ACCT2200

Principles of Accounting II

Managerial Accounting
COURSE OVERVIEW

 Required Textbook
 Whitecotton, Libby, and Phillips. Managerial
Accounting, 5th Edition (McGraw-Hill).
▪ Assessment

Participation 6%
Assignments 9%
Quiz 1 (Chap 1-4;19:30-21:00, Feb 28) 20%
Quiz 2 (Chap 5-7;19:30-21:00, Mar 28) 15%
Final (Chap 1-11) 50%

Total: 100%

▪ Participation: active in-class participation

▪ If you miss a midterm exam due to extenuating
circumstances, the weight of that midterm exam will be re-
assigned to the final exam.
▪ Exam arrangement is subject to changes;
▪ Communications
▪ Use Piazza as the primary communication
platform (https://piazza.com/school-search or
directly through Canvas)

▪ A student can post anonymously/publicly

to all

▪ (not required) providing high-quality answers

to other students’ questions will be awarded
bonus marks for participation.
▪ Tell me about yourself
▪ Which major are you pursuing?

A. Accounting
B. Finance
C. Other SBM majors rather than accounting
and finance
D. Non-SBM majors
▪ Tell me about yourself
▪ What is your financial accounting background?

A. I have taken ACCT 2010 or its equivalent.

B. I have not taken ACCT 2010, but I learned some
financial accounting in high school.
C. I have not taken ACCT 2010, but I am taking a
financial accounting course this term.
D. I have zero exposure to financial accounting.
CHAPTER 1

CHAPTER 1

Introduction to Managerial Accounting

Financial Accounting: Managerial Accounting:
External users Internal users

Ray Dalio, founder of the hedge Steve Jobs, founder of Apple

fund Bridgewater Associates. Image Credits: AP
Image Credits: Bridgewater Associates
Financial Accounting: Managerial Accounting:
Follow accounting standards Internal reports

US GAAP (Generally
Accepted Accounting
Principles)
Financial Accounting:
Objective, reliable, Managerial Accounting:
historical Subjective, future-oriented
Financial Accounting: Managerial Accounting:
Periodic reports Prepared as needed

Zara’s growth
story

Tesla’s financials reports

(from Yahoo Finance)
Financial Accounting: Managerial Accounting:
Report the whole company Report at the decision
level

Starbucks, the parent company Starbucks at HKUST

COMPARISON OF FINANCIAL AND MANAGERIAL
ACCOUNTING
Which of the following best describes the function of managerial
accounting within an organization?

A)It places more emphasis on precision of data than financial accounting does.
B)It focuses on the organization as a whole, rather than on the organization's
segments.
C)It has its primary emphasis on the future.
D)It is required by regulatory bodies such as the Securities and Futures
Commission.
 Implement

Plan Control

Plan: set goals (i.e., budget)

Implement: put the plan into action
Control: compare the actual and planned results; take
corrective actions if necessary (i.e., variance analysis)
Which activities can be classified as planning,
implementing, or controlling?

1-16
▪ Manufacturers
TYPES OF ORGANIZATIONS
▪ Merchandisers
▪ wholesalers
▪ retailers
▪ Service companies
Which of the following businesses is a retailer?
A. Coke cola
B. Fusion supermarket located in HKUST
C. HKUST’s clinic
D. HKUST’s Canteen 2

1-18
Which of the following statement is true about Apple ?
A. it’s a manufacturer.
B. It’s a service firm.
C. It’s a retailer.
D. It’s a wholesaler.

1-19
Define and give examples of different
types of costs
 Direct or Indirect
 Manufacturing or Nonmanufacturing
 Product or Period
 Variable or Fixed
 Relevant or Irrelevant
Direct Costs Indirect Costs
 Costs that can be  Costs that cannot be
easily and easily and
conveniently traced conveniently traced
to a unit of product to a unit of product
or other cost or other cost object.
object.
Name and Tell
Look around. Find one object in your
room. Name one direct cost and one
indirect cost of making it and
delivering it to the end customer
(you).
DIRECT MATERIALS

▪ Direct materials are major material inputs that can

be directly and conveniently traced to the product.
DIRECT LABOR

Direct labor is the cost of labor that can be directly

and conveniently traced to the product.
 “Touch labor”
MANUFACTURING OVERHEAD

 All costs other than direct materials and direct labor that
must be incurred to manufacture a product.
 Indirect labour
 Indirect materials
 Amortization on factory buildings, insurance, taxes, maintenance on
factory facilities
Which of the following is an indirect cost of
manufacturing a table made of wood and glass for a
firm that manufactures furniture?

A. The cost of the wood in the table.

B.The cost of the labor used to assemble the table.
C.The cost of the glass in the table.
D. The cost of rent on the factory where the table is
manufactured.
MANUFACTURING VERSUS
NONMANUFACTURING COSTS
Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

Prime Conversion
Cost Cost
Manufacturing Cost Flows
Manufacturer
Current Assets
 Cash
 Receivables
 Prepaid Expenses
 Inventories
• Raw Materials
• Work in Process
• Finished Goods
Manufacturing Cost Flows
Manufacturer
Current Assets
 Cash
Materials purchased from
 Receivables
suppliers but not yet used in
production
 Prepaid Expenses
 Inventories
• Raw Materials
Partially complete
products • Work in Process
• Finished Goods

Products completed
but not sold.
 Manufacturing Cost Flows

Inventory Equation

Withdrawals
Beginning Additions Ending
+
balance + to inventory = balance + from
inventory
Manufacturing Cost Flows
Inventory Equation in the T-account

Inventory
Debit Credit
(a)Beginning balance

(b)Additions
(c)Withdrawals

(d)Ending balance

(a)+(b)-(c) =(d) (a)+(b)=(c) +(d)

Manufacturing Cost Flows

Inventory Equation
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $200 during the month, what would
be the balance at the end of the month?

