Week 1.pdf
- 2. 2 Types of Accounting Information • Financial Accounting • Provides information primarily to people outside the company (e.g., stockholders, creditors, regulators), through general-purpose financial statements. • Management Accounting • Provide information to people inside the company (e.g., managers) • Tax Accounting • Provides information to the tax authorities
- 3. 3 Financial and Managerial Accounting: Seven Key Differences Financial Accounting Managerial 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 versus relevance objectivity and verifiability relevance 4. Precision versus Emphasis on Emphasis on timeliness precision timeliness 5. Subject Primary focus is on Focus on companywide reports segment reports 6. Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS and prescribed formats or any prescribed format 7. Requirement Mandatory for Not external reports Mandatory
- 5. 5 Planning Establish Goals Specify How Goals Will Be Achieved Develop Budgets
- 6. 6 Controlling The control function gathers feedback to ensure that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
- 7. 7 Decision Making Decision making involves making a selection among competing alternatives. What should we be selling? Who should we be serving? How should we execute?
- 8. 8 Managerial Accounting: Planning, Controlling, and Decision Making Controlling Planning Decision Making The primary purpose of this course is to teach measurement skills that managers use to support planning, controlling, and decision making activities.
- 9. 9 Managerial Accounting: Measurement Skills How should I create a financial plan for next year? How well am I performing relative to my plan? Measurement skills help managers answer important questions.
- 10. 10 Managerial Accounting: Business Management Perspectives Six Business Management Perspectives that go beyond the numbers to enable intelligent planning, control, and decision making: • An Ethics Perspective • A Strategic Management Perspective • An Enterprise Risk Management Perspective • A Corporate Social Responsibility Respective • A Process Management Prospective • A Leadership Perspective
- 11. 11 Abandoning ethical standards in business would lead to a lower quality of life with less desirable goods and services at higher prices. An Ethics Perspective Without ethical standards in business, the economy, and all of us who depend on it for jobs, goods, and services, would suffer. Ethical standards in business are essential for a smooth functioning economy.
- 12. 12 A Corporate Social Responsibility Perspective CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations. Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. Customers Employees Communities Suppliers Stockholders Environmental & Human Rights Advocates
- 13. 13 Chapter 1 Managerial Accounting and Cost Concepts
- 14. 14 What Does Cost Mean? • Accountants define cost as a resource sacrificed or forgone to achieve a specific objective. • The term “cost” is a relative term, dependent both on: the “cost object” chosen the purpose for which cost is being calculated and reported.
- 15. 15 15 Cost Object -- Specific Product Dell XPS 600 Project Promotional campaign Product Category Laptop vs. Desktop Activity Setting up a new assembly line Department Customer service department Region U.S., Asia, Europe
- 16. 16 Different Costs for Different Purposes •The way the cost is to be used will define the way it should be computed. Suppose you are asked to compute the cost of flying one person from Shanghai to Hong Kong. How do you get a cost per person? Now suppose that you are told that the flight is going anyway and you must compute the cost of adding one more person on board. Would you use the same cost to make the decision?
- 17. 17 Different Costs for Different Purposes •External Uses For financial reporting purposes, product cost is determined in a standard way. •Internal Uses Inside the organization costs serve many different purposes, e.g., pricing, product mixing, etc. The way the cost is to be used will define the way it should be computed.
- 18. 18 1.Assigning costs to cost objects 2.Accounting for costs in manufacturing companies 3.Preparing financial statements 4.Predicting cost behavior in response to changes in activity 5.Making decisions Purposes of Cost Classification
- 19. 19 Learning Objective 1 Understand cost classifications used for assigning costs to cost objects: direct costs and indirect costs.
- 20. 20 Assigning Costs to Cost Objects Direct costs • Costs that can be easily and conveniently traced to a unit of product or other cost object. • Examples: direct material and direct labor Indirect costs • Costs that cannot be easily and conveniently traced to a unit of product or other cost object. • Example: manufacturing overhead Common costs Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
- 21. 21 Learning Objective 2 Identify and give examples of each of the three basic manufacturing cost categories.
- 22. 22 Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs The Product
- 23. 23 Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile
- 24. 24 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers
- 25. 25 Manufacturing Overhead All manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products. Includes indirect labor that cannot be easily or conveniently traced to specific units of product Includes indirect materials that cannot be easily or conveniently traced to specific units of product.
- 26. 26 Manufacturing Overhead – Examples Examples of manufacturing overhead: ◦ Depreciation of manufacturing equipment ◦ Utility costs ◦ Property taxes ◦ Insurance premiums incurred to operate a manufacturing facility Only those indirect costs associated with operating the factory are included in manufacturing overhead.
- 27. 27 Prime Costs and Conversion Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost
- 28. 28 Nonmanufacturing Costs Selling Costs The costs incurred to secure customer orders and get the finished product to the customer. Selling costs can either be direct or indirect costs. Administrative Costs The costs associated with the general management of an organization rather than with the manufacturing or selling. Administrative costs can be either direct or indirect costs.
- 29. 29 Learning Objective 3 Understand cost classifications used to prepare financial statements: product costs and period costs.
- 30. 30 Product Costs Product costs include all the costs involved in acquiring or making a product. Product costs “attach” to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.
