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Planning
Planning
Directing
Directing and
and
Motivating
Motivating
Controlling
Controlling
McGraw-Hill/Irwin Slide 2
Planning
Identify
Identify
alternatives.
alternatives.
Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.
Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
McGraw-Hill/Irwin Slide 3
Directing and Motivating
McGraw-Hill/Irwin Slide 4
Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.
Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
McGraw-Hill/Irwin Slide 5
Planning and Control Cycle
Formulating
Formulatinglong-
long- Begin
and
andshort-term
short-termplans
plans
(Planning)
(Planning)
Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance Making plans(Directing
(Directing
performance and
(Controlling) andMotivating)
Motivating)
(Controlling)
Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
McGraw-Hill/Irwin Slide 6
Learning Objective 1
McGraw-Hill/Irwin Slide 7
Comparison of Financial and Managerial
Accounting
McGraw-Hill/Irwin Slide 8
Learning Objective 2
McGraw-Hill/Irwin Slide 9
Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
McGraw-Hill/Irwin Slide 10
Direct Materials
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
McGraw-Hill/Irwin Slide 11
Direct Labor
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
McGraw-Hill/Irwin Slide 12
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
McGraw-Hill/Irwin Slide 13
Nonmanufacturing Costs
Administrative
Costs
All executive,
organizational, and
clerical costs.
McGraw-Hill/Irwin Slide 14
Learning Objective 3
Distinguish between
product costs and period
costs and give examples
of each.
McGraw-Hill/Irwin Slide 15
Product Costs Versus Period Costs
Sale
McGraw-Hill/Irwin Slide 17
Quick Check
McGraw-Hill/Irwin Slide 18
Classifications of Costs
Prime Conversion
Cost Cost
McGraw-Hill/Irwin Slide 19
Comparing Merchandising and
Manufacturing Companies
Merchandisers . Manufacturers .
.. ..
Buy finished Buy raw
goods. materials.
Sell finished Produce and
goods. sell finished
MegaLoMart goods.
McGraw-Hill/Irwin
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash ◆ Cash
Receivables ◆ Receivables
Merchandise Inventory ◆ Inventories
• Raw Materials
• Work in Process
• Finished Goods
McGraw-Hill/Irwin Slide 21
Balance Sheet
Merchandiser Manufacturer
Current assets Current Assets
Cash ◆ Cash
Receivables ◆ Receivables
Merchandise Inventory ◆ Inventories
• Raw Materials
• Work in Process
• Finished Goods
McGraw-Hill/Irwin Slide 22
Learning Objective 4
Prepare an income
statement including
calculation of the cost of
goods sold.
McGraw-Hill/Irwin Slide 23
The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory $ 14,200
+ Purchases 234,150
Goods available
for sale $ 248,350
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold $ 236,250
McGraw-Hill/Irwin Slide 24
Basic Equation for Inventory Accounts
Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
McGraw-Hill/Irwin Slide 25
Quick Check
McGraw-Hill/Irwin Slide 26
Quick Check
McGraw-Hill/Irwin Slide 27
Learning Objective 5
McGraw-Hill/Irwin Slide 28
Schedule of Cost of Goods Manufactured
McGraw-Hill/Irwin Slide 31
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
McGraw-Hill/Irwin Slide 32
Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process
McGraw-Hill/Irwin Slide 33
Product Cost Flows
McGraw-Hill/Irwin Slide 34
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
McGraw-Hill/Irwin Slide 38
Quick Check
McGraw-Hill/Irwin Slide 39
Quick Check
McGraw-Hill/Irwin Slide 40
Quick Check
McGraw-Hill/Irwin Slide 41
Quick Check
McGraw-Hill/Irwin Slide 42
Quick Check
McGraw-Hill/Irwin Slide 43
Learning Objective 6
Understand the
differences between
variable costs and fixed
costs.
McGraw-Hill/Irwin Slide 44
Cost Classifications for Predicting Cost
Behavior
How
How aa cost
cost will
will react
react to
to
changes
changes inin the
the level
level of
of
activity
activity within
within thethe
relevant
relevant range.
range.
Total variable costs
Total variable costs
change
changewhen
whenactivity
activity
changes.
changes.
Total fixed costs remain
Total fixed costs remain
unchanged
unchangedwhen
whenactivity
activity
changes.
changes.
McGraw-Hill/Irwin Slide 45
Variable Cost
McGraw-Hill/Irwin Slide 46
Variable Cost Per Unit
McGraw-Hill/Irwin Slide 47
Fixed Cost
Your monthly contract fee for your cell phone is fixed for the
number of monthly minutes in your contract. The monthly
contract fee does not change based on the number of calls
you make.
Monthly Cell Phone
Contract Fee
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
McGraw-Hill/Irwin Slide 50
Quick Check
McGraw-Hill/Irwin Slide 51
Quick Check
McGraw-Hill/Irwin Slide 52
Learning Objective 7
Understand the
differences between direct
and indirect costs.
