1-1
Exhibit 1-1
Planning and Control Cycle
Formulating long-and
short-term plans
(Planning)
Comparing actual
to planned
performance
(Controlling)
Decision
Making
Measuring
performance
(Controlling)
Begin
Implementing
plans (Directing and
Motivating)
1-2
Exhibit 1-2
Comparison of Financial and Managerial Accounting
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6. GAAP
Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
Mandatory for
external reports
Not
Mandatory
1. Users
2. Time focus
7. Requirement
Learning Objectives 2 – 5: Multiple cost definitions
I’m going to present the different costs in a way that may help illustrate “the whole divided into parts.”
COSTS
Manufacturing
AKA:
Product Costs
Inventoriable Costs
DM
Nonmanufacturing
AKA:
Period Costs
Balance
Sheet
Income
Statement
DL
S,G & A
MOH
Direct Material:
Material that becomes part of the final
product & can be conveniently traced to it.
Direct Labor:
Labor costs that can be easily traced to the
final product.
Manufacturing Overhead:
Manufacturing costs that cannot be easily &
conveniently traced directly to specific units
produced.
Selling:
Sales Commission
Rent on sales facility
Free samples
Administrative:
Secretarial salaries
Human Resources
CEO & Executive salaries
Baseball Video
Try to identify items as one of the three manufacturing (product) costs
Prime Costs:
Conversion Costs:
BE 1-2
DM + DL
DL + MOH
Manufacturing Cost Flows
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Summary of Cost Flow
Raw Materials
Direct Material
Indirect Material
Wages Payable
Direct Labor
Indirect Labor
Balance Sheet
Work in Process
DM
DL
MOHApplied
Mfg. Overhead
IDM Overhead
IDL Applied to
WIP
Other
Finished Goods
COGM
Income Statement
Cost of Goods Sold
COGS
1-6
End of Chapter 1
Chapter 2
Job-Order Costing
2-8
Job-Order Costing—An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge direct
material and
direct labor
costs to each
job as work is
performed.
2-9
Job-Order Costing—An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Manufacturing
Overhead,
including indirect
materials and
indirect labor, are
allocated to jobs
rather than
directly traced to
each job.
Manufacturing Overhead Application
POAR =
POAR =
Estimated (Budgeted) total
Manufacturing overhead cost
Estimated (Budgeted) total
allocation base
$640,000
160,000 direct labor hours (DLH)
POAR = $4.00 per DLH
Overhead Applied During the Period
Applied Overhead = POAR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Q1. Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000.
What would be recorded as the cost of job WR53?
A)
B)
C)
D)
$200.
$350.
$380.
$730.
Q1. Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000.
What would be recorded as the cost of job WR53?
A)
B)
C)
D)
$200.
$350.
$380.
$730.
POHR = $760,000/20,000hours = $38
Direct materials
$200
Direct labor
$15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Total cost
$730
2-13
Defining Under- and Overapplied
Overhead
Over/Under-applied overhead := The difference
between the overhead cost applied to WIP and the
actual overhead costs.
Overapplied overhead:
Underapplied overhead :
Actual < Applied
Actual > Applied
2-14
Disposition of Under- or Overapplied
Overhead
Mfg. Overhead
Actual
overhead
costs
Overhead
applied
to jobs
$650,000
Cost of Goods Sold
Unadjusted
Balance
$30,000
$680,000
$30,000
overapplied
$30,000
ø
Adjusted
Balance
2-15
End of Chapter 2
Chapter 3
Systems Design: ActivityBased Costing
McGraw-Hill /Irwin
© The McGraw-Hill Companies, Inc., 2007
Activity-Based Costing (ABC)
For each activity in
isolation, this system works exactly
like the job-order costing system
described in Chapter 2.
A POAR is computed for each activity (estimates) &
then applied based on the actual amount of activity.
Hierarchy of Activities
Level
Activities
Activity Measure
Unit-level
Processing units on machines
Processing units by hand
Consuming factory supplies
Machine-hours
Direct labor-hours
Units produced
Batch-level
Processing purchase orders
Processing production orders
Setting up equipment
Handling materials
Purchase orders processed
Production orders processed
Number of setups
Pounds of material handled
Product-level
Testing new products
Administering parts inventories
Designing products
Hours of testing time
Number of part types
Hours of design time
Facility-level
General factory administration
Plant building and grounds
Direct labor-hours
Direct labor-hours
3-19
Activity rates are determined as =
Estimated Total OH $ / Estimated Total Activity
Estimated
Overhead
Activity Cost Pool
Cost
Machine related
$ 175,000
Purchase orders
63,000
Machine setups
92,000
Product testing
160,000
General factory
300,000
$ 790,000
÷
÷
÷
÷
÷
Total
Expected
Activity
5,000 MHs
700 orders
460 setups
200 tests
25,000 DLH
=
=
=
=
=
Activity Rate
$ 35 per MH
$ 90 per order
$ 200 per setup
$ 800 per test
$ 12 per DLH
Cost Flows in an ABC System
Overhead is applied on the basis of actual
activities during the year.
