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Chapter 2 ma note
- The document discusses various cost concepts including direct materials, direct labor, manufacturing overhead, product costs, period costs, fixed costs, variable costs, mixed costs, sunk costs, opportunity costs, and incremental costs. - It also compares absorption costing and variable costing methods for valuing inventory and calculating cost of goods sold and net operating income. Absorption costing includes both fixed and variable manufacturing overhead in product costs while variable costing only includes variable costs. - Various cost classification and analysis techniques are presented including cost behavior analysis using scatter graphs, regression, and the high-low method to determine the fixed and variable components of mixed costs.
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Chapter 2 ma note
- 1. MANAGEMENT ACCOUNTING 1 MKM1013 SAJIAH YAKOB 2013
- 2.
- 3. COST CONCEPTS •Every companywill incurred costs •Company has to know its costs for producing products •Why???? To improve performance •Company focused on cost leadership will focused on -Cost reduction -Simplify processing •Most manufacturing companies divide costs into 3 broad categories: oDirect materials oDirect labor oManufacturing overhead
- 4. •What is directmaterials, direct labor and manufacturing overhead •DM= those materials that become an integral part of the finished products and that can be physically and conveniently traced to it. •Example: bread, direct material flour •Chair: direct material wood oDirect materials
- 5. •Direct labor orlabor cost that can be physically and conveniently traced to individual units of products •Example: assembly line workers/operators oDirect labor
- 6. •Various names formanufacturing OH: indirect manufacturing costs, factory overhead and factory burden •Non-manufacturing costs; -marketing or selling cost -administrative costs •summary; handout/text book; page 40, exhibit 2-1 oManufacturing overhead
- 7. PRODUCT COST VERSUSPERIOD COST •Distinction between manufacturing and non-manufacturing cost – other way to look at a cost; product and period cost •When will cost being recognized???
- 8. Product costs •Include allthe cost that are involved in acquiring or making a product •Examples………. •Product cost are viewed as attaching to units of product as the goods are purchased or manufactured •Remain attach to the goods to the inventory awaiting sale •Product cost will assign to inventory in balance sheet •When the goods was sold, cost released from inventory as expenses (cost of good sold), will be matched against sales revenue •Product cost also known as inventoriable costs
- 9. Period cost •All thecosts that are not included in product costs •These costs are expensed on the income statement at the period in which they are incurred •Examples……. Cost classification on financial statement •FS in manufacturing company is more complex •Manufacturing company produce products •The production process includes so much costs that are not incurred in merchandising company
- 10. Balance sheet •In merchandisingcompany just one type of inventory •Manufacturing company has 3 class of inventory: Raw materials Work in progress Finished goods -Refer example in page 41
- 11. Income statement ITEM RMRM ITEM RM RM Sales 1,000,000 Sales 1,500,000 Cost of good sold ; Cost of goods sold: Beginning inventory 100,000 Beginning finished good inventory 125,000 (+) purchased 650,000 (+) cost of goods manufactured 850,000 Goods available for sale 750,000 Goods available for sale 975,000 (-) ending inventory 150,000 600,000 (-) ending finished goods inventory 175,000 800,000 Gross margin 400,000 Gross margin 700,000 (-) operating expenses: (-) operating expenses: Selling expenses 100,000 Selling expenses 250,000 Administrative expenses 200,000 300,000 Administrative expenses 300,000 550,000 Net operating income 100,000 Net operating income 150,000
- 12. • What isthe different between IS merchandising and manufacturing company?.....
- 13. Assignment 2: • Whatis the different between costs and expenses?
- 14. COST CLASSIFICATION FORPREDICTING COST BEHAVIOUR What is cost behavior; cost behavior refers to how a cost will react to changes in a level of activity •Costs are often categorized into 3 categories: fixed cost, variable cost and mixed cost Activity can be expressed in many ways, such as unit produced, units sold, miles driven, beds occupied, hours work, lines of print etc
- 15. Variable cost =is a cost that varies in total, in direct proportion to changes in the level of activity -Examples….. -Variable cost ordinarily mean that it is variable with respect to the amount of good or services the organization produced
- 16. -Examples….. Fixed cost arenot affected by changes in activity Examples: good example is rent Very few costs are completely fixed Most will change if there is a large enough change in activity So can conclude..fixed cost becomes fixed within some relevant range Fixed cost = is a cost that remain constant, in total, regardless of changes in the level of activity.