- 31. 31 Manufacturing Product Costs For manufacturing companies, product costs include: Raw materials include any materials that go into the final product. Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Finished goods consist of completed units of product that have not yet been sold to customers.
- 32. 32 Transfer of Product Costs When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.
- 33. 33 Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
- 34. 34 Concept Check 1 Which of the following costs would be considered a period rather than a product cost in a manufacturing company? (There may be more than one correct answer.) A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.
- 35. 35 Learning Objective 4 Understand cost classifications used to predict cost behavior: variable costs, fixed costs, and mixed costs.
- 36. 36 Cost Classifications for Predicting Cost Behavior Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are: ▫ Variable costs. ▫ Fixed costs. ▫ Mixed costs.
- 37. 37 Variable Cost • A variable cost varies, in total, in direct proportion to changes in the level of activity. • Your total data bill is based on how much data you use. Data Usage Total Data Bill
- 38. 38 Variable Cost • A variable cost per unit is constant. • The cost of data is constant at 5 cents per mb. Data Usage Data Bill per MB
- 39. 39 The Activity Base (Cost Driver) A measure of what causes the incurrence of a variable cost Labor hours Miles driven Units produced Machine hours
- 40. 40 • A fixed cost is a cost that remains constant, in total, regardless of changes in the level of the activity. • If your plan include unlimited call, your monthly fee for the phone call is fixed. The monthly fee does not change based on the number minutes. Fixed Cost Number of Minutes Used Monthly Fee
- 41. 41 • If expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity. • Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made Fixed Cost Number of Minutes Used Monthly Fee per Minutes
- 42. 42 Types of Fixed Costs Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment and Real Estate Taxes Discretionary May be altered in the short term by current managerial decisions Committed Long term, cannot be significantly reduced in the short term.
- 43. 43 The Linearity Assumption and the Relevant Range Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet. The relevant range of activity pertains to fixed cost as well as variable costs. For example, assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet.
- 44. 44 Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 Relevant Range: Graphic 90 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.
- 45. 45 Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost Increase Variable cost per unit and decrease in proportion remains constant. to changes in the activity level. Fixed Total fixed cost is not affected Fixed cost per unit decreases by changes in the activity as the activity level rises and level within the relevant range. increases as the activity level falls.
- 46. 46 Concept Check 2 Which of the following costs would be variable with respect to the number of ice cream cones sold at a Baskin & Robbins? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.
- 47. 47 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y A mixed cost contains both variable and fixed elements. Consider the example of utility cost. Mixed Costs (1 of 2)
- 48. 48 Mixed Costs (2 of 2) 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 vertical intercept of the line). b = The variable cost per unit of activity (the slope of the line). X = The level of activity.
- 49. 49 Mixed Costs – An Example If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? Y = a + bX Y = $40 + ($0.03 × 2,000) Y = $100
- 50. 50 Learning Objective 5 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
- 51. 51 Cost Classifications for Decision Making •Decisions involve choosing between alternatives. The goal of making decisions is to identify those costs that are either relevant or irrelevant to the decision. •It is important to understand the terms differential cost and revenue, sunk cost, and opportunity cost.
- 52. 52 Differential Costs • Differential cost (or incremental cost) is the difference in cost between any two alternatives. • A difference in revenue between two alternatives is called differential revenue. • Both are always relevant to decisions. • Differential costs can be either fixed or variable. 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: $2,000 – $1,500 = $500 Differential cost : $300
- 53. 53 Sunk Costs •Sunk costs have already been incurred and cannot be changed by any decision now or in the future. •These costs should be ignored when making decisions. Example: Suppose you had purchased gold for $400 an ounce, but now it is selling for $250 an ounce. Should you wait for the gold to reach $400 an ounce before selling it? You may say, “Yes” even though the $400 purchase is a sunk cost.
- 54. 54 Opportunity Cost The potential benefit that is given up when one alternative is selected over another. These costs are not usually found in accounting but must be explicitly considered in every decision. For students: What are the opportunity costs you incur to attend this class?
- 55. 55 Concept Check 3 Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
- 56. 56 Concept Check 4 Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.
- 57. 57 • Costs in manufacturing firms Manufacturing cost (product cost) Nonmanufacturing cost (period cost) • Cost behavior Variable cost Fixed cost • Cost assignment method Direct cost Indirect cost • Decision relevance Relevant cost Irrelevant cost Cost Classifications Direct materials (DM) Direct labor (DL) Manufacturing overhead (MOH) Selling costs Administrative costs Direct materials (DM) / Direct labor (DL) Direct selling/admin cost Manufacturing overhead (MOH) Differential cost Opportunity cost Sunk cost Financial Reporting Product cost Period cost
- 58. 58 Learning Objective 6 Prepare income statements for a merchandising company using the traditional and contribution formats.
- 59. 59 The Traditional and Contribution Formats Used primarily for external reporting. Used primarily by management.
- 60. 60 Uses of the Contribution Format The contribution format income statement is used as an internal planning and decision-making tool. We will use this approach for: 1.Cost-volume-profit analysis (Chapter 6). 2.Segmented reporting of profit data (Chapter 7). 3.Budgeting (Chapter 8). 4.Special decisions such as pricing and make-or-buy analysis (Chapter 11).
- 61. 61 End of Chapter 1