Accounting 2 – ACCT 122 – Program #223 – Managerial Accounting Concepts

Hey, here we are, back together again, which
is the way that it’s supposed to be. Isn’t that nice? I didn’t give you any homework as far as
paper and pencil, did I? Okay? But I want to remind you to do that 15 point
Chapter 16 cash flow like mini project, through Connect. And again, that’s 15 stand-alone points
towards your overall grade in this class. Then I also gave you a Chapter 17, 25 point
mini project, right? Which is also stand-alone points, okay? Those two things do not go into your Connect

They’re 15 points and 25 points respectively
that go towards your overall grade. Everybody understand that? And on the Chapter 17 one, you know, use your
book as well when you do that, okay? Don’t just use the slides, but use, you
know, the information that you have in your book as well. They have a very nice, let me point it out,
I don’t think I pointed it out last time, but if you haven’t done it already, and
if you read the chapter you saw this, but they have Exhibit 17.16 in your book, okay? Where they list out all the ratios. So don’t just use the slides when you do
that project, but use your textbook as well, okay? All right, let’s go ahead and get started
here. We are going to start on Chapter 18. Chapter 18, which is called Managerial Concepts,
Managerial Accounting Concepts and Principles.

Okay, you can come off that for a second. We started to kind of make a shift in this
class in the last couple of lectures, okay? Accounting 2 is almost like two separate classes. The first half of it, which we are now done
with, the first half of it is like a continuation of Financial Accounting, okay? The second half of it where we’re kind of
starting now, but maybe started a couple lectures ago, technically, is kind of a pre-cursor
to Managerial Accounting, okay? Now, how many of you have to take Managerial
Accounting eventually? More than half of you. So everything you learn from here to the rest
of the semester you will be doubly blessed with, ‘cause you will be going over this
in greater detail and greater depth in Managerial Accounting. And I kind of talked about that as far as
Chapter 16 and 17 as well, right? You’ll readdress those subjects of the cash
flow statement and financial statement analysis. And you’ll have a little bit more time to
go in a little bit more depth, okay? So we are gonna start talking today about
managerial accounting.

Let me show you this first slide here, okay? Financial Accounting, which is what you did
in Accounting I and up ‘til now in this class, this is accounting that provides information
to external users, such as stockholders, creditors, potential creditors, okay? Those that are outside of the organization,
okay? That’s Financial Accounting. Now what is Managerial Accounting? What is this subject of Managerial Accounting
that we’re gonna start? It provides information for managers of an
organization who are gonna plan and control the operations of it, okay? Managerial accounting is for the managers,
okay? Makes sense. Let me give you a little bit of an analogy
here, okay? Nobody here’s married, are they? No? You are, Matt? >>Yeah.

>>I didn’t know that, okay? How long have you been married? >>Almost a year and a half. >>Okay. Are you far enough in your marriage where
you guys do finances and stuff together, and tax returns, and all that? >>Yeah. >>Okay. Well Matt, let me use an analogy that might
kind of clarify this financial versus managerial accounting, okay? Have you guys done a tax return together yet? Okay. When you did a tax return, think about that. Why did you do that tax return? >>Because we legally had to pay taxes.

>>’Cause you have to, right? And who did you do that tax return for? >>Federal and state. >>Federal and for state, for the government,
right? And are there lots of specific rules about
how you do your taxes? Yes there are, right? And when you did your taxes, you and your
wife, pretty much, you probably did them in the early part of the year, and you looked
at the previous year as a whole. Correct? Okay? But you kind of have to do it, right? You’re doing it for external users.

That’s kind of like financial accounting,
okay? You and your bride doing your taxes is analogous
to financial accounting. There’s a lot of rules, you’re doing it
for somebody outside of the company, you’re usually looking at past information, okay? Let’s talk about managerial accounting. Now I don’t know if you and your wife do
this, but sometime in your marriage you’ll probably start doing things like where you
get together and kind of financially plan out the next year, or look at your finances
together. Do you do that at all? >>Mm-hmm. >>Okay? So let’s say you and your wife sit down
and plan out a budget, okay? Plan out a budget for the next year, or a
portion of the year, or whatever. Are you required to do that by any outside
agency? No. You can do it, you can not do it. Are there lots of rules about how you do it
if you choose to? No. You want to make a category for, you know,
Royals tickets, in your expense budget? Make a category for Royals tickets, right? You can do what you want.

It’s just you and your wife managing the
entity that is your little family, right? So it’s very flexible, okay? Now, you don’t just look in the past though,
with that sort of a situation, do you? You’re doing a lot of talking about the
future. Like what do we want to be in a year? What should we save for the future? Let’s start saving up for holiday gifts,
or whatever, right? You’re looking at the future. You’re looking at the past, but it’s very
flexible, correct? You also may not look at your entire finances,
but you may just decide to do a budget, for example, for a vacation. Maybe you’re gonna take a vacation between
semesters. A ski trip or something, and so you do a budget
for that ski trip, okay? But that whole situation is analogous to managerial
accounting, does that make sense? Okay? Let’s take a look at this next chart, and
this chart is in your book, and I think that’ll help clarify it, too.

