Managerial Accounting Fifth Canadian Edition PDF

Managerial Accounting Fifth Canadian Edition Chapter 2 Building Blocks of Managerial Accounting Copyright © 2024 Pearson Canada Inc. 2-1 Learning...

Managerial Accounting Fifth Canadian Edition Chapter 2 Building Blocks of Managerial Accounting Copyright © 2024 Pearson Canada Inc. 2-1 Learning Objectives (1 of 2) 1. Distinguish among service, merchandising, and manufacturing companies. 2. Describe the value chain and its elements. 3. Distinguish between direct and indirect costs. 4. Identify the inventoriable product costs and period costs of merchandising and manufacturing firms. 5. Prepare financial statements for service, merchandising, and manufacturing companies. Copyright © 2024 Pearson Canada Inc. 2-2 Learning Objectives (2 of 2) 6. Describe costs that are relevant and irrelevant to decision making. 7. Classify costs as fixed or variable and calculate total and average costs at different volumes. 8. Analyze revenue, cost, and inventory data using data analytic tools. Copyright © 2024 Pearson Canada Inc. 2-3 Objective 1 Distinguish among service, merchandising, and manufacturing companies. Copyright © 2024 Pearson Canada Inc. 2-4 Most Common Business Sectors The three most common types of common business sectors are: Service Companies Merchandising Companies Manufacturing Companies Exhibit 2-2 Copyright © 2024 Pearson Canada Inc. 2-5 Manufacturing Companies Inventory Three inventory accounts: – Raw materials – Work in process – Finished goods Exhibit 2-1 Copyright © 2024 Pearson Canada Inc. 2-6 Quick Check – Distinguish among service, merchandising and manufacturing companies. (1 of 6) 1. H & R Block, an income tax preparation service, is what type of company? a. Manufacturer b. Service company c. Retailer d. Wholesaler Copyright © 2024 Pearson Canada Inc. 2-7 Quick Check – Distinguish among service, merchandising and manufacturing companies. (2 of 6) 2. Among other things, General Mills makes breakfast cereal. Which type of company is General Mills? a. Manufacturer b. Service company c. Retailer d. Wholesaler Copyright © 2024 Pearson Canada Inc. 2-8 Quick Check – Distinguish among service, merchandising and manufacturing companies. (3 of 6) 3. Which type of company typically produces its own inventory? a. Manufacturer b. Service company c. Retailer d. Wholesaler Copyright © 2024 Pearson Canada Inc. 2-9 Quick Check – Distinguish among service, merchandising and manufacturing companies. (4 of 6) 1. Before these materials are used to manufacture its cars, Honda classifies steel, glass, and plastic as a. finished goods inventory. b. raw materials inventory. c. work in process inventory. d. merchandise inventory. Copyright © 2024 Pearson Canada Inc. 2 - 10 Quick Check – Distinguish among service, merchandising and manufacturing companies. (5 of 6) 2. Walmart classifies its clothing held for sale as a. finished goods inventory. b. raw materials inventory. c. work in process inventory. d. merchandise inventory. Copyright © 2024 Pearson Canada Inc. 2 - 11 Quick Check – Distinguish among service, merchandising and manufacturing companies. (6 of 6) 3. How would Honda classify its partially completed vehicles? a. Finished goods b. Raw materials c. Supplies d. Work in process Copyright © 2024 Pearson Canada Inc. 2 - 12 Objective 2 Describe the value chain and its elements. Copyright © 2024 Pearson Canada Inc. 2 - 13 Value Chain Activities that add value to products and services and cost money Exhibit 2-3 Copyright © 2024 Pearson Canada Inc. 2 - 14 Quick Check: Describe the value chain and its elements. (1 of 2) 1. The promotion of products and services is known as a. customer service. b. design. c. distribution. d. marketing. 2. Depreciation on a factory would be classified as a cost in which part of the value chain? a. Design b. Distribution c. Production d. Research and development Copyright © 2024 Pearson Canada Inc. 2 - 15 Quick Check: Describe the value chain and its elements. (2 of 2) 3. A technical support hotline for customers would be considered which part of the value chain? a. Customer service b. Design c. Distribution d. Marketing Copyright © 2024 Pearson Canada Inc. 2 - 16 Objective 3 Distinguish between direct and indirect costs. Copyright © 2024 Pearson Canada Inc. 2 - 17 Direct and indirect costs (1 of 2) A direct cost is one that can be easily and directly traced to a "cost object". A cost object is anything for which we need to determine the full cost. An indirect cost is one that can't be easily or directly traced to the cost object but must be estimated and assigned. Copyright © 2024 Pearson Canada Inc. 2 - 18 Direct and indirect costs (2 of 2) Example: An office furniture manufacturing company wants to determine the full cost of one desk. Direct costs would include direct material, such as the wood for the desktop and direct labour for the staff that are directly involved in making the desk. Indirect costs would include any and all other costs incurred for manufacturing the desk, such