1 Managerial Accounting and Cost Concepts

Learning Objectives

1 Understanding the purpose and use of Managerial

Accounting

2 Cost concepts and its classification.

3 Preparing the schedule of cost of goods manufactured.

4 Traditional and Contribution format income statements.

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LEARNING
OBJECTIVE
1 Managerial Accounting

Managerial accounting is concerned with

providing information to managers within an
organization so that they can formulate plans,
control operations, and make decisions.

Managers have their own way of classification of

cost and revenue that is different from financial
accounting and that helps them to run the
organization.

3-2 LO 1
 Classification of Cost

Cost can be classified several different ways

❑ Assigning costs to cost objects

❑ Accounting for cost in manufacturing

companies

❑ Preparing an income statement and a balance sheet

❑ Predicting changes in cost due to changes in
activity

❑ Making decisions

3-3 LO 1
 Assigning costs to cost objects

Direct costs (directly identifiable)

▪ Direct material

▪ Direct labour

▪ Other direct cost

Indirect costs (Not directly identifiable)

▪ Indirect material

▪ Indirect labour

▪ Overhead cost

3-4 LO 1
 Accounting for cost in manufacturing
companies

Manufacturing costs
◆ Direct materials

◆ Direct labor
◆ Manufacturing overhead

Non-manufacturing cost
◆ Selling cost

◆ Administrative costs

3-5 LO 1
 Preparing an income statement and a balance
sheet

❖ Product costs (Inventoriable cost)

• Direct materials
• Direct labor
• Manufacturing overhead
❖ Period costs (expense as incurred)
• Marketing and selling costs
• Administrative costs

3-6 LO 1
 Predicting changes in cost due to changes in
activity/ Behavior

❖ Variable costs
❖ Fixed costs
▪ Discretionary fixed cost
▪ Committed fixed cost
❖ Mixed Cost

Unit of activity/ Cost driver

Relevant range

3-7 LO 1
3-8
 Segregation of Mixed cost

We can Expressed mixed cost in terms of activity level by the

following Equation

3-9 LO 1
 Segregation of Mixed cost

High Low method

Problem: The Lakeshore Hotel’s guest day occupancy and
supplies expenses for the last three months were

Months Days occupied Supplies expenses

March 4,000 $7,500

April 8,000 $10,500

May 12,000 $13,500

Using High Low method estimate the cost formula for

supplies expense

3-10 LO 1
 Estimating cost formula

No of Days Supplies expense

High 12,000 $13,500
Low 4,000 $7,500
Changes 8,000 $6,000

Variable cost per unit= 6,000/8,000=0.75

Fixed cost= 7,500- 4000×0.75=4,500
Or 13,500- 12,000×0.75= 4,500
Cost formula is
Y=4,500+0.75X

3-11 LO 2
 ● Assume that during June The Lakeshore is
expecting to have number of days
occupancy 10,500 days, Calculate amount of
supplies expense in June
Y= 4,500+0.75X
= 4,500+0.75×10,500=$12,000

3-12
 Schedule of cost of goods manufactured

Ryarder Company
Schedule of Cost of Goods Manufactured

Direct materials:
Beginning raw materials inventory $ 10,000
Add: Purchases of raw materials 200,000
Raw materials available for use 210,000
Deduct: Ending raw materials inventory 30,000

Raw materials used in production $180,000

Direct labor 250,000
Other direct cost 20,000
Prime cost 450,000

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 Cont……
Prime cost 450,000
Manufacturing overhead:
Indirect materials 5,000
Indirect labor 100,000
Utilities, factory 80,000
Property taxes, factory 36,000
Insurance, factory 9,000
Equipment rental 70,000
Depreciation, factory 120,000
Total manufacturing overhead 420,000
Total manufacturing costs 870,000
Add: Beginning work in process inventory 40,000
910,000
Deduct: Ending work in process inventory 60,000
Cost of goods manufactured $850,000
3-14
 Statement of Cost of goods sold

Cost of Goods Sold

Beginning finished goods inventory $130,000
Add: Cost of goods manufactured ( from 850,000
previous statement)
Goods available for sale 980,000
Deduct: Ending finished goods inventory 80,000
Cost of goods sold $900,000

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 LEARNING
2
Cost classification based on
OBJECTIVE
Making decisions

• Differential costs/ Relevant cost

• Sunk costs
• Opportunity costs

https://forms.gle/AZKurTJpFFJ7GKZC7

3-16 LO 2
LEARNING
OBJECTIVE
2 Identifying the different types of cost
The PC Works assembles custom computers from components supplied by various
manufacturers. The company is very small and its assembly shop and retail sales store
are housed in a single facility in a Redmond, Washington, industrial park. Listed below
are some of the costs that are incurred at the company.

For each cost, indicate whether it would most likely be classified as (a) direct
materials, (b) direct labor, (c) manufacturing overhead, (d) selling, or (e) an
administrative cost.

1. The cost of a hard drive installed in a computer.

2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s salespeople.
5. The salary of the assembly shop’s supervisor.
6. The salary of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before
release to customers.
8. Rent on the facility in the industrial park.
3-17 LO 2
 The Traditional Format Income Statement

3-18 LO 2
 The Contribution Format Income Statement

3-19 LO 3
 Managers use contribution format
income statement
◆ It provide clear distinction between fixed and variable cost
◆ Managers wants information on behavioral classification
that help them predict the future.
◆ It aids managers in planning, controlling, and decision
making

3-20 LO 3
3-21
3-22
 Income statement ( Contribution format)
Particulars Amounts Amounts Per unit
$ $
Sales Revenue 300,000 300
Less: Variable Expenses
COGS-1 213,000
Variable selling expenses 15,000
Variable administrative (balancing) 12,000
Total variable expenses (Balancing) 240,000 240
Contribution margin (given) 60,000 60
Less: Fixed Expenses:
Fixed selling expenses (Balancing) 30,000
Fixed administrative expenses 12,000
Total Fixed expenses 42,000
Net operating income (given) 18,000
3-23
 Requirement- 2:
Income Statement (Traditional Format)
Particulars Amounts Amounts
$ $
Sales Revenue 300,000
Less: COGS-1 213,000
Gross Profit 87,000
Less: Operating expenses
Selling expenses:
Variable 15,000
Fixed 30,000 45,000
Administrative expenses:
Variable 12,000
Fixed 12,000 24,000
Total Operating expenses 69,000
Net operating income (given) 18,000

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