- 17. Cost Classification ForAssigning Costs To Costs Objects •Costs assigning to cost object for a variety of purpose including pricing, profitability etc •Cost objects means anything for which cost data are desired •Examples: customers, jobs, product lines, departments, unit etc •Assigning cost to cost object, classified into 2 categories: direct cost and indirect cost
- 18. DIRECT COST &INDIRECT COST -Direct cost is a cost that can be easily and conveniently traced to the particular cost objects under consideration -Indirect costs is a cost that cannot be easily and conveniently traced to the particular cost objects under consideration
- 19. ASSIGNMENT 3: • GIVEDEFINITION; SUNK COST, OPPURTUNITY COST & INCREMENTAL COST
- 20. COST BEHAVIOUR ANALYSIS &USE -Mixed cost: oMixed cost contain fixed cost and variable cost oAlso known as semi variable costs oFormula –relationship between mixed costs and level of activity can be express by equation: •Fixed cost, variable cost and mixed cost Y = a + bX Y = total mixed cost a = total fixed cost b = variable cost per unit of activity X = level of activity
- 21. •Analysis of mixedcost -Scatter graph plot -Regression -High-low method
- 22. SCATTERGRAPH PLOT MONTH ACTIVITY LEVEL PATIENTDAYS MAINTENANCE COST INCURRED (RM) JANUARY 5600 7900 FEBUARY 7100 8500 MARCH 5000 7400 APRIL 6500 8200 MAY 7300 9100 JUNE 8000 9800 JULY 6200 7800
- 23.
- 24. Regression Regression method notcover midterm and final exam.
- 25. HIGH-LOW METHOD -formula toREMEMBER!!!! VARIABLE COST = CHANGE IN COST/CHANGE IN ACTIVITY
- 26. VARIABLE COSTING: A TOOLFOR MANAGEMENT •2 general approaches used by the manufacturing companies for costing products for valuing inventories and cost of goods sold •Absorption costing and variable costing •Absorption costing used for external reporting •Variable used by managers to make internal decisions
- 27. ABSORPTION COSTING •Treats allmanufacturing costs as product cost regardless whether there are fixed or variable •Known as full cost method
- 28. VARIABLE COSTING •Only thosemanufacturing costs that vary with output are treated as product cost •Usually include DM, DL and the variable portion of manufacturing OH •Fixed manufacturing OH are not treated as product cost and treated as period cost •Known as marginal costing or direct costing
- 29. Absorption costing Variable costing Productcost Direct materials Product costDirect labor Variable manufacturing overhed Fixed manufacturing overhed Period costPeriod cost Variable selling and administrative expenses Fixed selling and administrative expenses
- 30. Unit cost computation Example: Sasacompany, a small company that produces a single product and has the following in cost structure: RM No of unit produced each year 6,000 Variable cost per unit: DM 2 DL 4 Variable manufacturing OH 1 Variable selling and admin expenses 3 Fixed cost per year Fixed manufacturing OH 30,000 Fixed selling and admin expenses 10,000 Required: •Compute the unit product cost under absorption costing •Compute the unit product cost under variable costing
- 31. Solution: Absorption costing DM 2 DL4 MANUFACTURING OH VARIABLE 1 FIXED (30,000/6,000) 5 TOTAL 12 Variable costing DM 2 DL 4 VARIABLE MANUFACTURING OH 1 TOTAL 7
- 32. INCOME COMPARISON UNDERABSORPTION AND VARIABLE COSTING To illustrate, Sasa company, a small company that produces a single product and has the following in cost structure: RM No of unit produced each year 6,000 Variable cost per unit: DM 2 DL 4 Variable manufacturing OH 1 Variable selling and admin expenses 3 Fixed cost per year Fixed manufacturing OH 30,000 Fixed selling and admin expenses 10,000 Units in beginning inventory 0 Units produced 6000 Units sold 5000 Units in ending inventory 1000 Selling price per unit 20 Selling and admin expenses Variable per unit 3 Fixed per year 10,000 Required: Compute net operating income under absorption and variable costing
- 33. Solution Absorption costing RM RM Variable costing RMRM Sales Sales Less; COGS Less; variable expenses Beginning inventory Variable COGS Plus; cost of goods manufactured Beginning inventory Less: ending inventory Plus; variable manufacturing cost Gross margin Less: ending inventory Less;selling and admin expenses Net operating income