Chapter 1 Managerial Accounting and Cost Concepts

Companies that adopt a customer intimacy strategy are in essence saying to their customers,

"You should choose us because we can customize our products and services to meet your individual needs better than our competitors."

Companies that pursue the second customer value proposition, called operational excellence, are saying to their target customers,

"You should choose us because we deliver products and services faster, more conveniently, and at a lower price than our competitors."

Companies pursuing the third customer value proposition, called product leadership, are saying to their target customers,

"You should choose us because we offer higher quality products than our competitors."

five types of cost classifications that will be used throughout the textbook, namely cost classifications

(1) for assigning costs to cost objects, (2) for manufacturing companies, (3) for preparing financial statements, (4) for predicting cost behavior, and (5) for making decisions.

Nonmanufacturing costs are often divided into two categories:

(1) selling costs and (2) administrative costs.

Planning

1 Select organization objectives 2 Select alternative that does the best job of achieving organization's objectives 3 Select alternative that does the best job of achieving organization's objectives

Corporate social responsibility

A concept whereby organizations consider the needs of all stakeholders when making decisions.

Detective control

A control that detects undesirable events that have already occurred.

Preventive control

A control that deters undesirable events from occurring.

Lean Production

A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.

Cost of goods sold =

Beginning merchandise inventory + Purchases - Ending merchandise inventory

Deliver quality products /services faster, more conveniently, and at lower prices.

Deliver quality products /services faster, more conveniently,and at lower prices.

Operational Excellence Strategy

Deliver quality products /services faster, more conveniently,and at lower prices.

Conversion cost (formula) =

Direct labor + Manufacturing overhead

Prime cost (formula) =

Direct materials + Direct labor

Product cost (formula) =

Direct materials + Direct labor + Manufacturing overhead

Variable manufacturing cost (formula) =

Direct materials + Direct labor + Variable manufacturing overhead

Directing and Motivating

Directing and motivating involves managing day-to-day activities to keep the organization running smoothly. ◦Employee work assignments. ◦Routine problem solving. ◦Conflict resolution. Effective communications.

Total fixed cost (formula) =

Fixed manufacturing overhead + Fixed selling expense + Fixed administrative expense

A manufacturer's product costs flow through three inventory accounts on the balance sheet—

Raw Materials, Work in Process, and Finished Goods—prior to being recorded in cost of goods sold on the income statement.

Period cost (formula) =

Selling expense + Administrative expense

Value chain

The major business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service.

Customer Intimacy Strategy

Understand and respond to individual customer needs.

Relationship between a mixed cost and the level of activity

Y = a + bX In this equation, Y = The total mixed cost a = The total fixed cost (the vertical intercept of the line) b = The variable cost per unit of activity (the slope of the line) X = The level of activity

A strategy is

a "game plan" that enables a company to attract customers by distinguishing itself from competitors.

A direct cost is

a cost that can be easily and conveniently traced to a specified cost object. For example, if Adidas is assigning costs to its various regional and national sales offices, then the salary of the sales manager in its Tokyo office would be a direct cost of that office.

An indirect cost is

a cost that cannot be easily and conveniently traced to a specified cost object. For example, a Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager's salary would be an indirect cost of a particular variety, such as chicken noodle soup.

A sunk cost is

a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because sunk costs cannot be changed by any decision, they are not differential costs.

A common cost is

a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost (The factory manager's salary)

A fixed cost is

a cost that remains constant, in total, regardless of changes in the level of activity. Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, property taxes, rent, and supervisory salaries

A budget is

a detailed plan for the future that is usually expressed in formal quantitative terms.

A future cost that differs between any two alternatives is known as a

a differential cost (incremental cost). Differential costs are always relevant costs.

An activity base is

a measure of whatever causes the incurrence of a variable cost (cost driver) (direct labor-hours, machine-hours, units produced, and units sold)

A segment is

a part or activity of an organization about which managers would like cost, revenue, or profit data. Examples of business segments include product lines, customer groups (segmented by age, ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and departments

Enterprise risk management is

a process used by a company to identify those risks and develop responses to them that enable it to be reasonably assured of meeting its goals.

