Ch 2 Managerial accounting Cost Concept PDF

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Chapter 2 Managerial accounting Cost Concept details...

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Business Examples Videos 

Pearson 2: Fishes Eddy – Julie Gains (7min) – business start-up, fixed, COGS, financing) 

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Pearson 3: Rosa Mexicano -Jeanette Cebollero, CFO (7 min) – restaurant decisions 

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http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830028cc2045f53b0bfa#1002 8

Pearson 10: Rosa Mexicano Jason Berry COO (4min) – LT assets/equipment, depreciation 

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http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830028cc2045f53b0bfa#1002 8

Pearson 5: Fishes Eddy – Noah Lenovitz COO (7min) - merchandizing, COGS, expenses 

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http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830028cc2045f53b0bfa#1002 8

Pearson 11: Sheffield Pharmaceuticals (4min) – use of Debt, Current Liabilities, Payroll 

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http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830028cc2045f53b0bfa#1002 8

http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830028cc2045f53b0bfa#1002 8

Pearson 9 : Zack Mack – Alphabet City Beer – store operations, inventory © 2014 McGraw-Hill Ryerson

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http://media.pearsoncmg.com/ph/bp/bp_video_links/2014/accounting/real_world/pearson_rw_zmack_final.html

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Nelson Brain 4: Nederlander Concerts (10 min) Business overview –ops, fixed costs, the

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Week 6 

Current events

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Q&A – ICE’s?, Homework?, Team Assignment? Quiz/Exams?

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Financial Analysis – Brief Review

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Today: Class 6: Brewer Chap.2 – Cost Concepts

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In-Class time to meet in MS Teams (instructor will visit all today)

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10%Quiz#1 : Available this week, for 7-days

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Looking ahead… Week 7 class next week: Brewer Chap.6 Cost Behaviours  Week 8: Intersession  Week 9: Midterm Exam (after Intersession): 

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Written during class time On Connect, same format as Quiz and Homework Covers Classes 1-6 (Larson Vol.1&2, Brewer Chap.1,2) Approx. 90-minute duration Specific Announcement will be sent out

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CHAPTER 2 Cost Concepts

Prepared by

Rodney Delcourt, CPA (CMA) Algonquin College School of Business

Learning Objectives 1.

Understand cost classification by behaviour.

2.

Understand cost classification by traceability.

3.

Understand cost classification by relevance.

4.

Understand cost classification by function.

5.

Prepare financial reports.

6.

Understand and prepare manufacturing reports.

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Cost Classifications by Behaviour How a cost will react to changes in the level of business activity: variable costs change when activity changes.

 Total

fixed costs remain unchanged when activity changes.

 Total

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Variable Costs

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Fixed Costs

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LO1

Cost Classifications for Predicting Cost Behaviour Behaviour of Cost (within the relevant range) Cost

In Total

Per Unit

Variable

Total variable cost changes as activity level changes.

Variable cost per unit remains the same over wide ranges of activity.

Fixed

Total fixed cost remains the same even when the activity level changes.

Fixed cost per unit goes down as activity level goes up.

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Quick Check  Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (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.

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Quick Check Solution  Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) C. The cost of ice cream. D. The cost of napkins for customers.

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Quick Check  Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theatre? (There may be more than one correct answer.) A. The cost of renting the film. B. Royalties on ticket sales. C. Wage and salary costs of theatre employees. D. The cost of cleaning up after the show.

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Quick Check Solution  Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theatre? (There may be more than one correct answer.) B. Royalties on ticket sales. C. Wage and salary costs of theatre employees.

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Cost Classifications by Traceability How costs are assigned to Cost Objects:  Cost

Object: Anything for which cost information is desired (department, division, product, product line, etc).

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LO3

Differential (Relevant) Costs and Revenues Costs and revenues that differ among alternatives.

Example: •You have a job paying $1,500 per month in your hometown. •You get 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 is: $2,000 – $1,500 = $500 © 2014 McGraw-Hill Ryerson

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Differential cost is: $300

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LO3

Quick Check  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 pizza you ate last night while discussing the options relevant in this decision? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant. 15

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LO3

Quick Check  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 pizza you ate last night relevant in this decision? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant.

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LO3

Quick Check  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? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant. 17

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LO3

Quick Check  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? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant. 18

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Quick Check  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. © 2020 McGraw-Hill Limited

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Quick Check Solution  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? B. No, the licensing cost is not relevant. © 2020 McGraw-Hill Limited

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Quick Check  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 depreciation on your car relevant in this decision? A. Yes, the depreciation is relevant. B. No, the depreciation is not relevant.

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Quick Check Solution  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 Depreciation that don’t want to waste m is a function of kilometres needlessly. Is the depr driven would be relevant. your car relevant in th A. Yes, the depreciation is relevant. B. No, the depreciation is not Depreciation that is a relevant. © 2020 McGraw-Hill Limited

function of the passage of time would not be relevant.

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LO3

Note 

Every decision involves a choice from among at least two alternatives.