as indirect materials like oil for the machines, or indirect labour, such as the factory manager's salary, and all the other costs of running the factory (rent, utilities, etc.) Copyright © 2024 Pearson Canada Inc. 2 - 19 Assigning Costs to Cost Objects Exhibit 2-5 Copyright © 2024 Pearson Canada Inc. 2 - 20 Cost object determines nature of costs The Same Cost Can Be Direct or Indirect, Depending on the Cost Object Exhibit 2-4 Copyright © 2024 Pearson Canada Inc. 2 - 21 Quick Check – Direct & Indirect Costs Assume a grocery store manager wants to know the cost of running the Produce Department. Thus, the Produce Department is the cost object. Which of the following would be considered direct costs of the Produce Department? Baggies and Wages for Depreciation Cost of weekly Cost of twist ties Monthly lease Cost of scales Wages of workers in the on refrigerated advertisements bananas, available for payment for hanging in the checkout Poduce produce in local lettuce, and shoppers in the grocery store Produce clerks Department display cases newspaper other produce Produce retail location Department Department Copyright © 2024 Pearson Canada Inc. 2 - 22 Objective 4 Identify the inventoriable product costs and period costs of merchandising and manufacturing firms. Copyright © 2024 Pearson Canada Inc. 2 - 23 Period Costs and Product Costs Period Costs Product Costs Inventoriable Product Costs Copyright © 2024 Pearson Canada Inc. 2 - 24 Inventoriable Product Costs and Period Costs for Service, Merchandising, and Manufacturing Companies Exhibit 2-9 Copyright © 2024 Pearson Canada Inc. 2 - 25 Two Definitions of Product Cost Total costs – NOT Inventoriable product GAAP or IRFS and used costs – used for internally only (may external reporting include all resources (defined by IFRS and used throughout the ASPE) value chain) Copyright © 2024 Pearson Canada Inc. 2 - 26 Product Costs of Manufacturing Product Costs of a Manufacturer include: Direct Materials Direct Labour Manufacturing Overhead (All other costs of Production) Exhibit 2-8 Copyright © 2024 Pearson Canada Inc. 2 - 27 Quick Check: Identify whether the following are period costs or product costs. If product costs determine if they are direct materials, direct labour or manufacturing overhead. a. Depreciation on automated production equipment b. Telephone bills related to customer service call centre c. Wages and benefits paid to assembly line workers in the manufacturing plant d. Repairs and maintenance on factory equipment e. Lease payments on administrative headquarters f. Salaries paid to quality control inspectors in the plant g. Property insurance – 40% of building is used for administration and 60% used for manufacturing h. Standard packaging materials used to package individual units of product for sale Copyright © 2024 Pearson Canada Inc. 2 - 28 Prime and Conversion Costs Exhibit 2-10 Prime costs include direct materials and direct labour Conversion costs include direct labour and manufacturing overhead – These are the costs of converting direct materials into finished goods Copyright © 2024 Pearson Canada Inc. 2 - 29 Objective 5 Prepare financial statements for service, merchandising, and manufacturing companies. Copyright © 2024 Pearson Canada Inc. 2 - 30 Comparing Balance Sheets Type of Company Inventory Accounts Service Company None Merchandiser Merchandise Inventory Manufacturer Raw materials, work in process, and finished goods inventory Copyright © 2024 Pearson Canada Inc. 2 - 31  Comparing Income Statements Service Company Merchandising/Manufacturing Company Income Statement Income Statement (Multi Step) (Single Step) For the period ended Date For the period ended Sales Revenue $ 110,000 Date Less returns & allowances 8,000 Less discounts 2,000 $ 10,000 Service revenue $ 110,000 Net Sales $ 100,000 Less Expenses Less Cost of Goods Sold 40,000 Rent expense 35,000 Gross Income $ 60,000 Salaries expense 28,000 Less Operating Expenses Utilities expense 6,000 Rent expense 15,000 Net Income $ 69,000 Salaries expense 14,500 Utilities expense 2,500 32,000 Net Operating Income $ 28,000 +/- 'Other Revenues & Expenses 8,000 Net Income $ 20,000 Copyright © 2024 Pearson Canada Inc. 2 - 32 Calculating Cost of Goods Sold Merchandiser Beginning Inventory Purchases Beginning Inventory +Purchases =Goods Available for Sale Less Ending Inventory GOODS AVAILABLE FOR SALE =Cost of Goods Sold Ending Cost of Inventory Goods Sold Copyright © 2024 Pearson Canada Inc. 2 - 33 Cost of Goods Manufactured and Sold Raw materials (RM) Work In Process Inventory Finished Goods (FG) Beginning RM Inventory Beginning WIP Inventory +Purchases +RM + DL + Overhead Beginning FG Inventory =Materials Available for Use =Goods Manufactured +Goods Manufactured Less Ending RM Inventory Less Ending WIP Inventory Less Ending FG Inventory =Cost RM used =Cost of Goods Manufactured =Cost of Goods Sold Copyright © 2024 Pearson Canada Inc. 2 - 34 Quick Check: Financial Statements Differences (1 of 4) 1. The flow of inventory costs in a manufacturing company is a. work in process, raw materials, finished goods. b. finished goods, work in process, raw materials. c. work in process, finished goods, raw materials. d. raw materials, work in process, finished goods. 