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Planning
Planning
Directing
Directing and
and
Motivating
Motivating
Controlling
Controlling
McGraw-Hill/Irwin Slide 2
Planning
Identify
Identify
alternatives.
alternatives.
Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.
Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
McGraw-Hill/Irwin Slide 3
Directing and Motivating
McGraw-Hill/Irwin Slide 4
Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.
Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
McGraw-Hill/Irwin Slide 5
Planning and Control Cycle
Formulating
Formulatinglong-
long- Begin
and
andshort-term
short-termplans
plans
(Planning)
(Planning)
Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance Making plans(Directing
(Directing
performance and
(Controlling) andMotivating)
Motivating)
(Controlling)
Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
McGraw-Hill/Irwin Slide 6
Learning Objective 1
McGraw-Hill/Irwin Slide 7
Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
McGraw-Hill/Irwin Slide 8
Learning Objective 2
McGraw-Hill/Irwin Slide 9
Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
McGraw-Hill/Irwin Slide 10
Direct Materials
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
McGraw-Hill/Irwin Slide 11
Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
McGraw-Hill/Irwin Slide 12
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
McGraw-Hill/Irwin Slide 13
Nonmanufacturing Costs
Selling Administrative
Costs Costs
McGraw-Hill/Irwin Slide 14
Learning Objective 3
Distinguish between
product costs and period
costs and give examples
of each.
McGraw-Hill/Irwin Slide 15
Product Costs Versus Period Costs
Sale
McGraw-Hill/Irwin Slide 17
Quick Check
McGraw-Hill/Irwin Slide 18
Classifications of Costs
Prime Conversion
Cost Cost
McGraw-Hill/Irwin Slide 19
Comparing Merchandising and
Manufacturing Companies
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
MegaLoMart
McGraw-Hill/Irwin
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables Receivables
Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods
McGraw-Hill/Irwin Slide 21
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash Cash
Receivables
Materials waiting to
Receivables
be processed.
Merchandise Inventory Inventories
Partially complete Raw Materials
products – some Work in Process
material, labor, or
Finished Goods
overhead has been
added.
Completed products
awaiting sale.
McGraw-Hill/Irwin Slide 22
Learning Objective 4
Prepare an income
statement including
calculation of the cost of
goods sold.
McGraw-Hill/Irwin Slide 23
The Income Statement
Cost of goods sold for manufacturers differs only slightly
from cost of goods sold for merchandisers.
McGraw-Hill/Irwin Slide 24
Basic Equation for Inventory Accounts
Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
McGraw-Hill/Irwin Slide 25
Quick Check
McGraw-Hill/Irwin Slide 26
Quick Check
McGraw-Hill/Irwin Slide 27
Learning Objective 5
McGraw-Hill/Irwin Slide 28
Schedule of Cost of Goods Manufactured
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs
costs are
are costs
costs
+ Raw materials + Mfg. overhead incurred
incurredto to
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
available for use
direct
direct material
material
in production into
into aafinished
finished
– Ending raw materials product.
product.
inventory
= Raw materials used
in production
McGraw-Hill/Irwin Slide 31
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
McGraw-Hill/Irwin Slide 32
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
McGraw-Hill/Irwin Slide 33
Product Cost Flows
Work
In Process Finished Goods
McGraw-Hill/Irwin Slide 34
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
McGraw-Hill/Irwin Slide 36
Quick Check
B. P272,000 purchased
= Raw materials available
276,000
D. P 2,000 inventory
= Raw materials used
28,000
in production $ 280,000
McGraw-Hill/Irwin Slide 37
Quick Check
McGraw-Hill/Irwin Slide 38
Quick Check
McGraw-Hill/Irwin Slide 39
Quick Check
McGraw-Hill/Irwin Slide 40
Quick Check
McGraw-Hill/Irwin Slide 41
Quick Check
McGraw-Hill/Irwin Slide 42
Quick Check
McGraw-Hill/Irwin Slide 43
Learning Objective 6
Understand the
differences between
variable costs and fixed
costs.
McGraw-Hill/Irwin Slide 44
Cost Classifications for Predicting Cost
Behavior
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
activity
activity within
within thethe
relevant
relevant range.
range.
Total variable costs change
Total variable costs change
when
whenactivity
activitychanges.
changes.
Total fixed costs remain
Total fixed costs remain
unchanged
unchangedwhen
whenactivity
activity
changes.
changes.
