Title: Lesson 13 Managerial Accounting: Concepts and Principles
1Lesson 13 Managerial Accounting Concepts and
Principles
- Task Team of
- FUNDAMENTAL ACCOUNTING
- School of Business, Sun Yat-sen University
2Outline
- What is managerial accounting?
- Comparison between managerial accounting and
financial accounting - Cost classifications in different ways
- Flow of manufacturing activities
- Job order cost accounting systems and process
cost accounting systems - Cost allocation
3Introduction
- The previous 12 chapters focus on the financial
accounting topics - Please summarize the basic points of financial
accounting - Users/ Time focus/ Emphasis/ Importance/ Subject
focus/ Requirements - Thinking
- Is the information provided by financial
accounting enough for an enterprise to conduct
its operation and management? - If not, how to satisfy this demand for the
internal used information? - Have you ever heard managerial accounting?
4What is Managerial Accounting?
- An activity that provides financial and
nonfinancial information to managers and other
internal decision makers - Is quite important to planning, control, and
decision making activities
5The Environment of Managerial Accounting
6Managerial Accounting and Financial Accounting
7Cost Classifications
- Costs can be classified by
- Relevance
- Behaviour
- Controllability
- Traceability
- Function
8Costs Classification by Relevance
- Relevant
- If costs influence a decision
- Costs that are applicable to a particular
decision. - Costs that should have a bearing on which
alternative a manager selects. - Costs that are avoidable.
- Future costs that differ between alternatives.
- Irrelevant
- If costs do not influence a decision
9Costs Classification by Relevance
- Sunk Costs
- All costs incurred in the past that cannot be
changed by any decision made now or in the
future. - should not be considered in decisions.
- Irrelevant
- Example You bought an automobile that cost
30,000 two years ago. The 30,000 cost is sunk
because whether you drive it, park it, trade it,
or sell it, you cannot change the 30,000 cost.
10Costs Classification by Relevance
- Out-of-pocket costs
- require future outlays of cash
- associated with a particular decision
- relevant for future decisions
- Example Considering the decision to take a
vacation or stay at home, if you choose a
vacation, you will only have travel costs
(out-of-pocket costs).
11Costs Classification by Relevance
- Opportunity Costs
- The potential benefit that is given up when one
alternative is selected over another. - Example If you were not attending college or
university, you could be earning 25,000 per
year. Your opportunity cost of attending college
or university for one year is 25,000.
12Costs Classification by Behavior
- Cost behavior refers to
- how a cost will react to changes in the level of
business activity. - Fixed costs
- do not change when activity changes.
- Variable costs
- change in proportion to changes in the volume of
activity
13Costs Classification by Behavior
- Total fixed costs remain unchangedwhen activity
changes within a relevant range. - Fixed costs per unit decline as activity
increases.
14Costs Classification by Behaviour
- Total variable costs change when activity
changes. - Variable costs per unit do not change as activity
increases.
15Costs Classification by Behavior
- Mixed costs
- contain a combination of fixed and variable costs.
Total mixed cost
Variable Sales Commissions
Total Compensation
Fixed Monthly salary
Sales
16Costs Classification by Behaviour
- Step-Wise Costs
- remain fixed over limited ranges of volumes but
increase by a lump sum when volume increases
beyond maximum amounts. - Example additional production supervisors must
be added when another shift is added.
17Costs Classification by Controllability
- Controllable vs. not controllable
- depends upon the employees responsibilities.
- Example A lower level manager may have control
over overtime costs but not over the purchase of
high-cost machinery.
18Costs Classification by Traceability
- Management often traces costs to cost objects
- To obtain a better measure of their total cost
- Cost objects include
- Products
- Services
- Departments
- Divisions
- Customer groups
19Costs Classification by Traceability
- Traceable costs are classified as
- Direct costs
- can be conveniently traced to a unit of product
or other cost objective. - Examples salaries of production workers, salary
of maintenance department employees. - Indirect costs
- must be allocated to a unit of product or other
cost objective. - Examples factory rent, factory light and heat,
factory accounting costs.
