Chapter 1

Directing and motivating involves managing day-to-day activities to keep the organization running
smoothly
The control function ensures that plans are being followed

Difference between Financial accounting and managerial accounting

1. Financial accounting for external persons and Managerial accounting for managers
2. FA focus on historical data whereas MA looks for future
3. FA concerns on verifiability whereas MA focuses on relevance of planning and control
4. FA focus on precision and MA emphasis on timeliness
5. FA primarily concern on the whole organization and MA segments of an organization
6. FA follow GAAP and prescribed formats but MA not
7. FA for external reports but for MA not mandatory

Line positions are directly related to achievement of the basic objectives of an organization.
Example: Production supervisors in a manufacturing plant

Staff positions support and assist line positions. Example: Cost accountants in the manufacturing
plant.
The Chief Financial Officer is a member of the top management team responsible for:
(1) Providing timely and relevant data to support planning and control activities.
(2) Preparing financial statements for external users.

The Changing Business Environment

Just-in-time production
- Receive customer orders  Schedule production  Receive materials just in time for production
 Complete parts just in time for assembly into products  Complete products just in time to
ship customers.
- JIT Consequences: Improved plant layout, Reduced setup time, Zero production defects, and
Flexible workforce
- JIT purchasing: Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots.
Defect-free supplier deliveries
- Benefits: Reduced inventory costs, higher quality products, increased throughput, More rapid
response to customer orders, Greater customer satisfaction, Freed-up funds

Total quality management

- TQM improves productivity by encouraging the use of fact and analysis for decision making and if
properly implemented, avoids counter-productive organizational infighting
- Central focus is serving customers
- Systematic problem-solving using tools such as benchmarking

Process reengineering
- A business process is diagrammed in detail Every step in the business process must be justified
 The process is redesigned to eliminate all non-value-added activities
- Results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities
for errors are reduced

Nazrul Islam, IUB (BBA, MBA)

Process Reengineering versus TQM
 PR Radically overhauls existing processes and TQM Tweaks existing processes to realize gradual
improvements
 PR Likely to be imposed from above and to use outside consultants and TQM uses a team
approach involving people who work directly in the process

Theory of constraints
 A constraint (also called a bottleneck) is anything that prevents you from getting more of what
you want.
 The constraint in a system is determined by the step that has the smallest capacity
 Only actions that strengthen the weakest link in the “chain” improve the process
 Identify the weakest link  Allow the weakest link to set the tempo  Focus on improving the
weakest link  Recognize that the weakest link is no longer so

International competition
Increasing sophistication in international markets
Fewer tariffs, quotas, and other barriers to free trade
Improvements in global transportation systems

 E-commerce

Chapter Two and three

Total Manufacturing Costs

 all the costs incurred to produce a product. They are also called product costs
 = Direct Materials + Direct Labor + Manufacturing Overhead

Direct Materials
- Raw materials of the finished goods
- can be conveniently traced e.g., Flour (bakery), Fabric (garments), Wood (furniture), Steel
(automobile)

Direct Labor
- Wages paid to workers who directly make the product
- can be easily traced to individual units of product (Machine operator, Assembly line workers,
Tailors in garment factories, Bakers in a bakery)

Manufacturing Overhead/ FACTORY OVERHEAD

- All other factory-related costs that are not direct materials or direct labor
- cannot be traced directly to specific units produced
- E.g., Factory rent, Factory electricity, Depreciation of manufacturing equipment, Indirect
materials (Materials used to support the production process; such as glue, oil, cleaning
supplies), Indirect labor (supervisors, maintenance staff, janitors and security guards),
overtime

Nazrul Islam, IUB (BBA, MBA)

Classifications of Costs
 Prime Cost: Direct Materials + Direct Labor (Costs that are directly related to production)
 Conversion Cost: Direct Labor + Manufacturing Overhead (Costs required to convert raw
materials into finished goods)

Non-manufacturing Costs
 costs not directly related to production. These are expensed in the period incurred, so they are
also called period costs

Selling (Marketing) Costs

 Costs related to selling and delivering products to customers
 Advertising, Sales commissions, Delivery expenses, Sales staff salaries, Packaging for delivery

Administrative Costs
 Costs related to overall management and office operations
 Office rent, Office staff salaries, Accounting & legal fees, Property tax on corporate
headquarters, Office utilities

Included In Inventory?
 Manufacturing cost: Yes (Product cost)
 Non-manufacturing cost: No (Period cost)

(1) If your inventory balance at the beginning of the month was $1,000, you bought $100 during the
month, and sold $300 during the month, what would be the balance at the end of the month?
A. $1,000. B. $ 800. C. $1,200. D. $ 200
Ending Inventory=Beginning Inventory + Purchases−Cost of Goods Sold
Ending Inventory=1,000+ 100−300=800

RMWF (Remember)
Raw Materials Cost
(2) Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material
was purchased. A count at the end of the month revealed that $28,000 of raw material was still
present. What is the cost of direct material used/Raw materials used in production?
a. $276,000 b. $272,000 c. $280,000 d. $2,000

Direct Material Used

¿ Total Raw Materials Available for Use−Ending Raw Materials
¿(Beginning Raw Materials + Purchases)−Ending Raw Materials
¿ 32,000+276,000−28,000
¿ 280,000
¿ Raw materials used ∈ production

Raw Materials /Direct Materials

Beginning raw materials inventory
(+) Raw materials purchased
Raw materials available for use in production

Nazrul Islam, IUB (BBA, MBA)

(-) Ending raw materials inventory
Direct material used/Raw materials used in production
When Direct material used/Raw materials used in production removed from raw materials inventory
and placed into the production process they are called direct materials.