Activity
Activity Cost Pool
Rate
Machine related
$35/MH
Purchase orders $90/order
Machine setups
$200/setup
Product testing
$800/test
General factory
$12/DLH
Total Overhead Applied
×
×
×
×
×
Actual
Activity
4,600 MHs
800 orders
500 setups
190 tests
23,000 DLHs
=
=
=
=
=
Applied
Overhead
Cost
$ 161,000
72,000
100,000
152,000
276,000
$ 761,000
ABC vs. Traditional Costing
Comtek Example
Activity-Based Costing
DVD Unit
CD Unit
Direct material
$ 90.00
$ 50.00
Direct labor
20.00
20.00
Manufacturing overhead
97.80
25.55
Unit product cost
$ 207.80
$ 95.55
Direct-Labor Costing
DVD Unit
CD Unit
$ 90.00 $ 50.00
20.00
20.00
40.00
40.00
$ 150.00 $ 110.00
Note that the unit product cost of a CD unit
decreased from $110 to $95.55 . . . . .
. . . . . while the unit cost of a DVD unit increased from
$150 to $207.80.
Shifting of Overhead Cost
Activity-Based Costing
DVD Unit
CD Unit
Direct material
$ 90.00
$ 50.00
Direct labor
20.00
20.00
Manufacturing overhead
97.80
25.55
Unit product cost
$ 207.80
$ 95.55
Direct-Labor Costing
DVD Unit
CD Unit
$ 90.00 $ 50.00
20.00
20.00
40.00
40.00
$ 150.00 $ 110.00
Low-volume product
When a company implements activity-based costing,
overhead cost often shifts from high-volume to lowvolume products with a higher unit product cost
resulting for the low-volume products.
ABC vs. Traditional Costing
Activity-Based Costing
DVD Unit
CD Unit
Direct material
$ 90.00
$ 50.00
Direct labor
20.00
20.00
Manufacturing overhead
97.80
25.55
Unit product cost
$ 207.80
$ 95.55
The ABC system assigns $14.45
less overhead than the traditional
system to each CD player.
Direct-Labor Costing
DVD Unit
CD Unit
$ 90.00 $ 50.00
20.00
20.00
40.00
40.00
$ 150.00 $ 110.00
ABC vs. Traditional Costing
Activity-Based Costing
DVD Unit
CD Unit
Direct material
$ 90.00
$ 50.00
Direct labor
20.00
20.00
Manufacturing overhead
97.80
25.55
Unit product cost
$ 207.80
$ 95.55
The ABC system assigns $57.80
more overhead than the traditional
system to each DVD player.
Direct-Labor Costing
DVD Unit
CD Unit
$ 90.00 $ 50.00
20.00
20.00
40.00
40.00
$ 150.00 $ 110.00
3-25
End of Chapter 3
Chapter 4
Process Costing
Flow of Materials, Labor, and
Overhead Costs
Direct
Materials
Direct Labor
Manufacturing
Overhead
Work in
Process
Finished
Goods
Cost of
Goods
Sold
Flow of Materials, Labor, and
Overhead Costs
Direct
Materials
Direct Labor
Manufacturing
Overhead
Costs are traced and
applied to departments
in a process cost
system.
Processing
Department
Finished
Goods
Cost of
Goods
Sold
Assume Two Processing Departments:
Partially Completed Units Transferred
Work in Process
Department A
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Transferred
to Dept. B
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
Transfer of Cost of Completed Units
(in T-Account form)
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
•Cost of
Goods
Manufactured
Finished Goods
•Cost of
Goods
Manufactured
Equivalent Units of Production
Equivalent units are the product of the number
of partially completed units and the percentage
of completion of those units.
We need to calculate equivalent units because a
department usually has some partially completed
units in its beginning and ending inventory.
Equivalent Units – The Basic Idea
Two half completed products are
equivalent to one completed product.
+
=
1
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
Learning Objective 2
Compute the equivalent
units of production using the
weighted-average method.
Characteristics of the Weighted
Average Method
The weighted-average method . . .
• Makes no distinction between work done in
prior or current periods.
• Blends together units and costs from prior
and current periods.
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Direct
Labor
Direct labor costs
may be small
Manufacturing in comparison to
Overhead
other product
costs in process
costing systems.
