Session – 1: Introduction

PGP 2023-25

Prof. M. Shameem Jawed

McGraw-Hill/Irwin
 Define Managerial
Accounting

Managerial accounting is the process of

 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating information

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 Managerial versus Financial
Accounting
Accounting System
(accumulates financial and
managerial accounting data in the cost
accounting system)

Managerial Accounting Financial Accounting

Information for decision Published financial
making, planning, and statements and other
controlling an financial reports.
organization’s
operations.
Internal External
Users Users
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Managing Resources, Activities, and
People
An organization . . .
Directing

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People
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 Strategic Cost Management and the
Value Chain

Product
Design
Production
Research
and
Development Marketing

Securing raw
materials and Distribution
other resources

Customer
Start Service

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 Cost Management Systems
Objectives
Objectives

Measure
Measure the
the cost
cost
of
of resources
resources
consumed.
consumed.

Identify
Identify and
and Cost
eliminate
eliminate non-
non- Management
System
value-added
value-added costs.
costs.

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 Cost Management Systems
Objectives
Objectives

Determine
Determine
efficiency
efficiency and
and
effectiveness
effectiveness of of
major
major activities.
activities.

Identify
Identify and
and Cost
evaluate
evaluate new
new Management
System
activities
activities that
that can
can
improve
improve
performance.
performance.

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Course Outline

Divided in 2 broad modules

 Cost Concepts & Estimation (6)
 Costing for Decision Making (2),
 Pricing & Control (2)

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Textbook & Reference Materials

Basic Text
 Ronald W Hilton and David E Platt, Managerial
Accounting.

Additional Material
 HBR Cases & Reading materials
 Where do we get it from?
 Course pack ?
 Additional Handouts in select classes

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Assessment & Evaluation

Divided into three heads:

 Class Participation (10%) [“&” “|”]

 In-Class/Online Quizzes (10%)

 End Term Examination (50%) [Individual]

 Case Analysis/ Live Project (30%,

[Group])

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 Classroom Conduct, Rules & Norms!

• Its mandatory to have your name

displayed in front of you.
• Please always keep your mobiles devices
on vibration or silent mode.
– (a) Please don’t miss any call from your
family, provided:
• It consecutively rings thrice or more…
• In case of known emergency /exigency...
– (b) If you are holding a PoR, you are
allowed to take calls, but only after
walking out of the class.
– Though you lose the right to ask
questions for that session...
 In the interest of the class, I can revise any of
these rules/norms, citing necessary rationale …!
 Let’s go back to the basics

If you are asked to define core

management goal in one single and
simple equation, what that would be?

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What Do We Mean By COST?

Cost
is the measure of
resources given
up to achieve a
particular purpose.

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Product Costs, Period Costs, and
Expenses

Product costs are costs associated with goods for

sale until the time period during which the products
are sold, at which time the costs become expenses.

Period costs are costs that are expensed during the

time period in which they are incurred.

Expenses are the consumption of assets for the

purpose of generating revenue.

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 Cost Classifications on Financial
Statements – Income Statement

Product Costs Period Costs

Cost of goods sold Operating expenses

2-16
 Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Cash
 Receivables
– Receivables  Prepaid Expenses
– Prepaid Expenses  Inventories
– Merchandise Raw Materials
Inventory Work in Process
Finished Goods

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 Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
 Cash
Cash Those materials waiting
to be processed.
 Receivables
Receivables  Prepaid Expenses
Prepaid Expenses  Inventories

Merchandise Raw Materials

Inventory Work in Process
Finished Goods

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 Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Partially
Current completed
Assets
Current Assets products – material to
 Cash
Cash which some labor and/or
 Receivables
overhead has been
Receivables added.
 Prepaid Expenses
Prepaid Expenses  Inventories

Merchandise Raw Materials

Inventory Work in Process
Finished Goods

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 Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
– Cash
 Cash
 Receivables
Completed products
– Receivables awaiting
 Prepaid sale.
Expenses
– Prepaid Expenses  Inventories

– Merchandise Raw Materials

Inventory Work in Process
Finished Goods

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Types of Production
Processes

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 Manufacturing Costs

Direct Direct Manufacturing

Material Labor Overhead

The
Product

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 Direct Material

Cost of raw material that is used to

make, and can be conveniently
traced, to the finished product.
Example:
Steel used to
manufacture
the automobile.

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 Direct Labor

Cost of salaries, wages, and fringe

benefits for personnel who work
directly on manufactured products.

Example:
Wages paid to an
automobile assembly
worker.

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 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Materials used to support the

production process. Examples:
lubricants and cleaning supplies
used in an automobile assembly
plant.

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 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Cost of personnel who do

not work directly on the
product. Examples:
maintenance workers,
janitors, and security guards.