A. $1,000.
B. $ 900.
C. $1,200.
D. $ 200.
Manufacturing Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
As raw materials are put into the
in production production, they are
called direct materials.
Manufacturing Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

Conversion
materials inventory + Direct labour costs incurred
+ Raw materials + MOH to convert the
purchased = Total manufacturing
= Raw materials costs
direct material
available for use into a finished
in production product.
– Ending raw materials
inventory
= Raw materials used
in production
Manufacturing Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labour process inventory
+ Raw materials + MOH + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs during the
= Raw materials used period are added to the beginning
in production
balance of WIP inventory.
Manufacturing Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labour process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
Onceinventory
the goods are completed, the process inventory
= Raw materials used = Cost of goods
manufacturing
in production
costs are transferred manufactured
to finished goods inventory (COGM).
Manufacturing Cost Flows
Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
MANUFACTURING VERSUS
NONMANUFACTURING COSTS
Nonmanufacturing Costs

General and
Marketing or
Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product clerical costs
PERIOD COSTS VERSUS PRODUCT COSTS

Product Costs: costs that are assigned to the product

as it is being manufactured.
 “Inventoriable costs” → accumulate in inventory
 Matching principle

Period Costs: nonmanufacturing costs.

 Expensed in the period incurred.
 Matching principle not involved.
PRODUCT VERSUS PERIOD COSTS
Beginning balance of raw materials inventory was
$30,000. $270,000 of raw material was purchased
during the quarter. There were $28,000 raw materials
remaining at the end of the month. What is the cost of
raw materials used?

A.$276,000
B.$272,000
C.$280,000
D.$ 2,000
Direct materials used in production totaled
$200,000. During the month, direct labor was
$395,000 and manufacturing overhead was
$180,000. What were total manufacturing costs?

A. $568,000
B. $775,000
C. $415,000
D. $798,000
The beginning balance of work in process inventory was
$225,000. The total manufacturing costs incurred for the
month were $875,000. A count of work in process inventory
at the end of the month revealed that $150,000 of partially
finished goods remaining. What was the cost of goods
manufactured during the month?

A. $1,160,000
B. $ 950,000
C. $ 765,000
D. Cannot be determined.
Elon Musk’s idiot index of manufacturing cost

𝑪𝒐𝒔𝒕 𝒐𝒇 𝒂 𝒇𝒊𝒏𝒊𝒔𝒉𝒆𝒅 𝒑𝒓𝒐𝒅𝒖𝒄𝒕

𝐈𝐝𝐢𝐨𝒕 𝒊𝒏𝒅𝒆𝒙 =
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒓𝒂𝒘 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔

Direct materials=20
Direct labor=30
MOH:
Indirect materials=10
Indirect labor=10
Other MOH=40
Total manufacturing cost?
Idiot index?

1-44
Variable costs change, in total, in direct proportion to changes in
activity level.
VARIABLE VERSUS FIXED COSTS
 Fixed costs
VARIABLE VERSUS FIXED COSTS
Two mobile plans:
(1) Monthly plan: $ 64 per month
(2) Daily plan: $ 4 per day, assuming 30 days in a month

“Monthly Plan”:
Cost per day for 20 days? 16 days?

64/16=$4.00
“Daily Plan”:
Cost per day for 20 days? 16 days?

$64you be indifferent?
When would

$4*16=$64
Out-of-pocket costs involve an actual
outlay of cash.

An opportunity cost is the foregone

benefit (or lost opportunity) of the path
not taken.
• Company A produces furniture, including
tables. It generates $400,000 revenues per
year from table sales and the cost of
manufacturing tables is $350,000 per year.
Alternatively, it can rent the factory space
for $100,000 per year. What is the
opportunity cost of producing tables?
• A relevant cost has the potential to influence a
RELEVANT VERSUS IRRELEVANT COSTS
decision.
• Otherwise irrelevant cost

• For a cost to be relevant, it must:

1. Differ between the decision alternatives.
• incremental or differential costs.

2. Be incurred in the future rather than the past.

• sunk costs(historical and cannot be recovered)
Summary of Types of Cost Classification
➢ Assigning costs to cost objects
• (Direct costs vs. Indirect costs)
➢ Financial Reporting
• Direct materials, direct labor, manufacturing
overhead
• Period costs versus product costs
➢ Cost behavior
• Variable costs versus fixed costs
➢ Decision making
• Out-of-pocket costs versus opportunity costs
• Relevant costs
Case study: truth about working at a law firm

Imagine that you strive to become a lawyer.

Most law firms bill their clients by the hour. Survey

shows that in the U.S., the “target” billable hours
typically range between 1,700 and 2,300.
Case study: truth about working at a law firm
Class of 2019 Salary:
https://law.yale.edu/student-life/career-development/employment-data/class-2019-employment

(1) What’s your hourly wage if you work the target billable hours(1,832) at a
firm(use the business salary)?

(2) What’s your hourly wage if you work the target billable hours (1,832) for the
government?
Case study: truth about working at a law firm
Class of 2019 Salary:
https://law.yale.edu/student-life/career-development/employment-data/class-2019-employment

(3) Suppose you are a business manager who would like to hire lawyers.You expect
your employees to work the target 1,832 billable hours (2,420 total working hours)
and will pay them the business wage. How much of the wage expense is indirect
labor cost? How much of the wage expense is direct labor cost?