This is financial accounting, this is managerial
accounting, okay? Now, as I said, financial accounting deals
with external users. Managerial accounting has to do with those
internal to the company, okay? The purpose for financial is to make investment,
credit, and other decisions, whereas managerial it’s to plan and make decisions in regards
to running your company. Financial accounting is very structured, lots
of rules. Sometimes we say financial accounting is very
black and white, okay? Managerial accounting is relatively flexible,
or we might say it’s more gray, okay? It’s more gray.

It’s just like when you do your budget,
it’s not a lot of rules. Timeliness. Financial accounting, a lot of times, is only
available after the year is done and after the audit is complete. Whereas with managerial there’s no need
to wait on any sort of official audit or anything, right? Okay? Financial accounting mainly looks at the past
history. They may do a little, they’ll do some predictions,
but it’s mainly looking at historical information. Whereas with managerial accounting there’s
lots of projections and estimates that you make. Okay? The focus of financial accounting is on the
whole organization, whereas managerial might just look at a segment, okay? Similar to the way maybe you just did a budget
for your vacation. The nature of information in financial is
usually just strictly monetary. Whereas in, did I say that right? For financial accounting it’s strictly monetary. For managerial accounting though, you often
bring a lot of non-monetary information in there as well.

Such as, well if you and your wife, Matt,
were planning out a vacation, you would say, “Well, where do we think we would enjoy
going to the most?” Right? And, you know, “What’s the weather gonna
be?” And “Would we rather go on one big vacation
this next year, or two smaller vacations?” Right? But there’s a lot more of that sort of a
discussion in managerial. In a business you would bring into concepts
as far as like, “How will our customers react to this change?” Or, you know, “Are our vendors going to
be happy if we?” You know, that sort of thing.

So there’s a lot of non-monetary information
that’s discussed there as well. Does that kind of clarify it? Okay? Now, your book on page 749 and 750, let me
double-check to see if those pages are right. Page 749 to 750, yeah, that’s correct. 749 to 750, it lists some terms here. Now I’m not gonna read those terms to you,
okay, and the definitions, you can read those. But I think I have a homework question on
that, either on paper and pencil homework or on a Connect assignment.

And I usually do have a few multiple choice
over those. There’s a good chance you’ve talked about
some of these things in other classes as well, okay? So take a look at those on those two pages. All right? Okay, Cost Classification. Oh, this is such an important subject that
I’m gonna put a star there, and even a star over on the other side as well. This is extremely important. Being able to classify costs. Okay, see this illustration here, okay? Where there’s one guy in the middle of a
circle, and they’re looking at him from a bunch of different angles? Keep that in mind with the analogy that I
use, okay? Let’s say, let’s think, Jeremiah, you’ll
be our example, okay? Jeremiah is one person, correct? But there’s a lot of different ways we could
classify you.

Is that correct? We could say is he male or female? He’s male, obviously. Is he a full-time student or is he a part-time
student? >>Full-time. >>Full-time, okay? We could say, you don’t have to answer all
these questions, too, okay? We could say what age group does he fall into,
correct? We could say what religion are you, correct? We could say what’s your ethnicity, right? We could say what income bracket does he fall
into? >>Poor. >>Poor, okay. We could say where do you live? But do you see this is the same guy that we’re
analyzing, but we’re just classifying him in a lot of different ways, is that correct? Same guy, just depends on how we’re classifying
him. Well costs are the same way in looking at
that slide. We can look at a cost and classify it in a
lot of different ways, okay? One way that’s extremely important that
we’re gonna classify things is by behavior, okay? Specifically, how that cost reacts to changes
in activity levels within what we call the relevant range.

Now, total variable costs change as activity
changes. Total fixed costs remain unchanged as activity
changes. Say that again. Total variable costs change as activity changes. Total fixed costs remain unchanged as activity
changes. If you wanted to look on it as a graph, variable
costs look like this. As activity changes, as activity increases
our costs change and increase, right? Whereas with fixed costs, as activity changes,
fixed costs, it stays the same regardless of that level of activity.

You with me? Let me give you an example, okay? Mackenzie, let’s say that you were engaged,
okay? And let’s say you were planning out your
wedding, okay? Well, let’s say, I mean do you see where
like catering, the amount that you would spend on catering would be a variable cost? And what would it vary in regards to? >>(Inaudible.) >>Well, that and also the amount of people
that you invite. >>Yeah. >>Okay? The more people you have at your wedding reception,
the more you’ll spend on catering. Agreed? Okay, that’s a variable cost. Whereas an example of a fixed cost in this
situation might be, let’s say you pay $1,000 to rent a reception hall, okay? It’s $1,000 for that evening. Well, whether you have 100 people there or
200 people there or 300 people there, its $1,000. Does that make sense? That is a fixed cost. It does not change in regards to the number
of people that you have at your wedding reception, okay? Now, look back at this slide ‘cause I want
to point out something that’s important. This little phrase here that says, “Within
the relevant range.” Where’s my pointer? Now, there is some level of relevancy that
when I do that example with Mackenzie’s wedding reception, we have to stay within

For example, there is some number of people
that, I mean, if you have 25,000 people at your wedding reception you can’t even be
at that hall, right? But that’s not the relevant range, you’re
not gonna have 25,000 people at your wedding. You see what I’m saying? So, sometimes people take these costs, or
these examples, they take it to the ridiculous and say, “Well, we’re staying within the
relevant range.” Does that make sense? Okay? So it seems very easy to classify costs based
on fixed or variable, but we’re gonna work on a worksheet here in class, and we’ll
go through it and I’ll talk to you about some of the pitfalls sometimes that students
have when trying to classify costs as fixed or variable, okay? So what we’re gonna do now is, we’re gonna
take a little class time, you folks at home, as always, you do this with us and you have
this in your packet.

