Management Accounting The Cornerstone for Business Decisions Basic

Learning Objectives 1. Explain the meaning of cost and how costs are assigned to products and services. 2. Define the various costs of producing and services, as well as the costs of selling and administration. 3. Prepare income statements for manufacturing and service organizations.

Match Definitions Cost Expired costs Expenses The way a cost is linked to some cost object Price Accumulating Costs Assigning Costs Amount of cash sacrificed for goods or services expected to bring future or current benefit The way costs are measured and recorded Revenue per unit

Discuss Costs

Discuss Costs Continued

What are cost objects?

What is the difference between direct and indirect costs? ◙ Direct costs ◙ Indirect costs

Illustrate Object Costing

Review Assigning Indirect Costs

Match Definitions Variable Cost Fixed Cost Opportunity Cost Benefits given up when one alternative is chosen over another A cost that increases as output increases & decreases as output decreases A cost that does not change as output increases or decreases

How do products and services differ? Products Services

Define three components of producing a product. ◙ Raw Materials ◙ Direct Labor ◙ Overhead

Illustrate Product Costing

2 -1 How to calculate product cost in total and per unit. Blue. Denim Company makes blue jeans. Last week, direct materials costing $38, 400 were put into production. Direct labor of $24, 000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57, 600. By the end of the week, the company had completed 24, 000 pairs of jeans.

2 -1 How to calculate product cost in total and per unit. REQUIRED: Calculate the total product cost for the last week. Calculate the cost of one pair of jeans that produced for the last week. Calculation:

What costs make up prime costs and conversion costs? Prime Costs Conversion Costs Direct Materials Direct Labor Overhead

2 -2 How to calculate prime cost and conversion cost in total and per unit. Blue. Denim Company makes blue jeans. Last week, direct materials costing $38, 400 were put into production. Direct labor of $24, 000 (40 workers X 40 hours X $15 per hour) was incurred. Overhead equaled $57, 600. By the end of the week, the company had completed 24, 000 pairs of jeans.

2 -2 How to calculate prime cost and conversion cost in total and per unit. REQUIRED: Calculate the total prime cost last week. Calculate the per-unit prime cost. Calculate the total conversion cost for last week. Calculate the per-unit conversion cost. Calculation:

Define Period Costs

2 -3 How to calculate the direct materials used in production. Blue. Denim Company makes blue jeans. On July 1, Blue. Denim had $48, 000 of materials in inventory. During the month of July, the company purchased $238, 000 of materials. On July 31, materials inventory equaled $30, 000.

2 -3 How to calculate the direct materials used in production. REQUIRED: Calculate the direct materials used in production for the month of July. Calculation:

2 -4 How to calculate the cost of goods manufactured. Recall that Blue. Denim Company makes blue jeans. During the month of July, the company purchased $238, 000 of materials. On July 31, materials inventory equaled $30, 000. During the month of July Blue. Denim Company incurred direct labor of $115, 000 and overhead of $150, 000. Materials Work in process July 1 $ 48, 000 30, 000 July 31 $ 30, 000 26, 000

2 -4 How to calculate cost of goods manufactured. REQUIRED: Calculate the cost of goods manufactured for the month of July. Calculate the cost of one pair of jeans assuming 105, 000 pairs of jeans were completed during July. Calculation:

How to calculate cost of goods sold. 2 -5 Blue. Denim Company makes blue jeans. During the month of July 105, 000 pairs of jeans were completed at a cost of goods manufactured of $525, 000. Suppose that on July 1 Blue. Denim had 8, 000 units in finished goods inventory costing $40, 000, and on July 31 the company had 14, 000 finished goods costing $70, 000.

How to calculate cost of goods sold. 2 -6 REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation:

2 -6 How to calculate cost of goods sold. Continued REQUIRED: Calculate the cost of goods sold for the month of July. Calculate the number of pairs of jeans that were sold during July. Calculation:

2 -6 How to prepare an income statement for a manufacturing company. Recall that Blue. Denim sold 99, 000 pairs of jeans during the month of July at a total cost of $495, 000. Each pair sold at a price of $8. Blue. Denim also incurred two types of selling costs: commissions equal to 10% of the sales price and other selling expenses of $120, 000. Administrative expenses totaled $85, 000.

2 -6 How to prepare an income statement for a manufacturing firm. REQUIRED: Prepare an income statement for Blue. Denim for the month of July. Calculation:

2 -7 How to calculate the percentage of sales for each line of the income statement. Recall Blue. Denim Company income statement for the month of July was completed and shown on Cornerstone 2 -6. REQUIRED: Prepare an income statement for Blue. Denim for the month of July. Calculation: Income statement appears on the next slide. Every item is divided by Sales , i. e. , Sales; 792, 000 / 792, 000 = 100. 0%, Cost of goods sold; $495, 000 / $795, 000 = 62. 5%

2 -7 How to calculate the percentage of sales for each line of the income statement.

2 -8 How to prepare an income statement for a service organization. Komala Information Systems designs and installs human resources software for small companies. Last month, Komala had materials costs of $8, 000, direct labor (computer technicians, software designers) of $50, 000 and overhead of $65, 000. Selling expenses of $7, 000 and administrative expenses equaled $7, 000. Sales totaled $165, 000. REQUIRED: Prepare an income statement for Komala Information Systems for the past month. Calculation: Appears on the next slide

2 -8 How to prepare an income statement for a service organization.