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 Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Examples: depreciation on
plant & equipment, property
taxes, insurance, utilities,
overtime premium, and
unavoidable idle time.

2-27
 Classifications of Costs in
Manufacturing Companies

Manufacturing costs are often

combined as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost

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Manufacturing Cost Flows

Direct Material
Work in
Process
Direct Labor
Inventory

Manufacturing
Overhead

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 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished
Goods
Inventory

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 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

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Schedule of Cost of Goods
Manufactured

2-32
Schedule of Cost of Goods
Manufactured

2-33
Schedule of Cost of Goods
Manufactured
Include all direct labor costs
incurred during the current
period.

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2-35
 Schedule of Cost of Goods
Manufactured
Beginning work-in-process
inventory is carried over
from the prior period.

Ending work-in-process inventory

contains the cost of unfinished
goods and is reported in the
current assets section of the
balance sheet.

2-36
 Income Statement for a
Manufacturer

Comet Computer Corporation

Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500

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 Comet Computer Corporation
Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500

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Activities that cause costs to be
incurred are called COST DRIVERS:
• ACTIVITY COST DRIVER
– Machining operations Machine hours

– Machine Setup Setup hours

– Production Manufacturing orders

scheduling
Pieces inspected
– Product Inspection
(Manufacturing) Purchase orders

– Purchasing
Shop orders
– Shop order handling
 Cost Classifications

Cost behavior means how a cost

will react to changes in the level
of business activity.
– Total variable costs change
when activity changes.
– Total fixed costs remain
unchanged when activity
changes.
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Total Variable Cost Example
Your total cable pay-per-view bill is
based on how many movies you
watch.
Total Pay-Per-View Bill

Pay-Per-View
Movies Watched 2-41
Variable Cost Per Unit Example

The cost per movie watched is

constant.
For example, $4.00 per movie.

Per Movie Charge

Movies Watched
2-42
 Total Fixed Cost Example
Your monthly cable bill probably does not change
when you watch movies on channels that you
have elected to be paid on a monthly basis (HBO).
Monthly Charge for HBO
Bill

Number of HBO Movies

Watched 2-43
Fixed Cost Per Unit Example
The average cost per HBO movie
decreases as more HBO movies are
watched.

Monthly HBO Bill per Movie

Watched

Number of HBO Movies

Watched 2-44
 Direct and Indirect Costs
Direct costs Indirect costs
• Costs that can • Costs that must
be be allocated in
easily and order to be
conveniently assigned to a
traced to a product or
product or department.
department. • Example: cost of
• Example: cost of national
paint in the paint advertising for
department of an an airline is
automobile indirect to a 2-45
 Controllable and
Uncontrollable Costs

A cost that can be significantly

influenced
by a manager is a controllable cost.
Cost item Manager Classificaton
Cost of food used Restaurant Controllable
in a restaurant manager
Cost of national Restaurant Uncontrollable
advertising by a manager
restaurant chain
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 Opportunity Cost

The potential benefit that is

given up when one
alternative is selected over
another.
– Example: If you were
not attending college,
you could be earning
$30,000 per year.
Your opportunity cost
of attending college for
one year is $30,000.

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 Sunk Costs
All costs incurred in the past that cannot be
changed by any decision made now or in
the future are sunk costs. Sunk costs
should not be considered in decisions.
– Example: You bought an automobile that
cost $22,000 two years ago. The $22,000
cost is sunk because whether you drive it,
park it, trade it, or sell it, you cannot
change the $22,000 cost.

2-48
 Differential Costs
Costs that differ between
alternatives.
Example: You can earn $1,500 per month in your
hometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in your
hometown and $300 per month to the city.

What is your differential cost?

$300 - $50 = $250

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Marginal Costs and Average Costs

The total cost to

The extra cost
produce a quantity
incurred to produce
divided by the
one additional unit.
quantity produced.

Marginal and average costs are

largely a function of cost behavior
-- variable and fixed costs.
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Costs and Benefits of Information

Costs Benefits

More information does not mean more

benefits if information overload results.

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Let’s Look at Some Simple
Problems…!