For a merchandising company, cost of goods sold is

a variable cost that gets included in the "Variable expenses" portion of the contribution format income statement.

Costs are assigned to cost objects for

a variety of purposes including pricing, preparing profitability studies, and controlling spending.

Administrative costs include

all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, legal counsel, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Direct/Indirect

For financial accounting purposes, product costs include

all costs involved in acquiring or making a product.

Selling costs include

all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. Direct/Indirect

Manufacturing overhead, the third manufacturing cost category, includes

all manufacturing costs except direct materials and direct labor. From a product costing standpoint, manufacturing overhead costs are indirect costs

The selling and administrative expenses report

all period costs that have been expensed as incurred.

Period costs are

all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices

Discretionary fixed costs (often referred to as managed fixed costs) usually arise from

annual decisions by management to spend on certain fixed cost items. Examples of discretionary fixed costs include advertising, research, public relations, management development programs, and internships for students.

A cost object is

anything for which cost data are desired—including products, customers, plants, office locations, and departments.

Management accountants ordinarily assume that costs

are strictly linear

A mixed (semivariable) cost contains

both variable and fixed cost elements.

A performance report compares

budgeted data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performance.

An uncontrollable cost

cannot be influenced by the manager being evaluated.

Manufacturing overhead also includes other indirect costs that

cannot be readily traced to finished products such as depreciation of manufacturing equipment and the utility costs, property taxes, and insurance premiums incurred to operate a manufacturing facility

Finished goods consist of

completed units of product that have not yet been sold to customers.

The matching principle is based on the accrual concept that

costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized.

customer value propositions

customer intimacy, operational excellence, product leadership

decreases in cost should be referred to as

decremental costs.

In accounting, costs can be classified differently

depending on the needs of management.

Future revenue that differs between any two alternatives is known as

differential revenue. Differential revenue is an example of a relevant benefit.

For manufacturing companies, product costs include

direct materials, direct labor, and manufacturing overhead.

A variable cost varies, in total, in

direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead.

For planning purposes, fixed costs can be viewed as

either committed or discretionary

For purposes of assigning costs to cost objects, costs are classified as

either direct or indirect.

Indirect labor refers to

employees, such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product.

Planning involves

establishing goals and specifying how to achieve them.

product costs are not necessarily recorded as

expenses on the income statement in the period in which they are incurred. Rather they are recorded as expenses in the period in which the related products are sold.

Traditional income statements are prepared primarily for

external reporting purposes.

Differential costs can be either

fixed or variable.

Controlling involves

gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

Sales minus cost of goods sold equals the

gross margin.

Cost behavior refers to

how a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant.

Opportunity costs are not usually found

in accounting records, but they are relevant costs that must be explicitly considered in every decision a manager makes.

In practice, managers use various names for manufacturing overhead, such as

indirect manufacturing cost, factory overhead, and factory burden.

manufacturing overhead includes a portion of raw materials known as

indirect materials as well as indirect labor.

A controllable cost can be

influenced by the manager being evaluated

Contribution format income statements are prepared for

internal management purposes. They use cost classifications for predicting costs behavior (variable and fixed costs) to better inform decisions affecting the future.

Controlling

involves the steps taken by management to increase the likelihood that the objectives are attained and that all parts of the organization are working together toward that goal (behavior control, performance measurement, compensation and rewards system)

Sunk costs are

irrelevant costs and they should be ignored when making decisions.

Although the traditional income statement is useful for external reporting purposes,

it does not distinguish between fixed and variable costs.

hile total variable costs change as the activity level changes,

it is important to note that a variable cost is constant if expressed on a per unit basis.

For a cost to be variable,

it must be variable with respect to something.

The unique thing about the contribution approach is that

it provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making.

The relative proportion of each type of cost in an organization is known as

its cost structure. For example, an organization might have many fixed costs but few variable or mixed costs.

The focal point of a company's strategy should be

its target customers

Direct labor consists of

labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made.