Type of Product Cost
Treatment of Direct Labor
Direct
Materials
Dollar Amount
Conversion
Direct labor costs
may be small
in comparison to
other product
costs in process
costing systems.
Type of Product Cost
Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
Weighted-Average – Equivalent Units
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in Work in Process
1st -
identify the physical units completed and transferred out.
2nd -
identify the equivalent units of production in ending work in
process with respect to materials (% Complete * Physical Units)
and adding this to the units from step one.
3rd -
identify the equivalent units of production in ending Work in
Process with respect to conversion (% Complete * Physical Units)
and adding this to the units from step one.
Weighted-Average Equivalent Units
An Example
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
Work in Process, June 30:
900 units × 60%
540
900 units × 30%
Equivalent units of Production in
the Department during June
270
5,940
5,670
Compute and Apply Costs
Cost per
equivalent
unit
=
Cost of beginning
WIP
+
Cost added during
the period
Equivalent units of production
Compute and Apply Costs
Total
Cost
Materials
Conversion
Cost to be accounted for:
Beginning WIP $
Cost added
10,039
199,751
$
6,119
118,621
$
3,920
81,130
Total cost
209,790
$ 124,740
$
85,050
Equivalent units
$
5,940
5,670
Compute and Apply Costs
$124,740 ÷ 5,940 units = $21.00
$85,050 ÷ 5,670 units = $15.00
Total
Cost
Materials
Conversion
Cost to be accounted for:
Beginning WIP $
Cost added
10,039
199,751
$
6,119
118,621
$
3,920
81,130
Total cost
209,790
$ 124,740
$
85,050
Equivalent units
$
5,940
Cost per equivalent unit = $21.00 + $15.00 = $36.00
5,670
3-42
End of Chapter 4
Chapter
Chapter 35
Cost Behavior:
Analysis and Use
McGraw-Hill /Irwin
© The McGraw-Hill Companies, Inc., 2007
Types of Cost Behavior Patterns
Summary of Variable and Fixed Cost Behavior
Cost
In Total
Per Unit
Variable
Total variable cost is
proportional to the activity
level within the relevant range.
Variable cost per unit remains
the same over wide ranges
of activity.
Total fixed cost remains the
same even when the activity
level changes within the
relevant range.
Fixed cost per unit goes
down as activity level goes up.
Fixed
Summary of Variable, Fixed, and Mixed Cost Behavior
Cost
In Total
Per Unit
Variable
Fixed
Mixed
TC = FC + VC/activity * (Activity)
Learning Objective
LO3
To analyze a mixed cost
using the high-low method.
Quick Check 
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Quick Check 
Sales salaries and commissions are $10,000
when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
Total cost = Total fixed cost +
a. $ 2,000
Total variable cost
b. $ 4,000
$14,000 = Total fixed cost +
c. $10,000
($0.10 × 120,000 units)
d. $12,000
Total fixed cost = $14,000 - $12,000
Total fixed cost
= $2,000
The Contribution Format
Used primarily for
external reporting.
Used primarily by
management.
Overview of Absorption
and Variable Costing
DEFINITIONS
CHANGE!!!
Absorption
Costing
Variable
Costing
Direct Materials
Product
Costs
Direct Labor
Product
Costs
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Period
Costs
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Period
Costs
Summary of Key Insights
End of Chapter 5
&
End of Material For Midterm 1
Chapter 6
Cost-Volume-Profit Relationships
Using the Contribution Margin I/S
Key Assumptions of CVP Analysis
Selling price is constant.
Costs are linear.
In multi-product companies, the sales
mix is constant.
In manufacturing companies,
inventories do not change (units
produced = units sold).
Contribution Margin Method
The contribution margin method has two
key equations.
Break-even point
in units sold
Break-even point in
total sales dollars
=
Fixed expenses
Unit contribution margin
=
Fixed expenses
CM ratio
The Contribution Margin Approach
These methods can be used with target profit.
Unit sales to attain
=
the target profit
Sales dollars to attain
=
the target profit
Fixed expenses + Target profit
Unit contribution margin
Fixed expenses + Target profit
CM ratio
Margin of safety = Total sales - Break-even sales
Operating Leverage = Contribution Margin / NOI
End of Chapter 6
Chapter 7
Profit Planning
AKA …BUDGETING
The Master Budget: An Overview
Sales
budget
Ending
inventory
budget
Production
budget
Direct
materials
budget
Direct
labor
budge
t
Start
Selling and
administrative
expense budget
Manufacturing
overhead
budget
Cash
budget
Budgeted
income
statement
Budgeted
balance
sheet
• Budgets have “rules” that affect how each budget
is calculated
• There are a few features unique to each budget
– Labor: guaranteed hours, overtime, etc.
