.
Motivating managers and other employees towards organization’s goals.
Measuring performance of activities, managers, and other employees.
Assessing the organization’s competitive position.
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What Do We Mean By Cost?
- Cost is a resource sacrificed or forgone to achieve a specific objective.
- It is usually measured as the monetary amount that must be paid to acquire goods and services.
- 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.
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Cost and Cost Terminology
- Cost accumulation is the collection of cost data in some organised way by means of an accounting system.
- Cost assignment is a general term that encompasses ...
tracing accumulated direct costs to a cost object, and
allocating accumulated indirect costs to a cost object.
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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.
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Direct Costs
- Direct costs of a cost object are those that are related to a given cost object (product, department, etc.) and that can be traced to it in an economically feasible way.
- Cost-Tracing describes the assignment of direct costs to the particular cost object.
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Direct Material
Cost of raw material that is used to
make, and can be conveniently
traced, to the finished product.
Example:
Steel used to
manufacture
the automobile.
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Cost of salaries, wages, and fringe
benefits for personnel who work
directly on manufactured products.
Direct Labor
Example:
Wages paid to an
automobile assembly
worker.
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Indirect Costs ...
are related to the particular cost object but cannot be traced to it in an economically feasible way.
- Cost allocation describes the assignment of indirect costs to the particular cost object.
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All other manufacturing costs
Manufacturing Overhead
Indirect
Labor
Indirect
Material
Other
Costs
Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant.
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All other manufacturing costs
Manufacturing Overhead
Indirect
Labor
Indirect
Material
Other
Costs
Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards.
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All other manufacturing costs
Manufacturing Overhead
Indirect
Labor
Indirect
Material
Other
Costs
Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.
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Direct and Indirect Costs
- Several factors affect the classification of a cost as direct or indirect:
The materiality of the cost in question
Available information-gathering technology
Design of operations
Contractual arrangements
- The direct/indirect classification also depends on the choice of the cost object.
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- A cost can be direct to the department, but indirect to units of product produced in the department.
- Example: department manager’s salary.
- Tracing costs directly to departments or products facilitates responsibility accounting.
Direct and Indirect Costs
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Classifications of Costs in Manufacturing Companies
Prime
Cost
Manufacturing costs are often
combined as follows:
Direct
Material
Direct
Labor
Manufacturing
Overhead
Conversion
Cost
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Nonmanufacturing Costs
Marketing and Selling Cost
Costs necessary to get the order and deliver the product.
Administrative Cost
All executive, organizational, and clerical costs.
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Production Costs in the Service Industry
- A service provider cannot “inventory” services.
- The costs of providing the service can be identified and accounted for just as in a manufacturing environment.
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Cost Drivers
- A cost driver is a factor, such as the level of activity or volume, that causes costs to be incurred (over a given time span).
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Cost Classifications by behavior
Cost behavior means 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.
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Total Variable Cost Example
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Total Long Distance
Telephone Bill
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Variable Cost Per Unit Example
Minutes Talked
Per Minute
Telephone Charge
The cost per long distance minute talked is constant. For example, 5 cents per minute.
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Total Fixed Cost Example
Your monthly basic telephone bill probably does not change when you make more local calls.
Number of Local Calls
Monthly Basic Telephone Bill
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Fixed Cost Per Unit Example
Number of Local Calls
Monthly Basic Telephone Bill per Local Call
The average cost per local call decreases as more local calls are made.
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Relationships of Types of Costs
Direct
Indirect
Variable
Fixed
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Manufacturing
- Manufacturing-sector companies purchase materials and components, and convert them into finished goods.
- A manufacturing company must also develop, design, market, and distribute its products.
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Merchandising
- Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
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Service Companies ...
provide services or intangible products to their customers.
- Labour is the most significant cost category.