Relevant costs and relevant benefits should be considered when

making decisions.

Merchandising companies do not

manufacture the products that they sell to customers. For example, Lowe's and Home Depot are merchandising companies because they buy finished products from manufacturers and then resell them to end consumers.

Manufacturing companies such as Samtec, Mack Trucks, and 3M separate their costs into two broad categories—

manufacturing and nonmanufacturing costs.

Only those indirect costs associated with operating the factory are included in

manufacturing overhead.

The revenue that can be obtained from selling one more unit of product is called

marginal revenue, and the cost involved in producing one more unit of product is called marginal cost.

The gross margin minus selling and administrative expenses equals

net operating income.

Committed fixed costs represent

organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Examples include investments in facilities and equipment, as well as real estate taxes, insurance premiums, and salaries of top management.

Internally, managers need cost data organized by cost behavior to aid in

planning, controlling, and decision making

managerial accounting helps managers perform three vital activities—

planning, controlling, and decision making

The Work of Management

planning, directing and motivating, controlling

When preparing a balance sheet and an income statement, companies need to classify their costs as

product costs or period costs.

managerial accounting is concerned with

providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.

Direct materials refers to

raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. for example, the seats that Airbus purchases from subcontractors to install in its commercial aircraft

Indirect materials are

raw materials, such as the solder used to make electrical connections in a Toshiba HDTV, whose costs cannot be easily or conveniently traced to finished products.

The materials that go into the final product are called

raw materials.

Decision making involves

selecting a course of action from competing alternatives.

Nonmanufacturing costs are also often called

selling, general, and administrative (SG&A) costs or just selling and administrative costs.

step-oriented cost behavior pattern can also be used to describe other costs, such as

some labor costs. For example, the cost of compensating salaried employees can be characterized using a step pattern.

Cost behavior patterns such as salaried employees are often called

step-variable costs. Step-variable costs can often be adjusted quickly as conditions change.

The contribution margin is

the amount remaining from sales revenues after all variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period.

Because total fixed costs remain constant for large variations in the level of activity,

the average fixed cost per unit becomes progressively smaller as the level of activity increases.

To be traced to a cost object such as a particular product

the cost must be caused by the cost object.

A particular cost may be direct or indirect, depending on

the cost object.

The notion of different cost classifications for different purposes is

the most important unifying theme of this chapter and one of the key foundational concepts of the entire textbook.

period costs are expensed on the income statement in

the period in which they are incurred using the usual rules of accrual accounting.

Opportunity cost is

the potential benefit that is given up when one alternative is selected over another

The cost of goods sold reports

the product costs attached to the merchandise sold during the period.

The relevant range is

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

Because the variable cost per unit equals the slope of the straight line,

the steeper the slope, the higher the variable cost per unit.

Conversion cost refers to

the sum of direct labor and manufacturing overhead.

Prime cost is

the sum of direct materials cost and direct labor cost. Managers occasionally refer to their two direct manufacturing cost categories as prime costs.

While there are many activity bases within organizations, throughout this textbook, unless stated otherwise, you should assume that the activity base under consideration is

the total volume of goods and services provided by the organization.

A value-added cost increases

the value of products and services provided to the company's stakeholders, whereas a non-value-added cost does not provide any benefit to the company's stakeholders.

When direct materials are used in production,

their costs are transferred from Raw Materials to Work in Process.

Because product costs are initially assigned to inventories,

they are also known as inventoriable costs

period costs do not flow

through the inventory accounts on the balance sheet and they are not included in cost of goods sold in the income statement. Instead, they are recorded as selling and administrative expenses in the income statement during the period incurred.

Data analytics refers

to the process of analyzing data with the aid of specialized systems and software to draw conclusions about the information they contain

Most manufacturing companies further separate their manufacturing costs into

two direct cost categories, direct materials and direct labor, and one indirect cost category, manufacturing overhead.

Work in process consists of

units of product that are only partially complete and will require further work before they are ready for sale to the customer.

for Predicting Cost Behavior, costs are often categorized as

variable, fixed, or mixed