– MOH: Total budgeted MOH, non-cash expenses, etc.
– Cash: Cash on hand, Interest expense & borrowing, etc.
7-62
Expected Cash Collections
• All sales are on account.
• Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible.
• The March 31 accounts receivable balance of
$30,000 will be collected in full.
7-63
Expected Cash Collections
7-64
The Production Budget
7-65
The Cash Budget
7-66
End of Chapter 7
7-67
Chapter 8
Flexible Budgets and
Performance Analysis
8-68
We want to explain the difference between the
Budgeted and Actual Results – i.e., the Variances
8-69
We break the Total Variance up by inserting a
Flexible budget.
We end up with a Performance Report showing
Activity and Revenue and Spending Variances
8-70
End of Chapter 8
8-71
Chapter 9
Standard Costs
or
“How to look at the Spending
Variances from Ch 8”
8-72
Big Idea in Ch 9
In a standard costing system, inventories
are recorded using standard prices and
standard quantities.
The differences between what is actually
used and what is recorded at standard is
found in the “Quantity” and “Price”
variances.
Price and Quantity Variances:
DM, DL, & VOH
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
(AQ × AP) – (AQ × SP)
AQ = Actual Quantity
AP = Actual Price
Standard Quantity*
×
Standard Price
Quantity Variance
(AQ × SP) – (SQ × SP)
SP = Standard Price
SQ = Standard Quantity
* Standard Quantity allowed for Actual Production = (Std/unit * Units produced)
9-74
Inventories are recorded at standard cost.
Variances are recorded as follows:
 Favorable variances are credits, representing
savings in production costs.
 Unfavorable variances are debits, representing
excess production costs.
Variances closed out to cost of goods sold.
 Favorable variances decrease cost of goods sold.
 Unfavorable variances increase cost of goods sold.
9-75
Fixed Overhead Budget Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Applied
Fixed
Overhead
Budget
variance
Budget
variance
=
Actual
fixed
overhead
–
Budgeted
fixed
overhead
9-76
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Applied
Fixed
Overhead
Volume
variance
Volume
variance
=
Budgeted
fixed
overhead
–
Fixed overhead
applied to
work in process
9-77
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable OH
variances are equivalent
to underapplied overhead.
Favorable OH
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.
8-78
End of Chapter 9
&
Midterm 2 Material
Responsibility Centers:
Cost, Profit, and Investments Centers
Cost
Center
Profit
Center
Responsibility
Center
Investment
Center
Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a
particular segment and would disappear over time if
the segment itself disappeared.
No computer
division means . . .
No computer
division manager.
Identifying Common Fixed Costs
Common costs arise because of the overall
operation of the company and would not disappear
if any particular segment were eliminated.
No computer
division but . . .
We still have a
company president.
Return on Investment (ROI) Formula
Net operating income
ROI =
Average operating assets
Margin =
Turnover =
Net operating income
Sales
Sales
Average operating assets
ROI = Margin  Turnover
Increasing ROI
There are three ways to increase ROI . . .
Increase
Sales
Reduce
Expenses
Reduce
Assets
Calculating Residual Income
Residual
=
income
Net
operating income
(
Average
operating
assets

)
Minimum
required rate of
return
This computation differs from ROI.
ROI measures net operating income earned relative
to the investment in average operating assets.
Residual income measures net operating
income earned less the minimum required
return on average operating assets.
8-85
End of Chapter 10
8-86
Chapter 11
Cost Concepts for Decision Making
A relevant cost is a cost that differs
between alternatives.
Identifying Relevant Costs
An avoidable cost can be eliminated (in whole
or in part) by choosing one alternative over another.
Avoidable costs are relevant costs. Unavoidable costs
are irrelevant costs.
Two broad categories of costs are never relevant in
any decision and include:
Sunk costs.
Future costs that do not differ between the alternatives.
Chapter 11 Relevant Costs for Decision Making
Keep (Add) or Drop: Contribution Margin Lost vs. Costs Avoided.
If CM Lost > Cost Avoided, then Keep (Add)
Make or Buy: Costs avoided vs. Purchase price.
If Costs avoided > Purchase Price, then Buy
Special Order: Incremental Revenue vs. Incremental (variable) Costs.
If Incremental Revenue > Incremental Costs, Accept.
Notes: Capacity should be sufficient to accommodate the Special Order
Current Fixed Costs should be ignored
Constrained Resource: Maximize CM/unit of CONSTRAINT.
1. Find CM/unit of Constraint
2. Rank based on CM/unit of Constraint
3. Make as many units as demanded of the #1 product, then use the remaining constraint
to make as many units as demanded of the #2 product, and so on.