- Carry no ‘inventory’
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Merchandiser
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Merchandise Inventory
Manufacturer
Current Assets
- Cash
- Receivables
- Prepaid Expenses
- Inventories p.41
Raw Materials
Work in Process
Finished Goods
Cost Classifications on Financial Statements – Balance Sheet
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The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
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Sheet1
| Manufacturing Company | ||
| Cost of goods sold: | ||
| Beg. finished | ||
| goods inv. | $ 14,200 | |
| + Cost of goods | ||
| manufactured | 234,150 | |
| Goods available | ||
| for sale | $ 248,350 | |
| - Ending | ||
| finished goods | ||
| inventory | (12,100) | |
| = Cost of goods | ||
| sold | $ 236,250 |
]Sheet1
| 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 |
Inventoriable Costs
- Inventoriable costs (direct materials, direct labour and indirect manufacturing costs) are included in work-in-progress and finished goods stock. (Assets)
- Inventoriable costs associated with goods sold flow to the Profit &Loss Account as Cost of Goods sold.
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Manufacturing Cost Flows
Manufacturing
Overhead
Material Purchases
Direct Labor
Balance Sheet
Costs Inventories
Income
Statement
Expenses
Work in
Process
Finished
Goods
Raw Material
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Balance Sheet
Costs Inventories
Manufacturing Cost Flows
Manufacturing
Overhead
Raw Material
Work in
Process
Finished
Goods
Material Purchases
Direct Labor
Income
Statement
Expenses
Material, labor and
manufacturing
overhead costs
remain in inventory
until the product is
sold, so they are called
inventoriable costs.
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Balance Sheet
Costs Inventories
Manufacturing Cost Flows
Manufacturing
Overhead
Raw Material
Work in
Process
Finished
Goods
Material Purchases
Direct Labor
Income
Statement
Expenses
Cost of
Goods
Sold
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Manufacturing Cost Flows
Manufacturing
Overhead
Material Purchases
Direct Labor
Balance Sheet
Costs Inventories
Income
Statement
Expenses
Selling and
Administrative
Work in
Process
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Period Expenses
Raw Material
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Inventory Flows
Beginning
balance
$
Additions
$
Purchased/produced
+
Available
$
=
Ending
balance
$$
=
Withdrawals
$
Sold/used
_
Available
$
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As items are removed from raw materials inventory and placed into the production process, they are
called direct materials.
Product Costs - A Closer Look
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]Sheet1
| Manufacturing | Work | |||||||
| Raw Materials | Costs | In Process | Finished Goods | |||||
| Beginning raw | Direct materials | Beginning finished | ||||||
| materials inventory | goods inventory | |||||||
| + | Raw materials | + | Cost of finished | |||||
| purchased | goods mfg. | |||||||
| = | Raw materials | = | Finished goods | |||||
| available for use | available for sale | |||||||
| in production | - | Ending finished | ||||||
| – | Ending raw materials | goods inventory | ||||||
| inventory | = | Cost of finished | ||||||
| = | Raw materials used | goods sold | ||||||
| in production |
Product Costs - A Closer Look
Conversion costs are costs incurred to convert the direct material into a finished product.
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Sheet1
| Manufacturing | Work | |||||||
| Raw Materials | Costs | In Process | Finished Goods | |||||
| Beginning raw | Direct materials | Beginning finished | ||||||
| materials inventory | + | Direct labor | goods inventory | |||||
| + | Raw materials | + | Mfg. overhead | + | Cost of finished | |||
| purchased | = | Total manufacturing | goods mfg. | |||||
| = | Raw materials | costs | = | Finished goods | ||||
| available for use | available for sale | |||||||
| in production | - | Ending finished | ||||||
| – | Ending raw materials | goods inventory | ||||||
| inventory | = | Cost of finished | ||||||
| = | Raw materials used | goods sold | ||||||
| in production |
Product Costs - A Closer Look
All manufacturing costs incurred during the period are added to the beginning balance of work in process.
