copyright © 2013 pearson education, inc. publishing as prentice hall. building blocks of managerial...

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 1

Building Blocks of Managerial Accounting

Chapter 2


Objective 1Distinguish among service,

merchandising, and manufacturing companies


Three types of companies

• Service

• Merchandisers

• Manufacturers


Service Companies

• Provide a service only• No inventory• Examples

– Accountants– Banks– Doctors– Lawyers


Merchandisers

• Resell products purchased from suppliers • One inventory account• Examples

– Amazon.com– J. C. Penney– Sears

• Retailers vs. Wholesalers


Manufacturers

• Use labor and other inputs to convert raw materials into finished products

• Examples– Crayola Crayons– Dell Computers– Craftsman Tools

• 3 inventory accounts


Manufacturers

• 3 inventory accounts

– Raw materials

– Work in process

– Finished goods


Objective 2Describe the value chain

and its elements


Value Chain• Activities that add value to products and

services and cost money.

R&DProduction/Purchases

Marketing

Design

DistributionCustomer

Service


Now turn to E2-16A

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

E2-16A

Research on selling satellite radio service

Purchases of merchandise

Rearranging store layout

11


E2-16A

Research on selling satellite radio service R & D

Purchases of merchandise


12


E2-16A


Purchases of merchandise Purchases


13


E2-16A


Purchases of merchandise Purchases

Rearranging store layout Design

14


E2-16A (cont.)

Newspaper advertisements

Deprec. expense on delivery trucks

Payment to consultant for advice on location of new store

15


E2-16A (cont.)

Newspaper advertisements Marketing

Deprec. expense on delivery trucks


16


E2-16A (cont.)


Deprec. expense on delivery trucks Distribution


17


E2-17A (cont.)


Deprec. expense on delivery trucks Distribution

Payment to consultant for advice on location of new store R & D

18


E2-16A (cont.)

Freight-in

Salespersons’ salaries

Customer complaint department

19


E2-16A (cont.)

Freight-in Purchases

Salespersons’ salaries


20


E2-16A (cont.)


Salespersons’ salaries Marketing


21


E2-16A (cont.)


Salespersons’ salaries Marketing

Customer complaint departmentCustomer service

22


Objective 3Distinguish between direct and

indirect costs


Cost Object

• Anything for which managers want a separate measurement of cost– Direct cost

– Indirect cost


Now turn to S2-4


a. The wages of store employees

b. The cost of operating the corporate payroll department

c. The cost of carpet steamers offered for rent

d. The cost of gas and oil sold at the store

S2-4

Direct

Direct

Indirect

Direct


S2-4 (cont.)

e. Store utilitiesf. The CEO’s salaryg. The cost of chainsaws

offered for renth. The cost of national

advertising Indirect

Direct

DirectIndirect


Objective 4Identify the inventoriable product costs and period costs of merchandising and

manufacturing firms


Two definitions of product cost

• Total costs – used internally only (will see this in later chapters)

• Inventoriable product costs – used for external reporting


R&D Design

MarketingDistributionCustomer

Service

Production/Purchases

Inventoriable Product Costs

Inventoriable product costs


Period Costs: All costs incurred in the other stages of the value chain

Period Costs

MarketingDistributionCustomer

Service

R&D Design


Inventoriable Product Costs -- Merchandiser

• + Purchase price from suppliers • + Cost to get ready for sale• + Freight-in• + Import duties or tariffs


Inventoriable Product Costs -- Manufacturer

• Direct materials• Direct labor• Manufacturing overhead

Direct Costs

Indirect Costs


Manufacturing Overhead

• Indirect costs related to manufacturing that are not direct materials or direct labor– Indirect materials

– Indirect labor

– Other indirect manufacturing overhead


Now turn to S2-7


1. Company president’s annual bonus

2. Plastic gallon containers in which milk is packaged

3. Depreciation on marketing department’s computers

4. Wages and salaries paid to machine operators at dairy processing plant

S2-7

Period

Period

Product, DM

Product, DL


5. Research and Development on improving milk pasteurization process

6. Cost of milk purchased from dairy farmers

Product, DM

7. Lubricants used in running bottling machines

8. Depreciation on refrigerated trucks used to collect raw milk from dairy farms

S2-7 (cont.)

Product,MOH

Period

Product,MOH


9. Property tax on dairy processing plant

10. Television advertisements for DairyPlains’ products

11.Gasoline used to operate refrigerated trucks used to deliver finished dairy products to grocery stores

S2-7 (cont.)

Period

Product,MOH

Period


Prime and Conversion Costs

Manufacturing Overhead

Direct Materials

Prime Costs

Direct Labor

Conversion Costs


Direct and indirect labor costs include

• Salaries and wages • Fringe benefits• Payroll taxes


Objective 5Prepare the financial statements for

service, merchandising and manufacturing companies


Income Statement – Service Company

• Simplest income statement• All costs are period costs

Service Revenues- Operating expenses Operating income


Cost of Goods Sold Calculation – Merchandiser

+ Beginning inventory+ Purchases+ Import duties or tariffs+ Freight-in= Cost of goods available for sale- Ending inventory= Cost of goods sold


Now turn to S2-9


S2-9

45

Cost of Goods Sold Computation

Beginning inventory $ 4,200Purchases $42,000Import duties 1,100

-Freight in 3,600 46,700Cost of goods avail for sale 50,900

Ending inventory (5,400 )Cost of goods sold $45,500


Income Statement – Merchandiser

+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income


Now turn to S2-10


S2-10

Gossamer Secrets

Schedule of Cost of Goods Sold

Beginning inventory $ 3,350,000

Purchases 23,975,000

Cost of goods available $ 27,325,000

Ending inventory (4,315,000)

