Chapter 11

Fundamental Managerial Accounting Concepts

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Chapter 11: Objectives Differentiate between financial and managerial accounting. Distinguish between product and period costs, direct and

indirect costs, controllable and noncontrollable costs, and variable, fixed, and mixed costs.

Discuss the different costing systems and valuation methods used by organizations.

Calculate and use a predetermined overhead rate. Classify product costs as direct material, direct labor, and

overhead. Record the flow of costs through the accounting system. Prepare a statement of cost of goods manufactured.

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External Users

Rigid Rules

Historical Perspective

Aggregate Information

Quantitative Information

Monthly/Annually

Financial or Managerial?Internal Users

Flexible Format

Future Perspective

Detailed Information

Quantitative and Qualitative information

As needed

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Managerial Accounting is designed to:

--provide information to internal parties for planning and controlling operations;

--estimate an organization's product or service cost.

Managerial Accounting

and

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Product or Period Cost?Product Costs relate to the items that generate organizational revenues : Inventory

Direct Materials Direct Labor Factory Overhead

Period costs relate to an organization's selling and administrative functions: Certain Salaries

InsuranceFreight OutAdministrative Overhead

(become part of COGS)

(are expensed in period consumed)

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Direct and Indirect Costs

A direct cost is one that is clearly and easily traceable to, and a monetarily important part of, a specified cost object.

An indirect cost is one that is not clearly and easily traceable, or is not a monetarily important part of, a specified cost object.

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Controllable & Noncontrollable Costs

Any cost that a manager can authorize or directly influence in terms of dollar size is a controllable cost.

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Variable CostsA variable cost changes in total in direct proportion to changes in

activity.

TotalVariable Costs

=Variable Cost per unit

×Units of Activity

Examples include: Direct Materials, Direct Labor, Some Overhead

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Fixed CostsA fixed cost remains constant in total with changes in activity, within a Relevant Range.

Examples include: factory depreciation, insurance, property taxes.

Mixed costs have both a fixed and variable component.

TotalCosts

=( Variable Cost per unit

×Units of Activity )+

FixedCosts

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Manufacturing CostsDirect Materials: any readily clearly identifiable and conveniently traceable item that becomes a part of a manufactured product; the cost of a direct material must be monetarily significant to total product cost.

Direct Labor: the people who manufacture company products.

Overhead: any cost incurred in the manufacturing area that cannot or is not directly traced a product. Overhead consists of indirect labor, indirect materials, and other indirect costs that cannot be associated with a particular product.

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Inventory Costing Systems

Manufacturers that are producing goods in relatively small quantities, often to customer specifications, use a job order costing system. Service companies will generally use a job order costing system.

Manufacturers that produce mass quantities of similar goods (such as breakfast cereals, gasoline, or dog food) use a process costing system to accumulate costs. Because the goods are all the same and may flow through many production departments, costs are accumulated by batches of goods .

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Inventory Valuation Methods

In an actual cost system, the actual costs of materials, labor, and overhead are used to compute product cost.

In a normal cost system, the actual costs of materials and labor as well as an estimated cost for overhead are used to compute product cost.

In a standard cost system, estimated "norms" for materials, labor, and overhead are used to compute product costs.

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Conclusions There are significant differences between managerial and financial accounting. Costs may take many forms – product, period, direct, indirect, controllable, noncontrollable, fixed, variable, and mixed. Job order and process costing systems are used to accumulate costs. There are actual, normal, and standard costing systems.