STUDENT
CHAPTER 2
MANAGERIAL
ACCOUNTING
PowerPoint Presentation by
10TH EDITION
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
© Copyright 2008 Thomson South-Western, a part of
The Thomson Corporation. Thomson, the Star Logo,
and South-Western are trademarks used herein under
license.
BY
MAHER, STICKNEY & WEIL
MEASURING PRODUCT COSTS
1
Overview & Basic Concepts
LEARNING OBJECTIVES
1. Understand the nature of manufacturing costs.
2. Explain the need for recording costs by
department & assigning costs to products.
3. Understand how Work-in-Process account both
describes transformation of inputs into outputs &
accounts for costs incurred.
4. Compare & contrast normal & actual costing.
5. Know various production methods & different
accounting systems each requires.
Continued
2
Overview & Basic Concepts
LEARNING OBJECTIVES
6. Compare & contrast job & process costing.
7. Compare & contrast product costing in service
organizations to manufacturing companies.
8. Understand concepts of customer costing &
profitability analysis.
9. Identify ethical issues in job costing.
10. Recognize components of just-in-time (JIT)
production methods & understand how
accountants adapt costing systems to them.
Continued
3
LEARNING OBJECTIVES
Overview & Basic Concepts
11. Know how to compute end-of-period inventory
book value using equivalent units of production
(Appendix 2.1).
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☼
CHAPTER GOAL
☼
This chapter shows how the accounting system
records & reports the flow of costs in
organizations to answer questions such as
these:
Overview & Basic Concepts
To determine product/service cost
To compare cost with management’s expectations
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Overview & Basic Concepts
Where are we on the
value chain in
CHAPTER 2?
EXHIBIT 2.8
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LO 1
DIRECT MATERIALS: Definition
Overview & Basic Concepts
Can be easily traced
directly to a product.
7
LO 1
DIRECT LABOR: Definition
Overview & Basic Concepts
Is labor of workers who
transform materials into a
finished product.
8
LO 1
Overview & Basic Concepts
How are materials, labor not
directly traceable to a product
categorized?
All costs, including materials &
labor, not directly traceable to a
product are categorized as
Manufacturing Overhead.
9
LO 2
RESPONSIBILITY CENTER:
Definition
Overview & Basic Concepts
Is any organizational unit
with its own manager or
managers.
10
LO 2
Responsibility
center
(department)
Overview & Basic Concepts
Records costs &
assigns to products
Direct
materials
Direct
labor
Overhead
Management compares
costs to standards
11
LO 3
Overview & Basic Concepts
ACCOUNTING SYSTEM
PURPOSES
1) To record costs by responsibility
for performance evaluation &
control.
2) To assign manufacturing costs to
units produced for product
costing.
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LO 3
BASIC COST FLOW EQUATION
Beginning + Transfers = Transfers + Ending
Balance
In
Out
Balance
Overview & Basic Concepts
BB + TI = TO + EB*
*Recall from financial accounting:
Beginning Balance + Additions - Withdrawals = Ending Balance
13
LO 3
MANAGERIAL APPLICATION
Overview & Basic Concepts
How did the Gravins
Division manager
commit fraud?
The manager overstated
ending inventory to
improve his profit.
14
LO 3
MANAGERIAL APPLICATION
Overview & Basic Concepts
How did top
management catch the
fraud?
Top management caught the fraud
when they realized that recorded
inventory had outgrown the freezer
where it was stored.
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LO 4
Overview & Basic Concepts
Name 2 approaches to
determining overhead
cost.
2 approaches to determining
overhead cost are: (1) normal
costing and (2) actual costing
16
LO 4
COMPARING NORMAL &
ACTUAL COSTING
Normal costing advantages
Overview & Basic Concepts
Smoothes seasonal & other fluctuations that don’t
relate directly to activity levels
More timely than actual because of estimating
process
17
LO 4
Overview & Basic Concepts
USING NORMAL COSTING
Select a cost driver (allocation base) to apply
overhead
Estimate dollar amount of overhead & level of
activity for period
Compute predetermined (normal) overhead
rate
Apply overhead to production
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LO 5
COST SYSTEMS: Examples
Job costing
For custom production jobs
Users: accounting & consulting firms, health care
organizations
Process costing
Overview & Basic Concepts
For standardized production
Users: drink makers (e.g., Coca Cola, etc.)
Operation costing
A hybrid of job & process combined
Users: Levi Strauss, Dell
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LO 7
Overview & Basic Concepts
COMPARING COST SYSTEMS
Nature of
Production
Heterogeneous
Units
Homogeneous
Units
Each Unit
Large
Many
Continuous
Small Units Process
Costing System
Used
Job Costing
Process Costing
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LO 8
Overview & Basic Concepts
FLOW OF COSTS REPORTING
The income statement reports:
Revenue
- Cost of services billed
= Gross Margin
- Expenses (e.g., unbilled direct labor,
underapplied overhead, marketing expenses)
= Operating Profit
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LO 9
E!!!
Overview & Basic Concepts
MISREPRESENTING COSTS
Often costs are improperly assigned to jobs
(or research, or defense contracts, etc.).
Sometimes employees are encouraged to
understate or misrepresent job costs.
Because many of these events have been
discovered, funding agencies & other
payers now require audits of financial
records.
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LO 10
CHARACTERISTICS OF JIT: (Justin-Time Inventory)
Overview & Basic Concepts
JIT inventory methods attempt to obtain
materials just in time for production or sale
Reduces/eliminates inventory & carrying costs
Leads to immediate correction of defective units
Helps expose production problems
Relies on high-quality materials, production
Charges all costs directly to cost of goods sold
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LO 10
Overview & Basic Concepts
What happens to inventory
leftover after costs are charged
to cost of goods sold in a JIT
system?
Cost of leftover inventory is
“backflushed,” i.e., taken out of
cost of goods sold and put into
finished goods inventory.
24
LO 10
Overview & Basic Concepts
How is spoilage treated
in a JIT system?
Normal spoilage is a cost of
work done. Abnormal
spoilage is expensed in the
period.
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Overview & Basic Concepts
CHAPTER 2
THE END
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