20Costs Classification by Function
- Manufacturing Costs
- are necessary and integral to the production of
finished goods. - Examples direct labour, direct materials, and
manufacturing overhead. - Non-Manufacturing Costs
- are not integral to the manufacture of finished
goods. - Examples selling and administrative expenses.
21Costs Classification by Function
22Costs Classification by Function
- Direct materials
- Materials that are clearly and easily identified
with a particular product. - Example Steel used to manufacture an automobile
- Direct labour
- Labour costs that are clearly traceable to, or
readily identifiable with, the finished product. - Example Wages paid to an automobile
assemblyworker.
23Costs Classification by Function
- Manufacturing overhead
- All manufacturing costs except direct material
and direct labour. - Manufacturing costs that cannot be traced
directly to specific units produced. - Examples
- Indirect labour maintenance
- Indirect material cleaning supplies
- Factory utility costs
- Supervisory costs
24Costs Classification by Function
Manufacturing costs are oftencombined as follows
25Costs Classification by Function
- Non-Manufacturing costs (period costs) are
expenses not charged to the product. - Selling Costs
- Costs incurred to obtain customer orders and to
deliver finished goods to customers advertising
and shipping. - Administrative Costs
- Non-manufacturing costs of staff support and
administrative functions accounting, data
processing, personnel, research and development.
26Discussions
- ABC company manufactures a portable radio
designed for mounting on the wall of the
bathroom. The following list represents some of
the different types of costs incurred in the
manufacture of these radios - The plant manager's salary.
- The cost of heating the plant.
- The cost of heating executive offices.
- The cost of printed circuit boards used in the
radios. - Salaries and commissions of company salespersons.
27Discussions
- Depreciation on office equipment used in the
executive offices. - Depreciation on production equipment used in
plant. - Wages of janitorial personnel who clean the
plant. - The cost of insurance on the plant building.
- The cost of electricity to light the plant.
- The cost of electricity to power plant equipment.
- The cost of maintaining and repairing equipment
in the plant. - The cost of printing promotional materials for
trade shows. - The cost of solder used in assembling the radios.
- The cost of telephone service for the executive
offices.
28Discussions
- Required
- Classify each of the items above as product cost
or period costs.
29Discussions the answer
30Flow of Manufacturing Activities
31Job Order Cost Accounting Systems
- Job Order Cost Accounting Systems
- The production of products in response to special
orders. - quite flexible in the number of products they can
produce. - Jobs involving the production of more than one
unit of product are called job lots.
32Job Order Cost Accounting Systems
33Job Order Cost Accounting Systems
DirectMaterials
Cost per unit for Job No. 1
Job No. 1
Finished Goods
DirectLabour
Job No. 2
Finished Goods
Cost per unit for Job No. 2
FactoryOverhead
34Process Cost Accounting Systems
- Process Cost Accounting Systems
- Used for production of small, identical, low-
cost items. - Mass produced in automated continuous production
process. - Costs cannot be directly traced to each unit of
product.
35Process Cost Accounting Systems
DirectMaterials
FinishedGoods
Process 1
Process 2
DirectLabour
Cost per equivalent unit for Process 1
Cost per equivalent unit for Process 2
Total cost per equivalent unit
FactoryOverhead
36Process Cost Accounting Systems
- Unit cost
- To determine the cost of goods transferred from
department to department and to finished goods,
we need to calculate unit cost. - Unit cost is computed by dividing the accumulated
costs by the number of equivalent units produced
in the period.
37Process Cost Accounting Systems
- Costs are accumulated for a period of time by
process or department. - Equivalent units is a concept expressing a number
of partially completed units as a smaller number
of fully completed units. - Example Three one-third full pitchers are
equivalent to one full pitcher. - Equivalent units may be different for material
and labour and overhead at different stages of a
process.
