1 Chapter 2- Managerial Accounting and Cost Concepts. Summer, Edited July 1, Copyright 2011, Dr. Howard Godfrey This file contains illustrative problems that will be used in the lecture to illustrate important concepts and procedures. Copyright Dr. Howard Godfrey - M10-Chp-02-1-Man. Accounting Concepts Learning Objectives LO1Identify and give examples of each of the three basic manufacturing cost categories. LO2Distinguish between product costs and period costs and give examples of each. LO3Understand cost behavior patterns including variable costs, fixed costs, and mixed costs. LO4Analyze a mixed cost using a scattergraph plot and the high- low method. LO5Prepare income statements for a merchandising company using the traditional and contribution formats. LO6Understand the differences between direct and indirect costs. LO7Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs. 2 The next few files involve problems we will be working in this chapter, and later in the semester. 3 5 6 7 Continue the bookstore problem, except assume the sales are increased by 10% in the second month. 8 9 10 Continue the bookstore problem. Sales increased by 10% in the second month. Did net income increase buy 10%. 11 12 13 14 15 16 17 18 19 20 21 22 23 Introduce Manufacturing Acct 24 Introduce Manufacturing Acct 25 Introduce Manufacturing Acct 26 27 Chapter 2 Measurement of Cost Behavior Copyright Dr. Howard Godfrey - M11-Chp-02-1B-Measure-Cost-Behavior Introduction-Cost Behavior-1 On the next slide, a club will budget its costs for a party based on a plan for: (1) 100 persons attending and (2) 200 persons attending. The admission price will be set based on the plan for 100 persons to attend. Band cost is fixed. Food cost is variable. Only 90 people actually attend. What is the overall financial results for the dance? What can we learn from this example? 28 Introduction-Cost Behavior-6 In the preceding example, we have to set the admission price before we know the cost per person for the party. We probably cannot wait until after the party and bill members for actual cost. 34 Introduction-Cost Behavior-7 A construction contractor must submit a competitive bid for a construction job, with the expectation that the bid price will cover construction costs and some profit as well. 35 Introduction-Cost Behavior-8 When you take your auto into the shop, you are given an estimate of what the repair will cost: 1. Cost of auto parts (retail price) 2. Cost of labor for the repair 3. Cost for utilities, rent, etc. 36 Introduction-Cost Behavior-9 Actually, the repair shop charges you the retail price for the parts, and sets a cost for each hour of labor that will cover salaries and overhead. They may pay the mechanic $20 per hour, but charge you $50 per labor hour. This covers labor and overhead (and profit). 37 Introduction-Cost Behavior-10 What you see at the auto shop is not a cost sheet, but actually a Retail Sheet. The auto shop knows the wholesale cost of the parts and the actual cost of the labor. They have to hope the labor markup covers overhead and profit. (An auto repair bill looks a lot like a job cost sheet.) 38 1. Step- and mixed-cost behavior. 39 2. Management influence on cost behavior. 40 Step Costs Have you ever been in a fast food restaurant for an evening meal and noticed that business was pretty slow? You may have heard the manager tell an employee he or she can take the rest of the evening off. [punch out on the clock and go home] Trying to keep labor cost somewhat variable with the level of sales????? Actually the wage cost is probably a step cost- why? 41 3. Measure and mathematically express cost functions and use them to predict costs. 42 43 4. Importance of activity analysis for measuring cost functions. 44 5. Measure cost behavior using the engineering analysis, account analysis, high-low, visual-fit, and least-squares regression methods. 45 High-Low-Method- Slide 1 46 High-Low-Method- Slide 2 47 High-Low-Method- Slide 3 48 High-Low-Method- Slide 3 49 50 51 Flexible Budget UNCC Corp. operates its production department under a flexible budget with monthly allowances established for 20% intervals. Capacity is based on direct labor hours with 1,000 direct labor hours representing 100% normal capacity. Each unit requires one-half hour, so full capacity is 2,000 units. The exhibit shows budget allowance at the 80% and 100% levels. 52 54 55 The contribution approach - income statement Learning Objective 4: Prepare an income statement using the contribution format. The contribution approach provides an income statement format geared directly to cost behavior, which has been the focus of discussion in this chapter. This approach separates costs into fixed and variable categories. Sales variable costs = contribution margin. Contribution margin fixed costs = net operating income. 56 The contribution approach-income statement Useful as an internal planning and decision- making tool. For example, this approach is useful for: Cost-volume-profit analysis (Chapter 6). Budgeting (Chapter 9). Segmented reporting (Chapter 12). Special decisions such as pricing and make or buy analysis (Chapter 13). 57 The contribution approach differs from the traditional approach illustrated in an earlier chapter. The traditional approach organizes costs in a functional format. Costs relating to production, administration, and sales are grouped together without regard to their cost behavior. The traditional approach is used primarily for external reporting purposes. 58 Helpful Hint: The income statement from the annual report of a well-known local manufacturing firm can be used to illustrate the functional income statement. If the various expense categories on the income statement contain both fixed and variable costs. How to estimate the increase in profit that would result from a 4% increase in sales using the functional statement. There is no way to do this with reasonable accuracy, since there is no way to tell on a functional income statement what costs would increase. 59 The End 60