Accounting 202 notes
Managerial Accounting and Cost Concepts PPT notes:
● Financial accounting is concerned with reporting financial information to external
parties, such as stakeholders, creditors, and regulators
● Managerial accounting is focused on providing information to managers within an
organization, so they can formulate plans, control operations, and make decisions
Purpose of cost classification:
● Assigning costs to cost objects
● Accounting for costs in manufacturing companies
● Preparing financial statements
● Predicting cost behavior in response to changes in activity
● Making decisions
Assigning costs to cost objects:
● Direct Cost
-Costs that can be easily and conveniently converted to a unit of product, or other cost
-Examples are: direct material, and direct labor
● Indirect Cost
-Costs that cannot be easily and conveniently converted to a unit of product
-Example: manufacturing overhead
● Common Cost
-Indirect cost incurred, to support the number of cost objects. These cannot be traced
to any individual or object
● Direct materials are materials that become an integral part of a product that can be
conveniently be traced directly to it
● Direct labor costs are labor costs that can easily be traced to an individual's units of
product (ex: wages paid to hourly workers)
● Manufacturing overhead: Included all manufacturing costs, aside from direct
materials and direct labor. This is something such as: utility costs, or property taxes
● Nonmanufacturing costs include: selling costs, which are costs that are necessary to
secure the order and deliver the product. As well as administrative costs, which are
either indirect or direct. They are all executive organizational, and clerical costs
Product Costs:
Product costs involve all costs required for acquiring or marking a product
Manufacturing product costs:
For manufacturing companies, product costs include:
- Raw materials, which are any materials that go into the final product
, - Work in process, consist of units of product that are only partially complete, and will
require further work before they are ready for sale to customers
- Finished goods cost, which involves completed units of product that have not been
sold to customers yet
● Transfer of product costs occurs when materials get used in production. The costs
move from raw materials to work in progress
● Once units of production are finished, their costs are transferred from Work in
Progress, to Finished Goods
● When a manufacturer sells its finished goods to customers, the costs are transferred
from finished goods, to cost of goods sold
● Product Costs: include direct materials, direct labor, and manufacturing overhead
● Inventory is recorded on the balance sheet, when the sale occurs, inventory turns into
COGS, and gets recorded on the income statement
● Period costs: include all selling and administrative costs. These get recorded as an
expense on the income statement
Cost classifications for Predicting Cost behavior:
● Cost behavior pertains to how a cost will react to changes in the level of activity. The
most common of these, are:
○ Variable costs
○ Fixed costs
○ Mixed costs
● Variable cost: A cost that varies, in total, in direct proportion to changes in the level
of activity. A variable cost/unit is consistent
● The cost driver, for variable costs includes things, such as:
○ Units produced
○ Machine hours
○ Miles driven
○ Labor hours
● Fixed cost: A cost that remains consistent, in total, regardless to changes of level in
activity
● If expressed in a per unit basis, the average fixed cost per unit varies inversely with
changes in activity (as more of a unit is produced, AFC, and also AVC per unit will
decrease)
● Variable costs, are consistent on a per unit basis, but change for the overall amount
● Fixed costs change on a per unit basis, but are consistent for the overall amount
, Cost Classifications:
● Differential Costs: Differential costs are the difference in costs between any two
alternatives. A difference in revenue between two revenues is called differential
revenue. Differential costs can be fixed or variable.
● Sunk Costs: Sunk costs have already been incurred, and as such cannot be changed.
These costs should be ignored when making decisions.
● Opportunity Costs: Opportunity costs are: the potential benefit that is given up,
when one alternative is selected over the other. These are not kept in the accounting
record, but must be taken into consideration for every decision
● Management is more concerned with knowing: Sales/GM/Expenses, and net income
● Stakeholders/external players are more focused on: Sales/COGS/gross margin, and
net income.