38Comparing Job Order and Process Production
- Similarities
- Same objective
- to determine the cost of products
- Same inventory accounts
- raw materials, goods in process, and finished
goods - Same overhead assignment method
- predetermined rate times actual activity
39Comparing Job Order and Process Production
Differences
- Job Order Systems
- Custom orders
- Heterogeneous products
- Low output volume
- High flexibility
- Low to medium standardization
- Process Systems
- Repetitive production
- Homogeneous offerings
- High output volume
- Low product flexibility
- High standardization
40Cost Allocation
- Methods of Overhead Cost Allocation
- Plant-wide Overhead Rate
- Two-stage Cost Allocation
- Activity-based Costing
41Cost Allocation
- Plant-wide Overhead Rate
- A single plant-wide overhead rate is relatively
easy to use - but may result in inaccurate product costs
42Cost Allocation
- Two-stage Cost Allocation
- More accurate method than plant-wide
- Stage 1 Allocate service department costs to
production departments. Service department costs
are assigned to operating (or production)
departments. - Stage 2 Allocate production department costs to
cost objects. Costs accumulated within operating
(or production) departments are assigned to cost
objects.
43Cost Allocation
44Cost Allocation
- Activity-based Costing
- Attempts to better allocate costs to the desired
cost objects by focusing on activities consumed
by the cost objects. - Many activities within a department drive
overhead costs. - Products require activities.
- Activities consume resources.
45Cost Allocation
- Activity-based Costing Procedures
- Identify activities that consume resources.
- Assign costs to a cost pool for each activity.
- Identify cost drivers associated with each
activity. - Compute overhead rate for each cost pool.
46Cost Allocation
- Activity-based Costing Identifying Cost Drivers
- Most cost drivers are related to either volume or
complexity of production. - Examples purchasing, invoicing, quality
inspection, product design. - Three factors in choosing a cost driver
- Causal relationship
- Benefits received
- Reasonableness.
47Cost Allocation
Activity-based Costing Cost and Cost Driver
48Cost Allocation
- Activity-based Costing Benefits
- More detailed measures of costs
- Better understanding of activities
- More accurate product costs for . . .
- Pricing decisions
- Product elimination decisions
- Managing activities that cause costs
- Benefits should always be compared with costs of
implementation
49Summary
- Managerial accounting is quite important to
planning, control, and decision making
activities. - Managerial accounting and financial accounting
are different in users, time focus, requirements,
etc. - Costs can be classified by relevance, behaviour,
controllability, traceability, and function. - Flow of manufacturing activities.
- Similarities and differences between job order
and process cost accounting systems - The methods of cost allocation plant-wide
overhead rate, two stage cost allocation,
activity-based costing
50Case Study
- ABC Company acquired its factory building about
25 years ago. For a number of years, the company
has rented out a small, unused part of the
building. The renter's lease will expire soon.
Rather than renewing the lease, ABC Company is
considering using the space itself to manufacture
a new product. Under this option, the unused
space will continue to be depreciated on a
straight-line basis, as in past years.
51Case Study
- Direct materials and direct labour cost for the
new product is 45 per unit. In order to store
finished units of the new product, the company
will rent a small warehouse nearby. The rental
cost is 1,800 per month. It will cost the
company an additional 3,500 each month to
advertise the new product. A new production
supervisor, hired to oversee production of the
new product, will be paid 2,500 per month. The
company will pay a sales commission of 12 for
each unit of product that is sold.
52Case Study
- Required
- Complete the chart below (in the next page) by
placing an "?" under each column heading that
helps to identify the costs listed to the left.
You can place an "?" under more than one heading
for a single cost for example, a cost may be a
product cost, an opportunity cost, and a sunk
cost you would place an "?" under each of these
headings on the answer sheet opposite the cost.
53Case Study
54The End of Lesson 13