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Only those costs and benefits that differ between alternatives (i.e., differential costs and benefits) are relevant in a decision. All other costs and benefits can and should be ignored.

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LO3

What is an Opportunity Cost ?

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LO3

Opportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

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LO3

What is a Sunk Cost ?

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LO3

Sunk Costs Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

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LO3

Quick Check  Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

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LO3

Quick Check  Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

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Fishs Eddy 

Fishs Eddy : Julie Gains (7min) – start-up, financing, fixed vs. variable costs, expenses, (Pearson Chap.2) 

http://openvellum.ecollege.com/course.html?courseId=13393761&HepID=7e604316fd5e830 028cc2045f53b0bfa#10028

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What kind of company is Fishs Eddy?

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How are they “Financed”?

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What are their primary “fixed” costs?

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What is their primary variable cost?

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How many sales “channels” do they have?

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What are their core “strengths” (what do they do well)?

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Comparing Merchandising and Manufacturing Activities Merchandisers . . .

Manufacturers . . .

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Buy finished goods.

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Buy raw materials.

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Sell finished goods.



Produce and sell finished goods.

MegaLoMart

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LO4

Balance Sheet Merchandiser Current assets

Manufacturer Current Assets

 Cash

฀ Cash

 Receivables

฀ Receivables

 Prepaid

฀ Prepaid Expenses

expenses  Merchandise inventory (Finshed good)

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฀ Inventories Raw Materials Work in Process Finished Goods

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LO4

Balance Sheet Merchandiser Current assets

Manufacturer Current Assets

 Cash

฀ Cash

 Receivables

฀ Receivables Materials waiting to

 Prepaid

be processed. ฀ Inventories

expenses  Merchandise inventory Partially complete products – some material, labour, or overhead has been added. © 2014 McGraw-Hill Ryerson

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Raw Materials Work in Process Finished Goods

Completed products awaiting sale. 33

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LO2

Direct Costs and Indirect Costs Direct costs

Indirect costs



Costs that can be easily and conveniently traced to a unit of product or other cost objective.



Costs cannot be easily and conveniently traced to a unit of product or other cost object.



Examples: direct material and direct labour



Example: manufacturing overhead

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Direct and Indirect Costs of an individual flight

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LO4

Manufacturing Costs Direct Materials

Direct Labour

Manufacturing M g Overhead

The Product © 2014 McGraw-Hill Ryerson

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LO4

1) Direct Materials Those 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 © 2014 McGraw-Hill Ryerson

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LO4

2) Direct Labour Those labour costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers © 2014 McGraw-Hill Ryerson

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3) “Manufacturing Overhead” >>Plant costs that cannot be easily traced directly to the specific units produced. Indirect labour, Indirect materials & costs incurred to run factory

Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, plant manager, reception, security guards. © 2020 McGraw-Hill Limited

Materials used to support the production process. Examples: lubricants and cleaning supplies used in the assembly plant.

Costs incurred to run the factory Examples: rent, utilities, maintenance, insurance, taxes, equipment & building depreciation 39

Understanding costs, where they occur and how they are categorized in Financial Statements

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Direct Materials + Direct Labour + Manufacturing Overhea

= Manufacturing costs (also known as “Plant”, “Factory”,“Production” o “Product costs”)

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Understanding costs, where they occur and how they are categorized in Financial Statements

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Non-Manufacturing (non-plant) costs are called Period costs Sales, Corporate and Head Office costs

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Non-Manufacturing Costs Marketing and selling costs . . . 



Costs incurred to secure orders, deliver the products to customers and follow up with them. Examples: advertising, sales commissions and salaries

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Administrative costs . . . 

Costs associated with the general management of the company. All executive, organizational, and clerical costs.



Examples: Company president’s salary, office supplies

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Product Costs vs Period Costs Product costs include direct materials, direct labour, and manufacturing overhead. Inventory

Period costs are not included in product costs. They are expensed directly on income statement.

Cost of Goods Sold

Expense

Income Statement

Income Statement

Sale

Balance Sheet © 2020 McGraw-Hill Limited

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Quick Check  Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks. B. Sales commissions. C. The cost of a flight recorder in a Boeing 767. D. The wages of a production shift supervisor.

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Quick Check Solution  Which of the following costs would be considered manufacturing overhead at Boeing? (More than one answer may be correct.) A. Depreciation on factory forklift trucks.

D. The wages of a production shift supervisor.

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Quick Check  Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

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Quick Check Solution  Which of the following costs would be considered a period rather than a product cost in a manufacturing company? B. Property taxes on corporate headquarters.

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Balance Sheet Manufacturer Current Assets ฀ Cash ฀ Receivables ฀ Prepaid Expenses ฀ Inventories Raw Materials Work in Process Finished Goods

Materials waiting to be processed. Partially complete products – some material, labour, or overhead has been added. Completed products awaiting sale.

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The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise inventory + Purchases Goods available for sale - Ending merchandise inventory = Cost of goods sold

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$ 14,200 234,150 $ 248,350

(12,100) $ 236,250

Manufacturing Company Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cos...