McGraw-Hill/Irwin Slide 53
Assigning Costs to Cost Objects
Direct costs Indirect costs
Costs that can be Costs that cannot
easily and be easily and
conveniently conveniently
traced to a unit traced to a unit
of product or of product or
other cost object. other cost object.
Examples: direct Example:
material and manufacturing
direct labor overhead
McGraw-Hill/Irwin
Learning Objective 8
Define and give examples
of cost classifications used
in making decisions:
differential costs,
opportunity costs, and
sunk costs.
McGraw-Hill/Irwin Slide 55
Cost Classifications for Decision Making
McGraw-Hill/Irwin Slide 56
Differential Cost and Revenue
McGraw-Hill/Irwin Slide 57
Opportunity Cost
The potential benefit that is given
up when one alternative is selected
over another.
McGraw-Hill/Irwin Slide 58
Sunk Costs
McGraw-Hill/Irwin Slide 59
Quick Check
McGraw-Hill/Irwin Slide 60
Quick Check
McGraw-Hill/Irwin Slide 61
Quick Check
McGraw-Hill/Irwin Slide 62
Quick Check
McGraw-Hill/Irwin Slide 63
Quick Check
McGraw-Hill/Irwin Slide 64
Quick Check
McGraw-Hill/Irwin Slide 65
Summary of the Types of Cost
Classifications
Financial Predicting
Reporting Cost Behavior
Assigning Making
Costs to Cost Business
Objects Decisions
McGraw-Hill/Irwin Slide 66
Further Classification of Labor Costs
Appendix 2A
(Appendix 2A)
Properly account for labor
costs associated with idle
time, overtime, and fringe
benefits.
McGraw-Hill/Irwin Slide 68
Idle Time
Machine Material
Breakdowns Shortages
Power
Failures
McGraw-Hill/Irwin Slide 70
Labor Fringe Benefits
Appendix 2B
(Appendix 2B)
Identify the four types of
quality costs and explain
how they interact.
McGraw-Hill/Irwin Slide 73
Quality of Conformance
McGraw-Hill/Irwin Slide 74
Prevention and Appraisal Costs
Incurred to identify
defective products
Appraisal Costs before the products are
shipped to customers
McGraw-Hill/Irwin Slide 75
Internal and External Failure Costs
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
McGraw-Hill/Irwin Slide 76
Examples of Quality Costs
Appraisal Costs
Prevention Costs • Testing and inspecting
• Quality training
incoming materials
• Quality circles
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment
McGraw-Hill/Irwin Slide 77
Distribution of Quality Costs
McGraw-Hill/Irwin Slide 78
Learning Objective 11
(Appendix 2B)
Prepare and interpret a
quality cost report.
McGraw-Hill/Irwin Slide 79
Qua lity Cost Re port
For Yea rs 1 a nd 2
Yea r 2 Yea r 1
Am ount Pe rcent* Am ount Pe rcent*
Prevention costs:
Systems development $ 400,000 0.80% $ 270,000 0.54%
Quality training 210,000 0.42% 130,000 0.26%
Supervision of prevention activities 70,000 0.14% 40,000 0.08%
Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs:
Inspection 600,000 1.20% 560,000 1.12%
Reliability testing 580,000 1.16% 420,000 0.84% Quality cost
Supervision of testing and inspection 120,000 0.24% 80,000 0.16%
Depreciation of test equipment
Total appraisal cost
200,000
1,500,000
0.40%
3.00%
140,000
1,200,000
0.28%
2.40%
reports provide
Internal failure costs:
an estimate of
Net cost of scrap
Rework labor and overhead
900,000
1,430,000
1.80%
2.86%
750,000
810,000
1.50%
1.62%
the financial
Downtime due to defects in quality
Disposal of defective products
170,000
500,000
0.34%
1.00%
100,000
340,000
0.20%
0.68% consequences
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%
of the
company’s
External failure costs:
W arranty repairs 400,000 0.80% 900,000 1.80%
W arranty replacements 870,000 1.74% 2,300,000 4.60%
Allowances 130,000 0.26% 630,000 1.26% current defect
Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost
Total quality cost $
2,000,000
7,500,000
4.00%
15.00% $
5,150,000
9,000,000
10.30%
18.00%
rate.
* As a percentage of total sales. In each year sales totaled $50,000,000.
McGraw-Hill/Irwin Slide 80
Quality Cost Reports in Graphic Form
$10 20
9 18
Quality
7 14
6
External
Failure
External
Failure
can also 12
External
Failure
External
Failure
5 be 10
McGraw-Hill/Irwin Slide 81
Uses of Quality Cost Information
McGraw-Hill/Irwin Slide 84
End of Chapter 2
McGraw-Hill/Irwin Slide 85