Management Accounting for Business

1. Management Accounting for Business Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems Chapter 2 Basic Cost Management Concepts

2. Planning Strategy Formulation Directing Control DecisionMaking Process of Management Managers need cost information toperform each of these functions. Learning Objective 01

3. Product Costs, Period Costs and Expenses Product costs are costs associated with goods for sale until the time period during which the products are sold, Period costs are costs that are expensed during the time period in which they are incurred. Expenses are the consumption of assets for the purpose of generating revenue.

4. Cost Classifications on Financial Statements – Balance Sheet • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory

5. Types of Production Processes

6. DirectLabor Manufacturing Overhead TheProduct Manufacturing Costs DirectMaterial

7. Raw materials that become an integral part of the product and that can be traced directly to it. Direct Materials Example:A radio installed in an automobile

8. Those labor costs that can be easily traced to individual units of product. Direct Labor Example:Wages paid to automobile assembly workers

9. Manufacturing costs that cannot be easily traced directly to specific units produced. Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant. Manufacturing Overhead Examples:Indirect materials and indirect labor

10. Selling Costs Administrative Costs Costs necessary to secure the order and deliver the product. All executive, organizational, and clerical costs. Nonmanufacturing Costs

11. Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Expense Cost of Good Sold Sale BalanceSheet IncomeStatement IncomeStatement Product Costs Versus Period Costs

12. Classifications of Costs in Manufacturing Companies Manufacturing costs are oftencombined as follows: DirectMaterial DirectLabor ManufacturingOverhead PrimeCost ConversionCost

13. Manufacturing Cost Flows Direct Material Work in Process Inventory Direct Labor ManufacturingOverhead FinishedGoods Inventory Cost of GoodsSold

14. Schedule of Cost of Goods Manufactured

15. Beginning work-in-process inventory is carried over from the prior period. Ending work-in-process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet.

16. Income Statement for a Manufacturer

17. Income Statement for a Manufacturer

18. Activities that cause costs to be incurred are called COST DRIVERS cost driver: A factor that can causes a change in the cost of an activity Cost Driver Examples Activity Cost Driver Machining operations Machine hours Setup Setup hours Production scheduling Manufacturing orders Inspection Pieces inspected Purchasing Purchase orders

19. Cost Classifications

20. Direct costs:Costs that can be easily traced to a product or department. Indirect costs:Costs that must be allocated in order to be assigned to a product or department. Opportunity Costs:The potential benefit that is given up when one alternative is selected over another. Sunk Costs: All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions. Differential Costs: Costs that differ between alternatives. Marginal Cost: The extra cost incurred to produce one additional unit. Average Cost: The total cost to produce a quantity divided by thequantity produced. Various Costs

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