2. Which of the following is calculated last before operating income can be determined for a manufacturer? a. Cost of goods available for sale b. Cost of goods manufactured c. Cost of goods sold d. Cost of direct materials Copyright © 2024 Pearson Canada Inc. 2 - 35 Quick Check: Financial Statements Differences (2 of 4) 3. The main difference in the balance sheets of manufacturing vs. service business is in a. current assets. b. current liabilities. c. investments. d. Equity. 4. Which of the following would be on the balance sheet of a service company? a. Factory equipment depreciation b. Cost of goods manufactured c. Cost of goods sold d. Accounts receivable Copyright © 2024 Pearson Canada Inc. 2 - 36 Quick Check: Financial Statements Differences (3 of 4) Active Apparel Company reports the following data for its first year of operation. Cost of goods manufactured $500,000 Work in process inventory, beginning 0 Work in process inventory, ending 120,000 Direct materials used 85,000 Manufacturing overhead 100,000 Finished goods inventory, ending 72,000 Copyright © 2024 Pearson Canada Inc. 2 - 37 Quick Check: Financial Statements Differences (4 of 4) 1. What are the total manufacturing costs to account for at Active Apparel Company? a. $620,000 b. $500,000 c. $685,000 d. $493,000 2. What is the cost of goods sold at Active Apparel Company? a. $500,000 b. $428,000 c. $685,000 d. $548,000 Copyright © 2024 Pearson Canada Inc. 2 - 38 Objective 6 Describe costs that are relevant and irrelevant to decision making. Copyright © 2024 Pearson Canada Inc. 2 - 39  Relevant Costs Amon Diffe gst rs Altern atives Future Focused Irrelevant costs are any costs that were made in the past (Sunk Costs), or any costs that are the same regardless of the decisions made. Controllable costs are costs that management can influence or change cost (e.g. local advertising). Uncontrollable costs are costs that management cannot change or influence cost in the short-run (e.g. property taxes, lease costs) Copyright © 2024 Pearson Canada Inc. 2 - 40 Objective 7 Classify costs as fixed or variable, and calculate total and average costs at different volumes. Copyright © 2024 Pearson Canada Inc. 2 - 41 Fixed Costs: Stay constant in total over a wide range of activity levels Insurance costs do not change with the kilometers driven Exhibit 2-19 Copyright © 2024 Pearson Canada Inc. 2 - 42 Variable Costs: Change in total in direct proportion to changes in volume Total gasoline costs do increase with the kilometers driven. Exhibit 2-20 Copyright © 2024 Pearson Canada Inc. 2 - 43 Manufacturing Cost Exhibit 2-21 Copyright © 2024 Pearson Canada Inc. 2 - 44 Quick Check: Variable and Fixed Costs (1 of 2) 1. Which of the following describes the way in which variable costs per unit behave? a. They will decrease as production increases. b. They will increase as production decreases. c. They will remain the same as production levels change. d. They will decrease as production decreases. 2. Which of the following describes the way in which total variable costs behave? a. They remain the same as production levels change. b. They will decrease as production decreases. c. They will decrease as production increases. Copyright © 2024 Pearson Canada Inc. 2 - 45 Quick Check: Variable and Fixed Costs (2 of 2) 3. Which of the following describes the way in which total fixed costs behave? a. They will remain the same as production levels change. b. They will decrease as production decreases. c. They will decrease as production increases. d. They will increase as production decreases. 4. Which of the following describes the way fixed costs per unit behave? a. They will remain the same as production levels change. b. They will decrease as production decreases. c. They will increase as production increases. d. They will increase as production decreases Copyright © 2024 Pearson Canada Inc. 2 - 46 Objective 8 Analyze revenue, cost, and inventory data using data analytic tools. Copyright © 2024 Pearson Canada Inc. 2 - 47 Analyze revenue, cost, and inventory data using data analytics tools. Derive summary information from large data sets. Sorting data by specific criteria (such as date, or location) Filtering data to extract a specific subset from the data Utilize Excel tables to analyze the data Exhibit 2-22 Copyright © 2024 Pearson Canada Inc. 2 - 48 How to Create, Filter, and Sort a Table (1 of 2) Start with a data set To convert the data set to an Excel table, click on any cell in the data set, and then click the Insert tab on the ribbon. Next, click the Table icon. Copyright © 2024 Pearson Canada Inc. 2 - 49 How to Create, Filter, and Sort a Table (2 of 2) Specifiy the data range to be converted to a table and indicate whether headings are included. Copyright © 2024 Pearson Canada Inc. 2 - 50