managerial accounting series 2
TRANSCRIPT
MANAGERIAL ACCOUNTING COST BEHAVIORS, SYSTEMS, AND ANALYSIS
with Gary Hecht
Costing Systems 1: Elements and Design
Financial Perspective and Costing System Approaches
Lesson Objectives
LESSON 2-1 OBJECTIVES
You will understand:
The purpose of costing systems inside organizations
How to identify different types of costing systems
Flow of Costs Through Financial Statements
FUNDAMENTALS
Financial perspective Product costing according to generally accepted accounting principles
Matching principle
“Inventoriable” costs versus period costs
Costs versus expenses
DIFFERENT PERSPECTIVES OF COSTS: MANUFACTURING SETTING
PRODUCT COSTS =
INVENTORIABLE COSTS
PERIOD COSTS =
SELLING & ADMIN
DIRECT PRODUCT
COSTS
INDIRECT PRODUCT COSTS
= MFG OVERHEAD
Direct Materials
FLOW OF COSTS THROUGH FINANCIAL STATEMENTS
Direct Labor
Mfg Overhead
Work in Process Inventory
Finished Goods
Inventory
Cost of Goods Sold
Two Traditional Systems
COST SYSTEMS BY COST OBJECT TYPE
Many types of costing systems - one distinction relates to cost object type
Job Costing
Cost object is a unit or multiple units of a distinct product or service
Process Costing
Cost object is masses of identical or similar units of product or service
Often, a continuum . . .
EXAMPLES
Job costing Law firms Consulting Planes, yachts
Process costing Computers Food products Mail, express delivery
JOB COSTING VS. PROCESS COSTING
Finished-Goods Inventory
Cost of Goods Sold
Work-in-Process Inventory
Direct Material Direct Labor Manufacturing Overhead
Job 1
Job 2
Job 3
Job Costing: Accumulates Costs by Individual Job
JOB COSTING VS. PROCESS COSTING
Work-in-Process Inventory: Production Department A
Direct Material Direct Labor Manufacturing Overhead
Process Costing: Accumulates Costs by Production Department
Work-in-Process Inventory: Production Department B
Cost of Goods Sold
Finished-Goods Inventory
Extension – Overhead Costs
OVERHEAD CONSIDERATIONS
Consulting firm setting Accounting for costs Pricing decision
Two general types of costs Labor Overhead
OVERHEAD TIMING
Beginning of the Period
End of the Period
Budgeted
Actual
Decisions
Applied
APPLYING OVERHEAD
A simple formula:
Predetermined OH Rate = Budgeted Overhead (Total)
Total Volume of Driver
Use this rate to allocate overhead.
EXAMPLE
Step 1: Calculate Rate
Predetermined OH Rate = Budgeted Overhead (Total)
Total Volume of Driver
Predetermined OH Rate = $1,500,000 = $50 per hour
30,000 Labor Hours
EXAMPLE
Step 2: Apply Overhead
Suppose a consulting engagement used 350 labor hours.
$50 per hour x 350 hours = $17,500
CORRECTING ESTIMATES
The predetermined OH rate is based on budgeted information.
However, estimates from the beginning of the year likely do not match actual overhead at the end of the year.
An adjustment is usually made to reflect this difference in the costing system.
VIDEO 2-1.6
What We’ve Learned
What We’ve Learned
WHAT WE’VE LEARNED IN LESSON 2-1
Financial perspective of costs How costs flow through financial statements Production costs remain in inventory (i.e., as an asset) until sold
Various types of costing systems Adopted by organizations according to nature of business and product
The Problem of Fixed Costs
Lesson Objectives
LESSON 2-2 OBJECTIVES
You will understand:
How to account for costs using absorption costing, which is required for financial reporting purposes
The problems associated with fixed costs for decision making
Example Scenario
MANUFACTURING SETTING
Financial Accounting Revenue
- Direct Material (V) - Direct Labor (V) - Overhead (V & F) = Gross Margin - Other Expenses (V & F) = Profit
EXAMPLE Keith Adventures, Inc. manufactures and sells a variety of boats and jet skis. The following information is available for its main line of boats.
