Managerial Accounting, 13th Edition,

Garrison/ Noreen/ Brewer

Chapter 2
Managerial Accounting and Cost
Concepts
The Work of Management and
the Need for Managerial
Accounting Information

Everyorganization-large and small-

has managers.

Managers carry out three major

activities-planning, directing &
motivating and controlling.
 Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organizations
organizations objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
 Directing and Motivating
Directing and motivating involves managing day-
to-day activities to keep the organization
functioning smoothly. For example-

Assigning tasks to employees,

Arbitrating disputes,
Answering questions,
Solving on-the-spot problems,
Making Decisions etc.
 Controlling
The control function ensures that plans are being
followed.

Feedback in the form of performance reports that

compare actual results with the Budget are an
essential part of the control function.

Performance reports suggest where operations

are not proceeding as planned and where some
parts of the organization may require additional
attention.
 Planning and Control Cycle
Formulating
Formulatinglong-
long-
and
andshort-term
short-termplans
plans
(Planning)
(Planning)

Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance Making plans(Directing
(Directing
performance and
(Controlling) andMotivating)
Motivating)
(Controlling)

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
 Comparison of Financial
and Managerial Accounting

Users

Emphasis on the
future

Relevance of Data
Emphasis on
precision
Segments of an
organization

GAAP

Requirement
 General Cost
Classifications
Manufacturing Costs:
Manufacturing costs can be classified into three broad
categories:
1. Direct Materials: Raw materials that become an integral
part of the product and that can be conveniently traced
directly to it. For example: A radio installed in an
automobile.
2. Direct Labor: Those labor costs that can be easily
traced to individual units of product. For example: Wages
paid to automobile assembly workers.
 General Cost
Classifications
3. Manufacturing Overhead: Manufacturing costs that
cannot be traced directly to specific units produced.
For example: Indirect materials and indirect labor.

Indirect Materials: Materials used to support the

production process. For example: lubricants and
cleaning supplies used in the automobile assembly
plant.
Indirect labor: Wages paid to employees who are
not directly involved in production work. For
example: maintenance workers, janitors and
security guards.
 General Cost
Classifications
Nonmanufacturing Costs:
Nonmanufacturing costs are often divided into two
categories:

1.Selling Costs: Costs necessary to secure the order

and deliver the product.

2.Administrative Costs: All executive, organizational,

and clerical costs associated with the general
management of the organization.
 Product Costs Versus
Period Costs
Product costs include Period costs include all
direct materials, direct selling costs and
labor, and manufacturing administrative costs.
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Also known as inventoriable
costs.
 Prime Cost and
Conversion Cost

Prime Cost is the sum of direct materials

cost and direct labor cost.

Conversion cost is the sum of direct

labor cost and manufacturing overhead
cost.
 Cost Classifications on
Financial Statements
The Balance Sheet

Merchandising Manufacturing
Company Company
Current Assets: Current Assets:
1. Cash 1. Cash
2. Receivables
2. Receivables
3. Inventories
3. Merchandise Raw Materials
Inventory Work in Process
Finished Goods
 Cost Classifications on
Financial Statements
The Balance Sheet

Inventories for a manufacturing Company:

Raw Materials: Materials waiting to be

processed.
Work in Process: Partially complete products
some material, labor, or overhead has been added.
Finished Goods: Completed products awaiting
sale.
 Cost Classifications on
Financial Statements
The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of
goods sold for merchandisers.
 Cost Classifications on
Financial Statements
The Income Statement
Basic Equation for Inventory Accounts:

Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
 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.
 Product Cost Flows
Balance Sheet Income
Costs Statement
Material Purchases Raw Materials
Product Costs

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods Goods Sold
Sold

Selling and Period Costs Selling and

Administrative Administrative
 Cost Classifications for
Predicting Cost Behavior

Cost behavior refers to how a cost reacts to changes

in the level of activity within the relevant range.

Total variable costs change when activity changes.

Total fixed costs remain unchanged when activity
changes.
 Variable Cost

Total cost of batteries is based on the

number of autos produced in a month.
Total Cost of
batteries

Number of Autos
produced in a month
 Variable Cost
Variable Cost Per Unit: The per unit cost
of batteries remains constant at $24.
Per Unit Cost of
Batteries

Number of Autos
produced in a month
 Fixed Cost
Total cost of monthly rent is fixed for the number of lab
tests performed in a month. The monthly rent does not
change based on the number of lab tests that may be
performed during the month.
Total cost of rent

Number of lab tests

performed in a month
 Fixed Cost
Fixed Cost per Unit increases and decreases inversely and
changes in activity. For example the average cost per unit
will fall as the number of test performed increases.

Monthly Rent For the

Machine

Number of lab tests

performed in a month
Summary of Variable and
Fixed Cost Behavior
 Cost Classifications for
Assigning Costs to Cost Objects
A cost object is anything for which cost data are desired-including
products, customers, jobs, and organizational subunits. For the purpose o
assigning cost to cost objects, costs are classified as:

Direct Cost: A cost that can be easily and conveniently traced to a

specified cost objects.

Indirect Cost: A cost that can not be easily and conveniently traced to a
specified cost objects.
A common cost is a cost that is incurred to support a number of cost
objects but can not be traced to them individually .

A particular cost can be direct or indirect depending on the cost

object.