Welcome to

Management
Accounting

Dr. Shu-Hui Su (sue)

E-mail: shuhuisu@isu.edu.tw
 Nature of Business
 The objective of most businesses
is to earn a profit.
 Profit = Revenue – Expense (cost).
 Profit is the difference between the
amounts received from customers
for goods or services and the
amounts paid for the inputs used
to provide the goods or services.
 Comparison of Financial and
Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
 Planning—choosing goals and deciding how to
achieve them
 Common goal—to increase operating income (profits)
 Achieved by raising prices or advertising more
 Budget—a mathematical expression of the plan
 Used to coordinate the business’s activities
 Shows the expected financial impact of decisions
 Helps identify the resources needed to achieve goals
 Controlling—implementing the plans and
evaluating operations
 By comparing actual results to the budget
 Cost data helps managers make decisions
4
 Prestudy-1
 The plans of management are
often expressed formally in:
 A) financial statements.
 B) performance reports.
 C) budgets.
 D) ledgers.
Role of Managerial Accounting
in Organizations
Decision-
Making
Orientation

The purpose of managerial accounting is to

provide useful information to internal
managers to help them make decisions that
arise as they manage people, projects,
products, or segments of the business.
6
 Prestudy-2
 The phase of accounting concerned
with providing information to
managers for use in planning and
controlling operations and in
decision making is called:
 A) throughput time.
 B) managerial accounting.
 C) financial accounting.
 D) controlling.
 Prestudy-3
 Managerial accounting places
considerable weight on:
 A) generally accepted accounting
principles.
 B) the financial history of the entity.
 C) ensuring that all transactions are
properly recorded.
 D) detailed segment reports about
departments, products, and customers.
Cost Concepts

Chapter 2
Learning Objective 2
Identify and give examples
of each of the three basic
manufacturing cost
categories.
 Manufacturing Costs
Direct Direct Manufacturing
Materials Labor Overhead

The Product
 Prestudy-4

The three basic elements of

manufacturing cost are direct
materials, direct labor, and:
A. cost of goods manufactured.
B. cost of goods sold.
C. work in process.
D. manufacturing overhead.
 Direct Materials
Raw 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

 Direct Labor
Those labor costs that can be
easily traced to individual
units of product.

Example: Wages paid to automobile assembly workers

 Manufacturing Overhead
Manufacturing costs that cannot
be traced directly to specific
units produced.
Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
 Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost
 Thecosts of direct materials are
classified as:


 A. Choice A
 B. Choice B
 C. Choice C
 D. Choice D
18
 Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.
 Prestudy-5

The corporate controller's

salary would be considered
a(n):
A. manufacturing cost.
B. product cost.
C. administrative cost.
D. selling expense.
Learning Objective 3
Distinguish between
product costs and period
costs and give examples
of each.
 Classification of total cost
Cost in factory, plant Cost out of factory, plant
Manufacturing Cost No-Manufacturing Cost

Product Cost Period Cost

direct cost In-direct Selling Admin.

DM DL MOH Cost Cost

Finished Cost of
goods sold
Goods
Product Costs Versus Period Costs

Product costs include

direct materials, direct Period costs include
labor, and all selling costs and
manufacturing administrative costs.
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Purchases of
materials
Materials
Inventory INCOME STATEMENT

Total
Sales revenue
Direct labor & Work in
manufacturing Process -
overhead
Inventory When
sales Cost of Product
Product Costs occur Goods Sold Costs
Finished -
Goods Operating Period
Inventory
Expenses Costs
=
24
Operating Income
 Type Inventoriable Period costs
product costs (Expenses)
Manufactu Direct materials, Delivery expense;
ring direct labor, and depreciation expense,
company manufacturing utilities, insurance,
overhead (including and property taxes on
indirect materials; executive (corporate)
indirect labor; headquarters, office,
depreciation on the warehouse;
manufacturing plant advertising; selling
and equipment; (sales);
plant insurance, billing ;shipping
factory utilities, and CEO’s salary
property taxes
25
 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.
E. Sales commissions.
 Prestudy-6
The cost of fire insurance
for a manufacturing plant is
generally considered to be a:
A. product cost.
B. period cost.
 C. variable cost.
D. all of these.
In-class exercise
cost term
 P roduct P eriod
Cost Cost
1. Depreciation on salespersons’ cars

2. Rent on equipment used in the factory

3. Lubricants used for maintenance of machines

4. Salaries of finished goods warehouse

personnel
5. Soap and paper towels used by factory
workers at the end of a shift
6. Factory supervisors’ salaries

7. Heat, water, and power consumed in the

factory
8. Materials used for boxing products for
shipment overseas (units are not normally
boxed)
 P roduct P eriod
Cost Cost
9. Advertising costs