Selling price (per unit) Variable costs (per unit) Materials Labor Selling Fixed costs (total) Manufacturing Selling
$ 21,000
5,000 3,000 2,000
1,500,000 450,000
Beginning inventory ProducFon Sales Ending inventory
Month 1 0
400
300
100
Month 2
100
350
400
50
CREATING THE INCOME STATEMENT
What is Keith’s revenue from boats for Month 1? $21,000 per unit x 300 units sold = $6,300,000
What are Keith’s variable manufacturing costs? Direct materials + Direct labor = $5,000 + $3,000 = $8,000 per unit Total = $8,000 per unit x 400 units = $3,200,000
Where are the variable manufacturing costs reported?
Income statement (COGS): $8,000 x 300 units sold = $2,400,000 Balance sheet (Inventory): $8,000 x 100 units in inventory = $800,000
CREATING THE INCOME STATEMENT (CONT)
What are Keith’s fixed manufacturing costs for Month 1? Given as $1,500,000
Where are the fixed manufacturing costs reported? How much fixed cost is allocated per unit? $1,500,000 / 400 units produced = $3,750 per unit Income statement (COGS): $3,750 x 300 units sold = $1,125,000 Balance sheet (Inventory): $3,750 x 100 units in inventory = $375,000
CREATING THE INCOME STATEMENT (CONT)
What are Keith’s other costs? Variable selling and admin: $2,000 per unit x 300 units sold = $600,000 Fixed selling and admin: $450,000
Where are these costs reported?
All on the income statement, as they are not inventoriable costs
2,400,000 + 1,125,000
600,000 + 450,000
Revenues Cost of goods sold Gross margin Total Selling & Admin Operating income
$6,300,000 3,525,000 2,775,000 1,050,000 1,725,000
INCOME STATEMENT – MONTH 1
The Manager Did What?
AN ALTERNATIVE VERSION
Let’s envision a different version of Month 1 . . .
That is, suppose that Keith manufactured 800 units (instead of the 400 units in our original scenario).
ALTERNATIVE VERSION
What is Keith’s revenue from boats for Month 1? $21,000 per unit x 300 units sold = $6,300,000
What are Keith’s variable manufacturing costs? Direct materials + Direct labor = $5,000 + $3,000 = $8,000 per unit Total = $8,000 per unit x 800 units = $6,400,000
Where are the variable manufacturing costs reported?
Income statement (COGS): $8,000 x 300 units sold = $2,400,000 Balance sheet (Inventory): $8,000 x 500 units in inventory = $4,000,000
ALTERNATIVE VERSION (CONT)
What are Keith’s fixed manufacturing costs for Month 1? Given as $1,500,000
Where are the fixed manufacturing costs reported? How much fixed cost is allocated per unit? $1,500,000 / 800 units produced = $1,875 per unit Income statement (COGS): $1,875 x 300 units sold = $562,500 Balance sheet (Inventory): $1,875 x 500 units in inventory = $937,500
Revenues Cost of goods sold Gross margin Total Selling & Admin Operating income
400 units $6,300,000 3,525,000 2,775,000 1,050,000 1,725,000
800 units $6,300,000 2,962,500 3,337,500 1,050,000 2,287,500
COMPARISON
INCENTIVE IMPLICATIONS
Assume the boating business unit manager’s evaluation and compensation is determined by operating income . . .
Certainly, the manager is aligned with the organization.
However, the “accounting” story might induce inventory build-up!
WHAT IS THE ROOT OF THE PROBLEM?
Accounting for fixed costs is complicated.
Absorption costing (required for financial accounting purposes) treats fixed costs as product costs.
Financial accounting information may not be the best for internal decision-making.
POTENTIAL FIX?
For internal purposes, firms can account for costs however they like. Variable costing is one such method.
Separate costs according to behavior, and account for variable costs on a per unit basis, and leave fixed costs in aggregate.
What We’ve Learned
WHAT WE’VE LEARNED IN LESSON 2-2
Challenges of accounting for fixed costs
Misleading information
Dysfunctional behavior
Customization of information according to decision
WHAT WE’VE LEARNED IN MODULE 2
The purpose of costing systems
How to differentiate the financial and managerial perspectives of costing systems
Different types of costing systems
The problems associated with accounting for fixed costs