McGraw-Hill/Irwin Slide 45
Variable Cost
McGraw-Hill/Irwin Slide 46
Variable Cost Per Unit
McGraw-Hill/Irwin Slide 47
Fixed Cost
Your monthly contract fee for your cell phone is fixed for
the number of monthly minutes in your contract. The
monthly contract fee does not change based on the number
of calls you make.
Monthly Cell Phone
Contract Fee
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
McGraw-Hill/Irwin Slide 50
Quick Check
McGraw-Hill/Irwin Slide 51
Quick Check
McGraw-Hill/Irwin Slide 52
Learning Objective 7
Understand the
differences between direct
and indirect costs.
McGraw-Hill/Irwin Slide 53
Assigning Costs to Cost Objects
Direct costs Indirect costs
Costs that can be Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
Examples: direct Example:
material and direct manufacturing
labor overhead
McGraw-Hill/Irwin
Learning Objective 8
Define and give examples
of cost classifications used
in making decisions:
differential costs,
opportunity costs, and
sunk costs.
McGraw-Hill/Irwin Slide 55
Cost Classifications for Decision Making
McGraw-Hill/Irwin Slide 56
Differential Cost and Revenue
McGraw-Hill/Irwin Slide 57
Opportunity Cost
The potential benefit that is given
up when one alternative is selected
over another.
McGraw-Hill/Irwin Slide 58
Sunk Costs
McGraw-Hill/Irwin Slide 59
Quick Check
McGraw-Hill/Irwin Slide 60
Quick Check
McGraw-Hill/Irwin Slide 61
Quick Check
McGraw-Hill/Irwin Slide 62
Quick Check
McGraw-Hill/Irwin Slide 63
Quick Check
McGraw-Hill/Irwin Slide 64
Quick Check
McGraw-Hill/Irwin Slide 65
Summary of the Types of Cost
Classifications
McGraw-Hill/Irwin Slide 66
Further Classification of Labor Costs
McGraw-Hill/Irwin Slide 68
Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
McGraw-Hill/Irwin Slide 70
Labor Fringe Benefits
McGraw-Hill/Irwin Slide 73
Quality of Conformance
McGraw-Hill/Irwin Slide 74
Prevention and Appraisal Costs
Support activities
Prevention whose purpose is to
Costs reduce the number of
defects
Incurred to identify
defective products
Appraisal Costs before the products are
shipped to customers
McGraw-Hill/Irwin Slide 75
Internal and External Failure Costs
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
McGraw-Hill/Irwin Slide 76
Examples of Quality Costs
McGraw-Hill/Irwin Slide 77
Distribution of Quality Costs
McGraw-Hill/Irwin Slide 78
Learning Objective 11
McGraw-Hill/Irwin Slide 79
Quality Cost Report
For Years 1 and 2
Year 2 Year 1
Amount Percent* Amount Percent*
Prevention costs:
Systems development $ 400,000 0.80% $ 270,000 0.54%
Quality training 210,000 0.42% 130,000 0.26%
Supervision of prevention activities 70,000 0.14% 40,000 0.08%
Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs:
Inspection 600,000 1.20% 560,000 1.12%
Quality cost
Reliability testing
Supervision of testing and inspection
580,000
120,000
1.16%
0.24%
420,000
80,000
0.84%
0.16%
reports provide
Depreciation of test equipment
Total appraisal cost
200,000
1,500,000
0.40%
3.00%
140,000
1,200,000
0.28%
2.40%
an estimate of
the financial
Internal failure costs:
Net cost of scrap 900,000 1.80% 750,000 1.50% consequences
Rework labor and overhead 1,430,000 2.86% 810,000 1.62%
Downtime due to defects in quality 170,000 0.34% 100,000 0.20% of the
Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00% company’s
External failure costs: current defect
Warranty repairs
Warranty replacements
400,000
870,000
0.80%
1.74%
900,000
2,300,000
1.80%
4.60%
rate.
Allowances 130,000 0.26% 630,000 1.26%
Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30%
Total quality cost $ 7,500,000 15.00% $ 9,000,000 18.00%
9
Quality 18
7
External External
can also 14
External External
6 Failure Failure
be 12 Failure Failure
5
prepared 10
4 Internal
Failure
in 8 Internal
Failure
3 Internal
Failure
graphic 6 Internal
Failure
2
Appraisal form. 4
Appraisal
Appraisal Appraisal
1 2
Prevention Prevention Prevention Prevention
0 0
1 2 1 2
Year Year
McGraw-Hill/Irwin Slide 81
Uses of Quality Cost Information
McGraw-Hill/Irwin Slide 84