1-1

Management accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP).

Financial  accounting  focuses  on  reporting  to  external  parties  such  as  investors, government agencies, and banks. It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP).

Other differences include (1) management accounting emphasizes the future (not the past), and (2) management accounting influences the behavior of managers and other employees (rather than primarily reporting economic events).

1-18

Value chain and classification of costs, pharmaceutical company.

Cost Item         Value Chain Business Function

a.                           Marketing

b.                          Design of products and processes

c.                           Customer service

d.                          Research and development

e.                           Marketing

f.                           Production

g.                          Marketing

h.                        Distribution

1-20

Change in Operations/

Management Accounting                Key Success Factor                                                           

a.                                         Innovation

b.                                         Cost and efficiency and quality

c.                                         Time and cost and efficiency

d.                                         Innovation, sustainability, and cost and efficiency

e.                                      Cost and efficiency

1-32

1.        Cost-benefit approach

2.        Cost-benefit approach and/or behavioral and technical considerations (for example: how the overall morale of employees will be impacted due to retrenchment, and whether the  machines will operate normally after the new start-up)

3.         Different costs for different purposes

4.        Cost-benefit approach or behavioral and technical considerations (for example: how employees will react to more supervisory control)

5.        Cost-benefit approach or behavioural and technical consideration (for example: how to    design the performance bonus to correctly improve productivity without sacrificing other aspects)

6.         Cost-benefit approach

7.       Cost-benefit approach and/or behavioral and technical considerations (for example: how employees will react to the production process)

CHAPTER 2

AN INTRODUCTION TO COST TERMS AND PURPOSES

2-14

A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include

•     pricing and product mix decisions,

•     contracting with government agencies, and

•     preparing financial statements for external reporting under GAAP.

2-24

Classification of costs, merchandising sector.

Cost object: t-shirts sold in apparel section of store

Cost variability: With respect to changes in the number of t-shirts sold

There may be some debate over classifications of individual items, especially with regard to cost variability.

D or I

V or F

A

B

C

D

E

F

G

H

D

I

D

D

I

I

I

D

F

F

V

F

F

V

F

V

2-40

Income statement and schedule of cost of goods manufactured.

Howell Corporation

Income Statement for the Year Ended December 31, 2020

(in millions)

Revenues                                                                                                            $950

Cost of goods sold

Beginning finished goods, Jan. 1, 2020                                    $  70

Cost of goods manufactured (below)                                          645

Cost of goods available for sale                                                     715

Ending finished goods, Dec. 31, 2020                                           55                     660

Gross margin                                                                                                                             290

Marketing, distribution, and customer-service costs                                                    240

Operating income                                                                                                        $  50

Howell Corporation

Schedule of Cost of Goods Manufactured

for the Year Ended December 31, 2020

(in millions)

Direct materials costs

$   15

325

340

20

$320 100

60

10

220  640  10  650  5 $645

2-41

Interpretation of statements

1.         The schedule in 2-40 can become a Schedule of Cost of Goods Manufactured and Sold simply by including the beginning and ending finished goods inventory figures in the supporting schedule, rather than directly in the body of the income statement. Note that the term cost of goods manufactured refers to the cost of goods brought to completion (finished) during the accounting period, whether they were started before or during the current accounting period.  Some of the manufacturing costs incurred are held back as costs of the ending work in process; similarly, the costs of the beginning work in process inventory become a part of the cost of goods manufactured for 2020.

2.       The sales manager’s salary would be charged as a marketing cost as incurred by both manufacturing and merchandising companies. It is basically a period (operating) cost that appears below the gross margin line on an income statement.

3.       An assembler’s wages would be assigned to the products worked on. Thus, the wages cost would be charged to Work-in-Process and would not be expensed until the product is transferred through Finished Goods Inventory to Cost of Goods Sold as the product is sold.

4.       The direct-indirect distinction can be resolved only with respect to a particular cost object. For example, in defense contracting, the cost object may be defined as a contract. Then, a plant supervisor working only on that contract will have his or her salary charged directly and wholly to that single contract.

5.         Direct materials used  = $320,000,000 ÷ 1,000,000 units = $320 per unit             Depreciation on plant equipment = $80,000,000 ÷ 1,000,000 units = $80 per unit

6.       Direct materials unit cost would be unchanged at $320 per unit. Depreciation cost per unit would be $80,000,000 ÷ 1,200,000 = $66.67 per unit. Total direct materials costs would rise by 20% to $384,000,000 ($320 per unit ×  1,200,000 units), whereas total depreciation would be unaffected at $80,000,000.

7.      Unit costs are averages, and they must be interpreted with caution. The $320 direct materials unit cost is valid for predicting total costs because direct materials is a variable cost; total direct materials costs indeed change as output levels change. However, fixed costs like depreciation must be interpreted quite differently from variable costs. A common error in cost analysis is to regard all unit costs as one—as if all the total costs to which they are related are variable costs.  Changes in output levels (the denominator) will affect total variable costs, but not totalfixed costs. Graphs of the two costs may clarify this point; it is safer to think in terms of total costs rather than in terms of unit costs.