10 Workers’ compensation insurance on factory

. employees
11 Depreciation on chairs and tables in the
. factory lunchroom
12 The wages of the receptionist in the
. administrative offices
13 Lease cost of the corporate jet used by the
. company's executives
14 Rent on rooms at a Florida resort for holding
. the annual sales conference
15 Attractively designed box for packaging the
. company’s product—breakfast cereal
 QUIZ1
Problem2-19
 Example
for
midterm
exam
problem-1
20%
Factory labor, direct $100
Advertising $50
Factory supervision $45
Property taxes, factory building $25
Sales commissions $80
Insurance, factory $20
Depreciation, administrative office $40
equipment
Lease cost, factory equipment $10
Indirect materials, factory $35
Depreciation, factory building $15
Administrative office supplies (billing) $30
Administrative office salaries $60
Direct materials used (wood, bolts, etc.) $55
Utilities, factory $20
Learning Objective 4
Prepare an income
statement including
calculation of the cost of
goods sold.
 Comparing Merchandising and
Manufacturing Companies
Merchandisers . Manufacturers . . .
Buy finished Buy raw
goods. materials.
Sell finished Produce and sell
goods. finished goods.
MegaLoMart

McGraw-Hill/Irwin
 Balance Sheet
Manufacturer
Merchandiser Current Assets
u Cash
Current assets u Receivables
Cash u Inventories
• Raw Materials
Receivables
• Work in Process
Merchandise • Finished Goods
Inventory
 Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
 Cash u Cash
Materials waiting to
 Receivables u Receivables
be processed.
 Merchandise Inventory u Inventories
Partially complete
products – some • Raw Materials
material, labor, or • Work in Process
overhead has been • Finished Goods
added.
Completed products
awaiting sale.
 The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $ 248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $ 236,250
Basic Equation for Inventory Accounts

Withdrawals
Beginning Additions Ending
balance + to inventory = balance + from
inventory

Cost of
Purchase good
sold
 Quick Check 
If your inventory balance at the
beginning of the month was $1,000, you
bought $100 during the month, and
sold $300 during the month, what
would be the balance at the end of the
month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
Learning Objective 4

Prepare a schedule of cost

of goods manufactured
and income statement.
 Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead
used in production.

Calculates the manufacturing

costs associated with goods
that were finished during the
period.
 Calculate
 1. the cost of direct material used?
 2. total manufacturing costs incurred?
 3. the cost of goods manufactured?
 4. the cost of goods sold ?
(Product Cost )?
 5. the operating expense ?
(Period cost)?
 6. the net income or net loss?
Sales - Product Cost- Period cost
Purchases of
materials
Materials
Inventory INCOME STATEMENT

1 Total
Sales revenue
Direct labor & Work in
manufacturing Process -
overhead Inventory When 4
sales Cost of Product
Product Costs 2 occur Goods Sold Costs
Finished
3 -
Goods 5Operating Period
Inventory
Expenses Costs
6 =
47
Operating Income
 1.Calculation for the cost of
direct material used?
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
As items are removed from raw
inventory materials inventory and placed into
= Raw materials used the production process, they are
in production 1 called direct materials.
 Quick Check 
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end
of the month revealed that $28,000 of raw
material was still present. What is the cost
of direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
2.Calculation for total manufacturing costs
incurred for the month?
Manufacturing Work
Raw Materials Costs In Process
Conversion
Beginning raw Direct materials costs are costs
materials inventory + Direct labor incurred to
+ Raw materials + Mfg. overhead convert the
purchased = Total manufacturing
direct material
= Raw materials costs
available for use 2 into a finished
in production product.
– Ending raw materials
inventory
= Raw materials used
in production
 Quick Check 
Direct materials used in production
totaled $280,000. Direct labor was
$375,000 and factory overhead was
$180,000. What were total
manufacturing costs incurred for
the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
All manufacturing costs incurred
inventory
= Raw materials used during the period are added to the
in production beginning balance of work in
process.
 3. Calculation for the cost of
goods manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
Costs associated with the goods that
= Raw materials used = Cost of goods
areincompleted
production
during the period are manufactured 3
transferred to finished goods
inventory.
 Quick Check 
Beginning work in process was
$125,000. Manufacturing costs
incurred for the month were $835,000.
There were $200,000 of partially
finished goods remaining in work in
process inventory at the end of the
month. What was the cost of goods
manufactured during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
 Prestudy-7
 Green Company's costs for the month of
August were as follows: direct materials,
$27,000; direct labor, $34,000; selling,
$14,000; administrative, $12,000; and
manufacturing overhead, $44,000. The
beginning work in process inventory was
$16,000 and the ending work in process
inventory was $9,000. What was the cost
of goods manufactured for the month?
A. $105,000
B. $132,000
C. $138,000
D. $112,000
4. Calculation for the cost of goods
sold for the month?
Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
3 4
 Quick Check 
Beginning finished goods inventory
was $130,000. The cost of goods
manufactured for the month was
$760,000. And the ending finished
goods inventory was $150,000. What
was the cost of goods sold for the
month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Learning Objective 5

Understand the
differences between
variable costs and fixed
costs.
 Cost Classifications for
Predicting Cost Behavior
How a cost will react
to changes in the
level of activity
within the relevant
range.
 Totalvariable costs
change when activity
changes.
 Totalfixed costs
remain unchanged
when activity changes.
 Variable Cost
Your total long distance telephone
bill is based on how many minutes
you talk.
Total Long Distance
Telephone Bill

Minutes Talked
 Variable Cost Per Unit
The cost per long distance minute
talked is constant. For example, 10
cents per minute.