2-52
Yang Corporation recently computed
total product costs of $567,000 and total
period costs of $420,000, excluding
$35,000 of sales commissions that were
overlooked by the company's
administrative assistant. On the basis of
this information, Yang's income
statement should reveal operating
expenses of:
• A. $35,000.
• B. $420,000.
• C. $455,000.
• D. $567,000.
• E. $602,000.
Yang Corporation recently computed
total product costs of $567,000 and total
period costs of $420,000, excluding
$35,000 of sales commissions that were
overlooked by the company's
administrative assistant. On the basis of
this information, Yang's income
statement should reveal operating
expenses of:
• A. $35,000.
• B. $420,000.
• C. $455,000.
• D. $567,000.
• E. $602,000.
The accounting records of Georgia Company
revealed the following costs: direct materials used,
$250,000; direct labor, $425,000; manufacturing
overhead, $375,000; and selling and administrative
expenses, $220,000. Georgia's product costs total:

• A. $1,050,000.
• B. $830,000.
• C. $895,000.
• D. $1,270,000.
• E. None of the other answers are correct.
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The accounting records of Georgia Company
revealed the following costs: direct materials used,
$250,000; direct labor, $425,000; manufacturing
overhead, $375,000; and selling and administrative
expenses, $220,000. Georgia's product costs total:

• A. $1,050,000.
• B. $830,000.
• C. $895,000.
• D. $1,270,000.
• E. None of the other answers are correct.
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Which of the following
inventories would a discount
retailer such as Wal-Mart report
as an asset?
• A. Raw materials.
• B. Work in process.
• C. Finished goods.
• D. Merchandise inventory.
• E. All of the other answers are
correct.
Which of the following
inventories would a discount
retailer such as Wal-Mart report
as an asset?
• A. Raw materials.
• B. Work in process.
• C. Finished goods.
• D. Merchandise inventory.
• E. All of the other answers are
correct.
Lake Appliance produces washers and
dryers in an assembly-line process.
Labor costs incurred during a recent
period were: corporate executives,
$500,000; assembly-line workers,
$180,000; security guards, $45,000; and
plant supervisor, $110,000. The total of
Lake's direct labor cost was:
• A. $110,000.
• B. $180,000.
• C. $155,000.
• D. $235,000.
• E. $735,000.
Lake Appliance produces washers and
dryers in an assembly-line process.
Labor costs incurred during a recent
period were: corporate executives,
$500,000; assembly-line workers,
$180,000; security guards, $45,000; and
plant supervisor, $110,000. The total of
Lake's direct labor cost was:
• A. $110,000.
• B. $180,000.
• C. $155,000.
• D. $235,000.
• E. $735,000.
Depreciation of factory equipment would
be classified as:

• A. Operating cost.
• B. Other cost.
• C. Manufacturing overhead.
• D. Period cost.
• E. Administrative cost.
Depreciation of factory equipment would
be classified as:

• A. Operating cost.
• B. Other cost.
• C. Manufacturing overhead.
• D. Period cost.
• E. Administrative cost.
Holden Industries began July with a
finished-goods inventory of $48,000. The
finished-goods inventory at the end of July
was $56,000 and the cost of goods sold
during the month was $125,000. The cost
of goods manufactured during July was:

• A. $104,000.
• B. $125,000.
• C. $117,000.
• D. $133,000.
• E. None of the other answers are
correct.
Holden Industries began July with a
finished-goods inventory of $48,000. The
finished-goods inventory at the end of July
was $56,000 and the cost of goods sold
during the month was $125,000. The cost
of goods manufactured during July was:

• A. $104,000.
• B. $125,000.
• C. $117,000.
• D. $133,000.
• E. None of the other answers are
correct.
Pumpkin Enterprises began operations on January
1, 2017, with all of its activities conducted from a
single facility. The company's accountant concluded
that the year's building depreciation should be
allocated as follows: selling activities, 20%;
administrative activities, 35%; and manufacturing
activities, 45%. If Pumpkin sold 60% of 2017
production during that year, what percentage of the
depreciation would appear (either directly or
indirectly) on the 2017 income statement?

A. 27%. B. 45%. C. 55%. D. 82%.

E. 100%.
Pumpkin Enterprises began operations on January
1, 2017, with all of its activities conducted from a
single facility. The company's accountant concluded
that the year's building depreciation should be
allocated as follows: selling activities, 20%;
administrative activities, 35%; and manufacturing
activities, 45%. If Pumpkin sold 60% of 2017
production during that year, what percentage of the
depreciation would appear (either directly or
indirectly) on the 2017 income statement?

A. 27%. B. 45%. C. 55%. D. 82%.

E. 100%.
The fixed costs per unit are $10 when a
company produces 10,000 units of
product. What are the fixed costs per
unit when 8,000 units are produced?

• A. $12.50.
• B. $10.00.
• C. $8.00.
• D. $6.50.
• E. $5.50.
The fixed costs per unit are $10 when a
company produces 10,000 units of
product. What are the fixed costs per
unit when 8,000 units are produced?

• A. $12.50.
• B. $10.00.
• C. $8.00.
• D. $6.50.
• E. $5.50.
Which of the following costs should
be ignored when choosing among
alternatives?

• A. Opportunity costs.
• B. Sunk costs.
• C. Out-of-pocket costs.
• D. Differential costs.
• E. None of the other answers are
correct.
End of Session 1

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