● (Management wants bigger overall picture, while Stakeholders want more statistical
information/hard data)
Lecture #2: 9/14:
● Financial accounting is focused on GAAP
● Understanding and controlling costs are very important in managerial accounting
● Product costs, are all costs related to the product
● Period costs are related to the time period for the inventory
● Example 1-6: Traditional income statement:
○ Sales (# of units) = 20,000. SPU: $30 =$60,000
○ COGS:
Beginning Inventory + Purchases = End inventory
$24,000 + $180,000 - $44,000 = $160,000
$160,000 = Gross Margin
● Gross Margin = Sales - COGS
● Selling and administrative expenses
○ Selling expenses ($4 per unit x 20,000 (VC)) +30,000 =70,000
○ Net Operating income = 250,000
● Contribution margin, Income Statement
● Sales (# of units sold x selling price)
● 20,000 x $30 = 600,000
● Variable expenses: COGS BI (24,000) + Purchase (180,000) - EI (44,000)
● Variable selling expenses ($4 x 20,000) = 80,000
● Variable administrative expense: 2 x 20,000 = 40,000
● 40,000+ 80,000+ 160,000 = 320,000
● Contribution margin =$320,000
● Fixed expenses:
● Selling Expenses: $40,000
● Administrative expenses: $30,000 $70,000
● Total: $250,000
Managerial Accounting and Cost Concepts PPT notes:
● Financial accounting is concerned with reporting financial information to external
parties, such as stakeholders, creditors, and regulators
● Managerial accounting is focused on providing information to managers within an
organization, so they can formulate plans, control operations, and make decisions
Purpose of cost classification:
● Assigning costs to cost objects
● Accounting for costs in manufacturing companies
● Preparing financial statements
● Predicting cost behavior in response to changes in activity
● Making decisions
Assigning costs to cost objects:
● Direct Cost
-Costs that can be easily and conveniently converted to a unit of product, or other cost
-Examples are: direct material, and direct labor
● Indirect Cost
-Costs that cannot be easily and conveniently converted to a unit of product
-Example: manufacturing overhead
● Common Cost
-Indirect cost incurred, to support the number of cost objects. These cannot be traced
to any individual or object
● Direct materials are materials that become an integral part of a product that can be
conveniently be traced directly to it
● Direct labor costs are labor costs that can easily be traced to an individual's units of
product (ex: wages paid to hourly workers)
● Manufacturing overhead: Included all manufacturing costs, aside from direct
materials and direct labor. This is something such as: utility costs, or property taxes
● Nonmanufacturing costs include: selling costs, which are costs that are necessary to
secure the order and deliver the product. As well as administrative costs, which are
either indirect or direct. They are all executive organizational, and clerical costs
Product Costs:
Product costs involve all costs required for acquiring or marking a product
Manufacturing product costs:
For manufacturing companies, product costs include:
- Raw materials, which are any materials that go into the final product
, - Work in process, consist of units of product that are only partially complete, and will
require further work before they are ready for sale to customers
- Finished goods cost, which involves completed units of product that have not been
sold to customers yet
● Transfer of product costs occurs when materials get used in production. The costs
move from raw materials to work in progress
● Once units of production are finished, their costs are transferred from Work in
Progress, to Finished Goods
● When a manufacturer sells its finished goods to customers, the costs are transferred
from finished goods, to cost of goods sold
● Product Costs: include direct materials, direct labor, and manufacturing overhead
● Inventory is recorded on the balance sheet, when the sale occurs, inventory turns into
COGS, and gets recorded on the income statement
● Period costs: include all selling and administrative costs. These get recorded as an
expense on the income statement
Cost classifications for Predicting Cost behavior:
● Cost behavior pertains to how a cost will react to changes in the level of activity. The
most common of these, are:
○ Variable costs
○ Fixed costs
○ Mixed costs
● Variable cost: A cost that varies, in total, in direct proportion to changes in the level
of activity. A variable cost/unit is consistent
● The cost driver, for variable costs includes things, such as:
○ Units produced
○ Machine hours
○ Miles driven
○ Labor hours
● Fixed cost: A cost that remains consistent, in total, regardless to changes of level in
activity
● If expressed in a per unit basis, the average fixed cost per unit varies inversely with
changes in activity (as more of a unit is produced, AFC, and also AVC per unit will
decrease)
● Variable costs, are consistent on a per unit basis, but change for the overall amount
● Fixed costs change on a per unit basis, but are consistent for the overall amount
, Cost Classifications:
● Differential Costs: Differential costs are the difference in costs between any two
alternatives. A difference in revenue between two revenues is called differential
revenue. Differential costs can be fixed or variable.
● Sunk Costs: Sunk costs have already been incurred, and as such cannot be changed.
These costs should be ignored when making decisions.
● Opportunity Costs: Opportunity costs are: the potential benefit that is given up,
when one alternative is selected over the other. These are not kept in the accounting
record, but must be taken into consideration for every decision
● Management is more concerned with knowing: Sales/GM/Expenses, and net income
● Stakeholders/external players are more focused on: Sales/COGS/gross margin, and
net income.
● (Management wants bigger overall picture, while Stakeholders want more statistical
information/hard data)
Lecture #2: 9/14:
● Financial accounting is focused on GAAP
● Understanding and controlling costs are very important in managerial accounting
● Product costs, are all costs related to the product
● Period costs are related to the time period for the inventory
● Example 1-6: Traditional income statement:
○ Sales (# of units) = 20,000. SPU: $30 =$60,000
○ COGS:
Beginning Inventory + Purchases = End inventory
$24,000 + $180,000 - $44,000 = $160,000
$160,000 = Gross Margin
● Gross Margin = Sales - COGS
● Selling and administrative expenses
○ Selling expenses ($4 per unit x 20,000 (VC)) +30,000 =70,000
○ Net Operating income = 250,000
● Contribution margin, Income Statement
● Sales (# of units sold x selling price)
● 20,000 x $30 = 600,000
● Variable expenses: COGS BI (24,000) + Purchase (180,000) - EI (44,000)
● Variable selling expenses ($4 x 20,000) = 80,000
● Variable administrative expense: 2 x 20,000 = 40,000
● 40,000+ 80,000+ 160,000 = 320,000
● Contribution margin =$320,000
● Fixed expenses:
● Selling Expenses: $40,000
● Administrative expenses: $30,000 $70,000
● Total: $250,000