(3) Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory
overhead was $180,000. What were total manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

We Know:
Total MC =Direct materials+ Direct Labor+ Manufacture overhead
Total MC =$ 280,000+$ 280,000+$ 180,000=$ 835,000

Now try to understand: RMWF

(4) Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material
was purchased. A count at the end of the month revealed that $28,000 of raw material was still
present. Direct labor was $375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month? What were the Prime and conversion cost?

We have,
Beginning raw materials inventory = $32,000
Purchased raw materials = $276,000
Ending raw materials = $28,000
Direct labor = $375,000
Conversion Cost*
Factory overhead = $180,000
Direct materials =???
Prime cost =??? (Costs that are directly related to production)
Conversion cost =??? (Costs required to convert raw materials into finished goods)

Recall the formula

Prime cost =Direct materials+ Direct Labor
Conversion cost=Direct Labor + Factory Overhead
Total MC =Direct materials+ Direct Labor+ Manufacture overhead

Now Direct materials

= Raw materials used
= total raw materials – ending raw materials
= Beginning raw materials + Purchased raw materials – ending raw materials
= $32,000 + $276,000 - $28,000
= $ 280,000

∴ Prime cost=Direct materials+ Direct Labor =$ 280,000+ $ 375,000=$ 655,000

∴ Conversion cost=Direct Labor + Factory Overhead=$ 375,000 +$ 180,000=$ 555,000

Nazrul Islam, IUB (BBA, MBA)

Total MC = $ 280,000 + $375,000 + $180,000 = $835,000

Now try to understand: RMWF

Total work in process for the period = Total manufacturing costs + Beginning work in process
inventory
Cost of good manufacture = Total work in process for the period – Ending work in process inventory
Now try to understand: RMWF
Cost of good available for sale = Cost of good manufacture + Beginning of finish good inventory
Cost of good sold = Cost of good available for sale – Ending finished goods inventory

(5) Beginning work in process was $125,000. Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially finished goods remaining in work in process
inventory at the end of the month. What was the cost of goods manufactured during the
month?
A. $1,160,000 B. $910,000 C. $760,000 D. Cannot be determined.

Given,
Beginning work in process = $125,000
Total work in process for the period
Total Manufacturing costs = $835,000
Good remaining end of the month = $200,000
Cost of goods manufactured =???
RMWF

Cost of goods manufactured

= Total work in process for the period - Ending work in process inventory
= Total Manufacturing costs + Beginning work in process inventory – Ending work process inventory
= $835,000 + $125,000 - $200,000
= $760,000 = Cost of good manufacture

(6) Beginning finished goods inventory was $130,000. The cost of goods manufactured for the
month was $760,000. And the ending finished goods inventory was $150,000. What was the cost
of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D.
$760,000.

Given,
Beginning finished goods inventory = $125,000
Cost of good available for sale
Cost of goods manufactured = $760,000
Ending finished goods = $150,000
Cost of goods sold =???

Cost of goods sold

= Cost of good available for sale – Ending finished goods inventory
= Cost of good manufactured + Beginning of finish good inventory – Ending finished goods inventory
= $760,000 + $130,000 - $150,000
= $740,000

Nazrul Islam, IUB (BBA, MBA)

 Behavior of the cost within a relevant range (Chapter 3)
Fixed Costs:
 Also called overhead or period costs (sometimes)
 Costs that do not change with the level of production or sales within a relevant range
 Fixed cost per unit = decreases as production increases
 Fixed costs per unit vary with the level of activity
 Total fixed costs are constant within the relevant range

Variable Costs:
 Often includes direct materials and direct labor (if labor varies with output)
 Change directly with the level of production (Total variable cost = increases with production)
 Variable cost per unit = usually constant
 Variable costs per unit are constant within the relevant range

Mixed cost
 A mixed cost has both fixed and variable components. E.g., utility cost
 Total mixed cost, Y = mx + c
 m = variable cost per unit, x = the level of activity, c = total fixed cost

(7) If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?
Total cost = (0.03×2000) + $40 = $100

High-Low Method
Changes∈cost ( High−Low)
Variable cost per unit (m) =
Changes∈unit (High−Low)

Total mixed cost/total cost (y) (high) = Total fixed cost (c) + (m× high level of activity)

(8) Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and
commissions? A. $ 2,000 B. $ 4,000 C. $10,000 D. $12,000

Changes∈cost (High−Low) $ 14,000−$ 10,000

m= = =$ 0.1 per unt
Changes ∈unit (High−Low) 120,000−80,000

Fixed cost (c) = Total cost (high) – (m× high level of activity) ¿ $ 14000−( 0.1 ×120,000 )=$ 2,000

Which of the following costs would be variable with respect to the number of cones sold at a Baskins
& Robbins shop? (There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.

Nazrul Islam, IUB (BBA, MBA)

C. The cost of ice cream. More cones sold → more ice cream used → cost increases
D. The cost of napkins for customers. More cones sold → more napkins needed → cost increases

Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.

Sunk Costs
A cost that has already been incurred and cannot be changed or recovered, no matter what decision
you make next. Since it cannot be changed, it should not influence future decisions.

(9) Suppose you are trying to decide whether to drive or take the train to Portland to attend a
concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the
cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket
affect the decision of whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert.
You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost
of licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

Labor Fringe Benefits

 Employer paid costs for insurance programs, retirement plans, supplemental unemployment
programs, Social Security, Medicare, workers’ compensation and unemployment taxes
 Some companies include all of these costs in manufacturing overhead
 Other companies treat fringe benefit expenses of direct laborers as additional direct labor costs

Quality of Conformance
When the overwhelming majority of products produced conform to design specifications and are
free from defects

Nazrul Islam, IUB (BBA, MBA)

Nazrul Islam, IUB (BBA, MBA)