Telephone Charge
Per Minute

Minutes Talked
 Fixed Cost
Your monthly basic telephone bill
probably does not change when you
make more local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

 Fixed Cost Per Unit
The average fixed cost per local call
decreases as more local calls are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
 Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
 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.
 Prestudy-8
 Within the relevant range, the difference
between variable costs and fixed costs
is:
A. variable costs per unit fluctuate and
fixed costs per unit remain constant.
B. variable costs per unit are constant
and fixed costs per unit fluctuate.
C. both total variable costs and total fixed
costs are constant.
D. both total variable costs and total fixed
costs fluctuate.
Learning Objective 6

Understand the
differences between direct
and indirect costs.
 Assigning Costs to Cost
Objects
Direct costs Indirect costs
 Costs that can be  Costs that cannot be
easily and easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost object. or other cost object.
 Examples: direct  Example:
material and direct manufacturing
labor overhead
 Prestudy-9
 Which two terms below describe the
wages paid to security guards that
monitor a factory 24 hours a day?
A. variable cost and direct cost
B. fixed cost and direct cost
C. variable cost and indirect cost
D. fixed cost and indirect cost
Learning Objective 7

Define and give examples

of cost classifications used
in making decisions:
differential costs,
opportunity costs, and
sunk costs.
 Cost Classifications for
Decision Making
 Every
decision involves a choice
between at least two alternatives.

 Only those costs and benefits that

differ between alternatives are
relevant in a decision. All other costs
and benefits can and should be
ignored.
Differential Cost and Revenue
Costs and revenues that differ
among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have 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

Differential cost is:

$300
 Opportunity Cost
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.
 Prestudy-10
 Buford Company rents out a small unused
portion of its factory to another company
for $1,000 per month. The rental
agreement will expire next month, and
rather than renew the agreement Buford
Company is thinking about using the
space itself to store materials. The term to
describe the $1,000 per month is:
A. sunk cost.
B. period cost.
C. opportunity cost.
D. variable cost.
 Sunk Costs
Sunk costs have already been incurred
and cannot be changed now or in the
future. They 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.
 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.
Summary of the Types of Cost
Classifications
Financial Predicting Cost
Reporting Behavior

Assigning Costs Making Business

to Cost Objects Decisions
 QUIZ1
Problem2-18
Prepare a schedule of cost of
goods manufactured and
income statement.
Moodle Quiz-1-P2-18
Learning Objective

Prepare a schedule of
cost of goods
manufactured and
income statement.
 Concept review
 1. the cost of direct material used?
 2. the manufacturing overhead costs?
 3. total manufacturing costs incurred?
 4. the cost of goods manufactured?
 5. the cost of goods sold (product cost)?
 6. Gross margin?
 Sales-Cost of good sold
 7. Operating Expenses (Period cost)?
 8. the net income or net loss?
 Gross margin - Operating Expenses
Direct materials:

Beginning raw materials inventory $ 60,000

Add: Purchases of raw materials 690,000
Raw materials available for use 750,000
Deduct: Ending raw materials inventory 45,000 1
Raw materials used in production $ 705,000
Direct labor 135,000
Manufacturing overhead 2 370,000
Total manufacturing costs 3 1,210,000
Add: Beginning work in process inventory 120,000

1,330,000

Deduct: Ending work in process inventory 130,000

Cost of goods manufactured 4 $1,200,000

Sales $2,450,000

Cost of goods sold:

Beginning finished goods inventory $ 590,000

Add: Cost of goods manufactured 1,200,000

Goods available for sale 1,749,000

5
Deduct: Ending finished goods inventory 49,000 1,700,000

Gross margin 6 750,000

Selling and administrative expenses:

Selling expenses 230,000

7
Administrative expenses 260,000 490,000

Net operating income 8 $ 260,000

Finished goods inventory, beginning $20
Finished goods inventory, ending 40
Depreciation, factory 22
Administrative expenses 110
Utilities, factory 8
Maintenance, factory 40
Supplies, factory 10
Insurance, factory 5
Purchase of raw materials 125
Raw materials inventory, beginning 10
Raw materials inventory, ending 15
Diredt labor 70
Indirect labor 15
Work in process inventory, beginning 20
Work in process inventory, ending 30
Sales 500
Selling Expenses 80
 Problem2-18
Finished goods inventory, beginning $20,000
Finished goods inventory, ending 40,000
Depreciation, factory 27,000
Administrative expenses 110,000
Utilities, factory 8,000
Maintenance, factory 40,000
Supplies, factory 11,000
Insurance, factory 4,000
Purchase of raw materials 125,000
Raw materials inventory, beginning 9,000
Raw materials inventory, ending 6,000
Direct labor 70,000
Indirect labor 15,000
Work in process inventory, beginning 17,000
Work in process inventory, ending 30,000
Sales 500,000
Selling Expenses 80,000