Cost of goods sold $ 23,010,000


S2-10

Gossamer Secrets

Income Statement

Sales revenue $ 39,300,000

Cost of goods sold 23,010,000

Gross profit $ 16,290,000

Operating expenses 6,150,000

Operating income $ 10,140,000


Direct Materials Used Calculation –Manufacturer

+ Beginning raw materials inventory+ Purchases of raw materials+ Freight in= Materials available for use- Ending raw materials inventory= Direct materials used


Now turn to S2-11


S2-11Allterrain

Computation of Direct Materials Used

Direct materials used:Beginning raw materials inventory $ 3,900

Purchases of direct materials $15,600

Import duties 900

Freight-in 600 17,100

Direct materials available for use 21,000

Ending raw materials inventory (2,000 )

Direct materials used $19,000


Cost of Goods Manufactured Calculation – Manufacturer

+ Beginning work in process inventory+ Direct materials used+ Direct labor+ Manufacturing overhead= Total manufacturing costs to account for- Ending work in process inventory= Cost of goods manufactured


How to calculate

Beginning Inventory + Net Purchases =

Cost of Goods Sold + Ending Inventory


Cost of Goods Sold Calculation –Manufacturer

+ Beginning finished goods inventory+ Cost of goods manufactured= Cost of goods available for sale- Ending finished goods inventory= Cost of goods sold


Now turn to E2-25A


E2-25A, Direct materials used

Quality Aquatic CompanyDirect Materials Used

Beginning direct materials inventory $ 29,000 Plus Purchases of direct materials 73,000 Available for use $ 102,000 Less Ending direct materials inventory (31,000)Direct materials used $ 71,000


E2-25A, Cost of goods manufacturedQuality Aquatic Company

Schedule of Cost of Goods Manufactured

Beginning work in process inventory $ 36,000

Plus: Manufacturing costs incurred:

Direct materials used 71,000

Direct labor 89,000

Manufacturing overhead* 69,500

Cost of goods available $ 265,500

Ending inventory (30,000)

Cost of manufactured $ 235,500

*Manufacturing overhead:

Indirect labor $ 42,000

Insurance on plant 10,500

Deprec - Plant bldg and equip 13,000

Repairs and mtnce - plant 4,000

Manufacturing overhead (total) $ 69,500


E2-25A, Cost of goods sold

Quality Aquatic CompanySchedule of Cost of Goods Sold

Beginning finished goods inventory $ 22,000 Plus: Cost of goods manufactured 235,500 Available for sale $ 257,500 Less: Ending finished goods inventory (28,000)Cost of Goods Sold $ 229,500


Income Statement – Manufacturer

+ Sales- Cost of goods sold= Gross profit- Operating expenses= Operating income


Now turn to E2-26A


E2-26A

Quality Aquatic CompanyIncome Statement

Sales revenue $ 462,000 Cost of goods sold 229,500 Gross profit $ 232,500 Operating expenses: Marketing expenses 83,000 General and admin expenses 26,500 Operating income $ 123,000


Product and Period CostsType of

CompanyInventoriable Product Costs

Period Costs

Service Company NoneAll costs along the

value chain

MerchandiserPurchases plus cost of freight, import duties,

etc.

All costs except total purchases

Manufacturer DM, DL, MOHAll costs except DM,

DL, MOH

Accounting Treatment

Inventory on balance sheet until sold

Immediately expense


Manufacturing Companies’Inventory Accounts

Raw Materials Inventory

+ Beginning inventory+ Purchases & freight

= Ending inventory

- Materials used in work in process



Work in Process Inventory

+ Beginning inventory

+ Matls used from raw matls

= Ending inventory

- Cost of goods manufactured and sent to finished goods

+ Direct Labor

+ Manufacturing overhead



Finished Goods Inventory

+ Beginning inventory

+ Cost of goods manufactured

= Ending inventory

- Cost of goods sold


Balance Sheet DifferencesType of Company Inventory Accounts

Service Company None

Merchandiser Merchandise Inventory

Manufacturer Raw materials, work in process, and finished goods inventory


Objective 6Describe costs that are relevant and

irrelevant for decision making


Controllable and Uncontrollable Costs

Controllable Management can influence or change cost

Uncontrollable Management cannot change or influence cost in the short run


Relevant and Irrelevant Costs

Relevant Differential costs, which are costs that differ between alternatives

Irrelevant

Costs which do not differ between alternatives-or-Sunk costs – costs incurred in the past which cannot be changed


Objective 7Classify costs as fixed or variable and calculate total and average costs at

different volumes


Cost Behavior

Variable costs Change in total cost in direct proportion to changes in volume

Fixed costs Stay constant in total cost over a wide range of activity levels


Total Variable Costs

$0

$500

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

To

tal

Sal

es

Co

mm

issi

on

s

Assume we pay 5% sales commissions on all sales.The cost of sales commissions increases proportionately with increases in sales.


Total Fixed Costs: Stay Constant in Total Over a Wide Range of Activity Levels

$0

$500

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

To

tal S

ales

Sal

arie

s


Total Cost

• Total cost = Fixed costs + (Variable cost per unit x number of units)

Example:Fixed costs = $20,000Variable cost per unit = $50 per unitNumber of units = 100

Total Cost = $20,000 + ($50 x 100) = $25,000


Average Cost

• Total cost ÷ number of units = Average cost

• The average cost per unit is NOT appropriate for predicting total costs at different levels of output.

Example:$25,000 = $250 per unit

100 units


Marginal Cost

• Cost of making one more unit


End of Chapter 2

copyright © 2013 pearson education, inc. publishing as prentice hall. building blocks of managerial...

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