Management
Accounting: The
Cornerstone for
Business Decisions
Basic Management
Accounting Concepts
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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 the 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.
BlueDenim 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.
BlueDenim 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:
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.
BlueDenim Company makes blue jeans.
On July 1, BlueDenim 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 BlueDenim 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 BlueDenim 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:
2-5
How to calculate cost of goods
sold.
BlueDenim 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 BlueDenim 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.
2-6
How to calculate cost of goods
sold.
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 BlueDenim 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. BlueDenim 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
BlueDenim for the month of July. Calculation:
2-7
How to calculate the percentage of
sales for each line of the income
statement.
Recall BlueDenim Company income
statement for the month of July was
completed and shown on Cornerstone 26.
REQUIRED: Prepare an income statement for
BlueDenim 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.