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Management Accounting

2020

BUILDING BLOCKS
CHAPTER 14 & 18 L01

Common Business Activities

Service:

Merchandising:

Manufacturing:

Non – Manufacturing Activities

Manufacturing Activities

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Non–manufacturing Activities

Manufacturing Activities…
… incur Manufacturing or Product costs

Manufacturing Activities…
… Create three types of inventory or
Product or Manufacturing costs:

Raw Materials

Work in Process

Finished Goods

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Total costs for a company

F/S presentation
2017 2016
( in Millions)

What is a Product cost?

Direct Materials (DM)

Direct Labour (DL)

Manufacturing Overhead (MOH)

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Remember !!

PRODUCT COST
=
MANUFACTURING COSTS
WE NEED A PROCESS TO TRACK THE COSTS OF MANUFACTURING

WIP - Work in progress

FG - Finished Goods

Flow of manufacturing costs

DM
DL WIP FG COGS
MOH
IN PROCESS COMPLETE SELL

Cost of Goods Sold Equation

INV OPEN. + PURCHASES – INV END. = COGS

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Manufacturing COGS Equations

#1 RMOPEN. + PURCHASES – RM END. = RM USED

#2 WIPOP.+(DM USED+DL+MOH)–
WIPEND.=COGM

#3 FG OPEN. + COGM – FG END. = COGS

Flow of manufacturing costs.. Direct Materials Used is not an account

Cost of goods manufactured is not an account

Alexandria Aluminum Company, a manufacturer of

recyclable soda cans, had the following inventory
balances at the beginning and end of 20x1.

Schedules of Cost of Goods Manufactured & Sold

Inventory Jan 1, 20x1 December
Classification 31, 20x1
Raw materials $ 60,000 $ 70,000
Work in process 120,000 115,000
Finished goods 150,000 165,000

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During 20x1, the company purchased $250,000 of

raw material and spent $400,000 on direct labour.
Manufacturing overhead costs were as follows:
Indirect materials $ 10,000
Indirect labour 25,000
Depreciation on plant equipment 100,000
Utilities 25,000
Other 30,000

Sales revenue was $1,105,000 for the year. Selling and

administrative expenses for the year amounted to $110,000.
The firm's tax rate is 40 percent.

# 1 Prepare a schedule of Raw materials Used

Inventory (opening) 60,000

Purchases 250,000

Raw Material Available 310,000

Inventory (ending) (70,000)

Raw Material Used 240,000

# 2 Calculate Total Manufacturing Costs

Direct Materials 240,000-10,000 230,000

Direct Labour 400,000

MOH

IDM 10,000

IDL 25,000

Depreciation 100,000

Utilities 250,000

Other 30,000

Total Manufactured ost Costs 190,000

Total Manufactured Csts 820,000

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# 3 Calculate cost of goods manufactured

Total Manufactured Costs 820,000

WIP (opening) 120,000

940,000
WIP (end) Total (115,000)

COGM 825,000

# 4 Calculate cost of goods Sold

Alexandria Aluminum Company
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20x1

FG (opening) 150,000

COGM 825,000

GAFS 975,000

FG (ending) (165,000)

COGS 810,000

Other Terms….
Controllable & Uncontrollable costs:

Relevant and Irrelevant costs:

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Fixed costs….

Variable costs…

Mixed cost
• Or Semi-variable costs

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Out of pocket costs is somthing that you actually pay for.

DECISION MAKING “CONCEPTS”
• Opportunity Costs
Benefit forgone (an o/c is the cost
of what is given up in a course of
action)

• Out-of-Pocket Costs
– Outlays of cash

• Sunk Costs
– Already incurred costs

Other Costs names:

– Conversion Costs
DL + MOH

– Prime Costs
DM + DL

Consider the following costs that were incurred

during the current year:

1. Tire costs incurred by Ford Motor Company.

2. Sales commissions paid to the sales force of Dell Inc.
3. Wood glue consumed in the manufacture of Thomasville furniture.
4. Hourly wages of refinery security guards employed by ExxonMobil
Corporation.
5. The salary of a financial vice president of Apple.
6. Advertising costs of Coca-Cola.
7. Straight-line depreciation on factory machinery of Boeing Corporation.
8. Wages of assembly-line personnel of Amana Corporation.
9. Delivery costs on customer shipments of Ben & Jerry's ice cream.
10. Newsprint consumed in printing The New York Times.
11. Plant insurance costs of Texas Instruments.
12. Glass costs incurred in light-bulb manufacturing of General Electric.

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Required: Evaluate each of the

preceding and determine whether the cost
is a:
(a)Product (PR) cost or a period cost (PC),
(b)Variable(V) or fixed(F) in terms of
behavior, and
(c) For the product costs only, whether the
cost is properly classified as direct
material(DM), direct labor(DL), or
manufacturing overhead(MOH).

Cost definitions

# Cost PR or PC V or F DM/DL/MOH
1 Tire cost Product Cost Variable Direct Material

2 Sales commission Period Cost Variable N/A

3 Wood glue Product Cost Variable MOH or DM

4 Hourly wages Product Cost Variable MOH

5 VP salary Period Cost Fixed

6 Advertising Period Cost Fixed

7 Depreciation (Factory) Product Cost Fixed MOH

8 Assembly line wages Product Cost Variable Direct Labour

9 Delivery (To Customers) Period Cost Variable or Fixed

10 Newsprint Product Cost Variable Direct Material

Product Cost Fixed MOH

11 Plant insurance
12 Light bulb glass Product Cost Variable Direct Material

FC and VC COSTS eg.

The phone company charges $100 per month
for the phone plan plus $0.25 per minute of
usage assuming each call is 1 min. in length.
In January, 6,000 minutes where used
In February, 5,000 minutes where used
Required:
Total cost for each month (fixed and Variable):
J = $100 + ($0.25*6,000) = $1,600

F = $100 + ($0.25*5,000) = $1,350

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FC and VC COSTS eg.

The phone company charges $100 per month
for the phone plan plus $0.25 per minute of
usage assuming each call is 1 min. in length.
In January, 6,000 minutes where used
In February, 5,000 minutes where used
Required: Calculate the cost per minute for each month.
J = $1600/6000 = $0.26

F = $1350/5000 = $0.26777

FC and VC COSTS eg.

The phone company charges $100 per month
for the phone plan plus $0.25 per minute of
usage assuming each call is 1 min. in length.
In January, 6,000 minutes where used
In February, 5,000 minutes where used

Required: What is the marginal cost of one additional

phone call in January?

$0.25

FC and VC COSTS eg.

The phone company charges $100 per month
for the phone plan plus $0.25 per minute of
usage assuming each call is 1 min. in length.
In January, 6,000 minutes where used
In February, 5,000 minutes where used

Required: If the phone plane was either a flat $1,500 per

month OR $0.30 per minute, what is the better plan:
J = $0.30*6,000 = $1,800
F = $0.30*5,000 = $1,500

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FC and VC COSTS eg.

Suppose you had purchased a calling card for
$75. The Phone company feels that these cards
are not cost effective, so they have offered to
buy it back for $100.

• What are the out-of-pocket costs $75

• What is the real cost of using the card if you
do not redeem it: $100 : $75 +($100-$75)
• How would you decide whether to take this
deal or not?

V $1.60 $1.60
V $1.90 $1.90
Mixed Cost $0.40 $0.33
F $0.80
$0.40
M $0.16 $0.14
F 0.20 0.10

Required : Classify each cost (above) as either Variable, Fixed or mixed.

END

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