Book Cover
Chapter One
Chapter One
Management Accounting:
A Value-Added Discipline
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2006
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Product Costing
Product
Costing
Cost Plus
Pricing
Managers need to
know the cost of
their products
and services.
A common
business practice.
Product Costs in
Manufacturing Companies
Materials
Labor
Overhead
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Average Cost per Unit
Total Cost
Number of Units
= Average Cost per Unit
Tabor Example Average Cost Per Unit
$1,000
= $250
4
Costs Can Be Assets or
Expenses
Product
Cost
Period
Cost
Asset
COGS
Expense
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Patillo Manufacturing
Company Transactions
Patillo Manufacturing Company experienced the following transactions:
Event 1
Event 2
Event 3
Event 4
Event 5
Event 6
Event 7
Event 8
Event 9
Event 10
Acquired additional $15,000 cash by issuing common stock.
Paid $2,000 for the materials that were used to make its products. All
products started were completed during the period.
Paid $1,200 for salaries of selling and administrative employees.
Paid $1,300 for wages of production workers.
Paid $2,800 for furniture used in selling and administrative offices.
Recognized depreciation expense on office furniture purchased in Event 5.
The furniture acquired on January 1 had a $400 estimated salvage value
and a four-year useful life. The annual depreciation charge is $600
[($2,800 - $400)/4].
Paid $4,500 for manufacturing equipment.
Recognized depreciation expense on equipment purchased in Event 7.
The equipment acquired on January 1 had a $1,500 estimated salvage value
and a three-year useful life. The annual depreciation charge is $1,000
[($4,500 - $1,500)/3].
Sold inventory to customers for $7,500 cash.
The inventory sold in Event 9 cost $4,000 to make.
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Labor Costs
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Overhead Costs
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Total Product Cost
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Overhead Costs: A Closer
Look
Indirect Costs
Depreciation
Supervisor’s
Salary
Utilities
Indirect Cost Allocation
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Manufacturing Cost Summary
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Marion Manufacturing
Company
Marion Manufacturing Company (MMC) had the
following transactions:
1. MMC was started when it acquired $12,000 from
issuing common stock.
2. MMC incurred specifically identifiable product
costs of $8,000.
3. MMC incurred $4,000 of costs to design its
product and plan the manufacturing process.
4. MMC made 1,000 units of product and sold 700 of
the units for $18 each.
Let’s look at two scenarios for MMC.
Marion Manufacturing
Company
Scenario 1
Scenario 2
The $4,000 of design
and planning costs are
classified as selling
and general and
administrative.
The $4,000 of design
and planning costs are
classified as product
costs, meaning they
are first accumulated
in the inventory
account and then
expensed when the
goods are sold.
Ethical Considerations
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Common Features of Criminal
and Ethical Misconduct
Secret
Problem
Opportunity
Rationalization
Upstream and Downstream
Costs
Upstream
Costs
Downstrea
m Costs
Costs occur before the
manufacturing process
begins.
Costs occur after the
manufacturing process
begins.
Product Costs in Service
Companies
Service companies, like manufacturing
companies, incur materials, labor and
overhead costs in the process of providing
services.
For example, a hospital providing
medical services to a patient
incurs costs for medical supplies
(materials), salaries for doctors
and nurses (labor), and
depreciation, utilities, insurance,
and so on (overhead).
Emerging Trends in
Managerial Accounting
Benchmarking
Total Quality
Management
Best Practices
Activity-Based
Management
Value-Added
Assessment
Just-in-Time
Inventory
Total Quality Management
(TQM)
ProblemSolving
Philosophy
to
achieve
Continuous
Improvement
Customer
Satisfaction
Activity-Based Management
and Value-Added Assessment
An organization cannot manage costs. Instead, it
manages the activities that cause costs to be
incurred. Activities represent the measures an
organization takes to accomplish its goals.
Just-in-Time Inventory
Inventory
Holding Costs
NonvalueAdded Activity
Many businesses have been able to
simultaneously reduce their inventory
holding costs and increase customer
satisfaction by making products available
just in time (JIT) for customer consumption.
End of Chapter One