BASIC MANAGERIAL ACCOUNTING CONCEPTS

Copyright © 2015 by Nelson Education Ltd. 2-1

CHAPTER 2

BASIC MANAGERIAL ACCOUNTING CONCEPTS

DISCUSSION QUESTIONS

• A cost object is something for which you want

to know the cost. For example, a cost object may be the human resources department of a company. The costs related to that cost object might include salaries of employees of that department, telephone costs for that depart- ment, and depreciation on office equipment.Another example is a customer group of a company. Atlantic City and Las Vegas casinos routinely treat heavy gamblers to free rooms, food, and drink. The casino owners know the benefits yielded by these high rollers and need to know the costs of keeping them hap- py, such as the opportunity cost of lost reve- nue from the rooms, the cost of the food, and so on.

• Accumulating costs is the way that costs are

measured and tracked. Assigning costs is linking costs to some cost object. For exam- ple, a company accumulates or tracks costs by entering them into the accounting records.Direct materials would be entered into the ma- terials account; direct labour would be entered into the direct labour account. Then, these costs are assigned to units of product.

• A direct cost is one that can be traced to the

cost object, typically by physical observation.An indirect cost cannot be traced to the cost object. The same cost can be direct for one purpose and indirect for another. For exam- ple, the salaries paid to purchasing depart- ment employees in a factory are a direct cost to the purchasing department but an indirect cost (overhead) to units of product.

• The cost of goods manufactured is the sum of

direct materials, direct labour, and overhead used in producing the units completed in a factory.

• Prime cost is the sum of direct materials and

direct labour. Conversion cost is the sum of direct labour and overhead. Total product cost consists of direct materials, direct labour, and overhead. This is not equal to the sum of prime cost and conversion cost because then direct labour would be double counted.

• A product is tangible in that you can see, feel,

and take it with you. Examples of products in- clude a tube of toothpaste, a car, or an or- ange. A service is a task or activity performed for a customer. For example, the dental hy- gienist who cleans your teeth provides a ser- vice.

• Cost is the amount of cash or cash equivalent

sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. An expense is an expired cost; the benefit has been used up.

• A period cost is one that is expensed immedi-

ately, rather than being inventoried like a product cost.

• Allocation means that an indirect cost is as-

signed to a cost object using a reasonable and convenient method. Since no causal rela- tionship exists, allocating indirect costs is based on convenience or some assumed link- age.

• Manufacturing overhead includes all product

costs other than direct materials and direct la- bour. It is because the remaining manufactur- ing (product) costs are gathered into one cat- egory that overhead is often thought of as a “catchall.”

• Direct materials purchases are first entered

into the materials inventory. They may or may not be used during the month. Only when the materials are withdrawn from inventory for use in production are they known as “direct mate- rials.”

• The percentage column on the income state-

ment gives some insight into the relative spending on the various expense categories.These percentages can then be compared with those of other firms in the same industry to see if the company’s spending appears to be in line or out of line with the experiences of others.

• The income statement for a manufacturing

firm includes the cost of goods sold, which is the sum of direct materials, direct labour, and overhead. The income statement for a service firm includes the cost of services sold. There Cornerstones of Managerial Accounting Canadian 2nd Edition Mowen Solutions Manual Visit TestBankDeal.com to get complete for all chapters

2-2 Copyright © 2015 by Nelson Education Ltd.are no beginning or ending inventories in a service organization.

• Selling costs are the costs of selling and de-

livering products and services. Examples in- clude free samples, advertising, sponsorship of sporting events, commissions on sales, and the depreciation on delivery trucks (such as Coca-Cola or Pepsi trucks).

• The cost of goods manufactured is the cost of

direct materials, direct labour, and overhead for the units produced (completed) during a time period. The cost of goods sold is the cost of direct materials, direct labour, and over- head for the units sold during a time period.The number of units produced is not neces- sarily equal to the number of units sold during a period. For example, a company may pro- duce 1,000 pairs of jeans in a month but sell only 900 pairs.

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CORNERSTONE EXERCISES

Cornerstone Exercise 2–1 Direct materials $ 48,000 Direct labour 80,000 Manufacturing overhead 112,000 Total product cost $240,000

Per-unit product cost = 8,000

$240,000

= $30 Therefore, one hockey stick costs $30 to produce.Cornerstone Exercise 2–2 Direct materials $ 48,000 Direct labour 80,000 Total prime cost $128,000

Per-unit prime cost = 8,000

$128,000

= $16

Direct labour $ 80,000 Manufacturing overhead 112,000 Total conversion cost $192,000

Per-unit conversion cost = 8,000

$192,000

= $24 Cornerstone Exercise 2–3 Materials inventory, June 1 $ 42,000 Purchases 180,000 Materials inventory, June 30 (51,000) Direct materials used in production $171,000

2-4 Copyright © 2015 by Nelson Education Ltd.Cornerstone Exercise 2–4 Direct materials* $171,000 Direct labour 165,000 Manufacturing overhead 215,000 Total manufacturing cost for June 551,000 WIP, June 1 60,000 WIP, June 30 (71,000) Cost of Goods Manufactured $540,000

*Direct materials = $42,000 + $180,000 – $51,000 = $171,000 [This was calculated in Cornerstone Exercise 2–3.] Per-unit cost of goods manufactured = units 18,000

$540,000

= $30 Cornerstone Exercise 2–5 Slapshot Company Cost of Goods Sold Statement For the Month of June

Cost of goods manufactured ......................................................... $ 540,000 Finished goods inventory, June 1 ................................................. 160,000 Finished goods inventory, June 30 ............................................... (215,000) Cost of goods sold .......................................................................... $ 485,000

Number of units sold:

Finished goods inventory, June 1 ................................................. 5,000 Units finished during June ............................................................. 18,000 Finished goods inventory, June 30 ............................................... (7,000) Units sold during June ................................................................... 16,000