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Sheet1
| Manufacturing | Work | |||||||
| Raw Materials | Costs | In Process | Finished Goods | |||||
| Beginning raw | Direct materials | Beginning work in | Beginning finished | |||||
| materials inventory | + | Direct labor | process inventory | goods inventory | ||||
| + | Raw materials | + | Mfg. overhead | + | Total manufacturing | + | Cost of finished | |
| purchased | = | Total manufacturing | costs | goods mfg. | ||||
| = | Raw materials | costs | = | Total work in | = | Finished goods | ||
| available for use | process for the | available for sale | ||||||
| in production | period | - | Ending finished | |||||
| – | Ending raw materials | goods inventory | ||||||
| inventory | = | Cost of finished | ||||||
| = | Raw materials used | goods sold | ||||||
| in production |
Product Costs - A Closer Look
Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
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Sheet1
| Manufacturing | Work | |||||||
| Raw Materials | Costs | In Process | Finished Goods | |||||
| Beginning raw | Direct materials | Beginning work in | Beginning finished | |||||
| materials inventory | + | Direct labor | process inventory | goods inventory | ||||
| + | Raw materials | + | Mfg. overhead | + | Total manufacturing | + | Cost of finished | |
| purchased | = | Total manufacturing | costs | goods mfg. | ||||
| = | Raw materials | costs | = | Total work in | = | Finished goods | ||
| available for use | process for the | available for sale | ||||||
| in production | period | - | Ending finished | |||||
| – | Ending raw materials | – | Ending work in | goods inventory | ||||
| inventory | process inventory | = | Cost of finished | |||||
| = | Raw materials used | = | Cost of goods | goods sold | ||||
| in production | manufactured. |
Product Costs - A Closer Look
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Sheet1
| Work | |||
| In Process | Finished Goods | ||
| Beginning work in | Beginning finished | ||
| process inventory | goods inventory | ||
| + | Manufacturing costs | + | Cost of goods |
| for the period | manufactured | ||
| = | Total work in process | = | Cost of goods |
| for the period | available for sale | ||
| – | Ending work in | - | Ending finished |
| process inventory | goods inventory | ||
| = | Cost of goods | Cost of goods | |
| manufactured | sold |
Professional Ethics (Hilton p.24-26)
Competence
Confidentiality
Integrity
Credibility
Familiarize yourself with these standards
End of Topic 1
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FinancialManagerial
AccountingAccounting
1. UsersExternal persons whoManagers who plan for
make financial decisionsand control an organization
2. Time focusHistorical perspectiveFuture emphasis
3. VerifiabilityEmphasis onEmphasis on relevance
versus relevanceverifiabilityfor planning and control
4. Precision versusEmphasis on Emphasis on
timelinessprecisiontimeliness
5. SubjectPrimary focus is onFocuses on segments
the whole organizationof an organization
6. RequirementsMust follow GAAPNeed not follow GAAP
and prescribed formatsor any prescribed format
Manufacturing Company
Cost of goods sold:
Beg. finished
goods inv.14,200$
+ Cost of goods
manufactured234,150
Goods available
for sale248,350$
- Ending
finished goods
inventory(12,100)
= Cost of goods
sold236,250$
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory14,200$
+ Purchases 234,150
Goods available
for sale248,350$
- Ending
merchandise
inventory(12,100)
= Cost of goods
sold236,250$
ManufacturingWork
Raw MaterialsCostsIn Process
Beginning rawDirect materials
materials inventory
+Raw materials
purchased
=Raw materials
available for use
in production
–Ending raw materials
inventory
=Raw materials used
in production
ManufacturingWork
Raw MaterialsCostsIn Process
Beginning rawDirect 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
ManufacturingWork
Raw MaterialsCostsIn Process
Beginning rawDirect materialsBeginning 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
ManufacturingWork
Raw MaterialsCostsIn Process
Beginning rawDirect materialsBeginning 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–Ending work in
inventory process inventory
=Raw materials used=Cost of goods
in production manufactured.
Work
In ProcessFinished Goods
Beginning work inBeginning finished
process inventory goods inventory
+Manufacturing costs+Cost of goods
for the period manufactured
=Total work in process=Cost of goods
for the period available for sale
–Ending work in-Ending finished
process inventory goods inventory
=Cost of goodsCost of goods
manufactured sold
