Management Accounting

220

3-1
 Agenda
• Review of last week
• Chapter 2
– Inventoriable costs
– Statements of goods manufactured
• Chapter 3
– Pre test
– Cost volume profit
 Review
• What are some of the differences between
managerial and financial accounting?
• What are the two key types of competitive
strategy?
• What is the difference between a value chain
and a supply chain?
• What are the three elements of management
control?
• What are the three key guidelines for
management accounting?
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 Cost terms
• What is a cost object?
• What is the difference between cost
accumulation and cost assignment?
• What is the key difference between direct
costs and indirect costs?
• Give an example of a variable cost and explain
what causes it to vary
• Give an example of a fixed cost

2-7
 Major Types of Costs
• Direct and Indirect
Covered last
• Prime and conversion
class
• Variable and Fixed
• Product and Period

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 LO 4

Period and Inventoriable Costs

• Period Costs
– Little evidence of future benefit, therefore
expensed in the period incurred
– Are all the costs on the income statement other
than cost of goods sold
• Inventoriable (Product) Costs
– The accumulation of all costs to manufacture or
purchase inventory for resale
– Inventoriable costs become cost of goods sold on
the income statement
 Inventoriable (Product) Costs Versus
Period (Operating) Costs

Inventoriable costs include Period costs are

direct materials, direct labour, expensed on the
and manufacturing overhead income statement –
which will be capitalized
non-manufacturing
Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
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2-30
Education Canada
 Product or Period
Which of the following are product costs or period costs?
1. Manufacturing overhead
2. Selling expenses
3. Administrative expenses
4. Direct labour
5. Advertising expenses
6. Direct material

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 Product or Period
Relevant Manufacturing provides you with the following
information:
Name Amount
Prime costs $195,000
Conversion costs 140,000
Total manufacturing costs 270,000
Selling and admin costs 200,000
1. What are the total costs of:
Direct materials used
Direct labour
Manufacturing overhead
2. What where the total period costs?

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 Types of Inventory
Retailer
• Merchandising inventory (FG)

Manufacturer
■ Direct material inventory (DM) (raw material / stock
awaiting use in the manufacturing process)
■ Work-in-process inventory (WIP) (partially completed
goods in the production facility)
■ Finished goods inventory (FG) (completed but not yet
sold)

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 LO 4

Costs in a Manufacturing Company

Balance Sheet Income Statement
Direct
Material Materials
Purchases Inventory
Revenue
Direct Cost of Goods Sold
Labour Work-in- Finished
Process (WIP) Goods (FG)
Indirect Inventory Inventory Gross Margin
Manufacturing Operating Expenses
Costs (Period Costs)

Inventoriable
(Product) Costs Operating Income
 LO 4

Cost Flows
• The Cost of Goods Manufactured and the Cost
of Goods Sold section of the Income
Statement are accounting representations of
the actual flow of costs through a production
system.
– Note the importance of inventory accounts in the
following accounting reports, and in the cost flow
chart
 Schedule of Cost of Goods
Manufactured

Calculates the cost of Direct

Materials Used

Accumulates the three

product costs for the
current period

Adjusts the current period

manufacturing costs to
account for units actually
completed
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 Income Statement Encompassing the
Cost of Goods Sold Schedule

Figure carries
forward from the
Schedule of Cost
of Goods
Manufactured

Period Costs are

expensed as
incurred

Copyright © 2007 Pearson

2-35
Education Canada
 Inventory & Cost of goods sold
Relationship
• Inventory + purchases – inventory = CoGS
begin end

CoGS = cost of goods sold

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 The many meanings of product
costs
Important theme of this book is “different costs
for different purposes”
• A product cost is the sum of costs assigned to
a “product” for a specific purpose, such as:
– To identify and manage cost-control problems
– For product pricing and product emphasis
– For contracting with government agencies
– For Financial Statements

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 Practice

2-9 page 45

2-35 page 52

2-33 page 51 (if time)

2-40
 Pre-test quiz
Chapter 3 – pre test
10 minutes (true or false, multiple
choice)

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I am planning on opening an
apple stand. It costs $200 per
month to rent the stand. And
each apple costs me 75 cents and
intend to sell them for $1.50. If I
want to make a profit of $300 a
month, how many apples do I
need to sell?

How many apples do I need to sell

in the month, just to break even?
 Chapter 3
Cost-Volume-Profit Analysis
• Takes data on volume, price and costs
• Classifies them according to their behaviour
• Produce information on breakeven volume
and/or revenue
– The point at which total revenue = total costs
• Can use historical or forecast data for analysis
 Assumptions of CVP Analysis
• Changes in sales volume and production volumes are identical
(meaning any costs to build up inventory or draw down
inventory are negligible)
• All costs can be classified as variable or fixed (mixed costs are
broken down into variable and fixed components)
• Total revenues and costs behave in a linear fashion in relation
to changes in volume within the relevant range
• Unit selling price, variable cost per unit, and fixed costs are all
known
• Usually single product; if more than one product exists, the
revenue mix remains constant
• The time value of money is ignored
 Operating income versus Net
income
• Operating income
– Pre-tax profit from operations
• Net income
– After tax operating income
• Both cases assume there is no non-operating
revenues nor costs

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Education Canada
 Alternative Income Statement Formats

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 Basic Formulae

Where the following equations hold:

And

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 Contribution Income Statement
General Format
Revenues
Less variable costs
= contribution margin
Less fixed costs
= operating income (before tax)
Less income tax
= net income

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Education Canada
 Contribution Margin

• Contribution margin
– Amount remaining from revenue obtained after
all variable costs have been paid
– Total revenue less Total variable costs
• Unit contribution margin
– Unit sales price less unit variable cost
• Contribution Margin Ratio
– Equals unit contribution margin per unit divided
by unit selling price
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 Contribution Margin
• Total CM equals sales (or revenue) less
variable costs
S – VC = CM
• Unit CM equals unit selling price less
variable cost per unit
USP – UVC = UCM
• Can also be found by dividing by the
number of units sold
CM/Q = UCM or UCM x Q = CM

Copyright © 2007 Pearson

3-6
Education Canada
 Contribution Margin Ratio

• Equals contribution margin per unit

divided by selling price
CMR = UCM ÷ USP
Also CMR = CM/Sales
• Often referred to as contribution
margin percentage
CM%

Copyright © 2007 Pearson

3-8
Education Canada
 Practice

3-3 page 79
3-11 page 80
3-12 page 80
3-17 page 81
Hand out if time

3-9
 Next class
Session covers break even, calculating target
income before and after interest and tax
CVP for multiple products, margin of safety,
operating leverage and decision models.

Any questions?

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