But we are going to work on the fixed versus
variable costs handout. Just do the entire handout, they’ll play
that music for ya, and we’ll go with it, okay? So we’ll see you in a few minutes, you folks
at home do this as well. Do your whole page of fixed and variable cost
handout. (music)
All right, let’s go through it. If you folks at home aren’t done, just pause
us and push play when you are done. Let’s go through these. Listed below are costs for the production
and sales of soccer balls. Classify each cost as variable or fixed, okay? All right, leather covers for soccer balls. >>Variable. >>Variable, right? The more soccer balls you produce, the more
you’ll spend on leather covers, okay? Annual flat fee paid for office security? >>Fixed. >>Fixed. Shipping costs of completed soccer balls to
customers? >>Variable. >>That would be variable, okay? The more you sell, the more your shipping
costs will be in total. Laces to hold the leather together? >>Variable. >>That would be variable.

Depreciation on the drill press? That’s the straight-line method. >>Fixed. >>Okay, that would be fixed, okay? Regardless of how many soccer balls you produce,
that’s gonna be the same amount, okay? Property taxes on the factory? >>Variable. >>Fixed. >>I heard both. >>Variable, it’s gonna be different. >>Fixed, it’s the same rate. >>Okay, you played right into my hands, okay? This is fixed, okay? And let me tell you why some people think
it is variable, okay? Incorrectly think its variable. But understandably, okay? What they say is this. Well, your property taxes you paid in 2012
are different than what you paid in 2013, which is different than what you pay in 2014,
thus they vary, they’re different every year, thus they’re variable costs. Well I agree with what you said, but that
is not our definition of a variable cost.

Our definition of a variable cost is, does
it change in the level of activity for the production and sales of soccer balls? >>Okay. >>Does that make sense? >>Mm-hmm. >>So it’s very easy to make that mistake. But what I like to ask myself is this. If I decide to produce and sell 1,000 more
soccer balls, would that change the property taxes on the factory for that period? It wouldn’t, would it, okay? So, that is a good example of that situation,
that pitfall.

Okay, so that’s fixed, number six is fixed. Wages of assembly line workers? >>Variable. >>Variable, okay? Factory manager’s salary? >>Fixed. >>Fixed. Any questions on those? Let’s go to the next one. State whether each of the following would
more likely be a fixed or variable cost. Which would be more likely, okay? Shipping costs for >>Variable. >>Variable. Cost of fuel used for a national trucking
company? >>Variable. >>Variable. Sales commissions at a car dealership? >>Variable. >>Variable. Monthly office lease cost for a CPA firm? >>Fixed. >>Fixed. Cost of fruit sold at a grocery store? >>Variable.

>>Monthly insurance cost for the home office
of a company? >>Fixed. >>Fixed. Cost of fabric used at a clothing manufacturer? >>Variable. >>Variable. Monthly rent for a nail salon? >>Fixed. >>Depreciation of exercise equipment at the
YMCA? >>Fixed. >>Now somebody asked, “Well what method
are we using?” Always assume we’re using straight-line
unless it states otherwise, okay? So if it is straight-line, what is the answer
to nine? >>Fixed. >>Fixed. What is the method of depreciation that if
we used it, depreciation would be variable? Does anybody remember? >>Accelerated? >>Not the accelerated method, that doesn’t
change in relation to level of activity.

It’s that other one. >>Accumulative? >>Hmm? >>Is it like the accumulative one, or something
like that? >>Units of production. Do you remember units of production, okay? But like I said, unless it states otherwise,
assume straight-line, okay? ‘Cause it by far is the most common. So that’s fixed. Hourly wages paid to sales clerks at Best
Buy? >>Variable. >>Property taxes for a restaurant? >>Fixed. >>Cost of coffee used in a Starbucks store? >>Variable. >>Monthly cost of french fries at a McDonalds
Restaurant? >>Variable. >>Variable. Salary of the accounting controller? >>Fixed. >>Fixed. Okay, is there any questions on any of those? Any that I need to kind of explain to you? I’m happy to do that. All right? Okay, being able to classify costs as fixed
or variable is very, very important, okay? Let’s talk about a different way to classify

Let’s say I classify costs by traceability. Okay, and we talk about direct costs versus
indirect costs, okay? Direct costs are costs incurred for the benefit
of one specific cost object. Whereas indirect costs are incurred for the
benefit of more than one cost object. Let me give you an example, okay? Pull off the slides for a second. I don’t know if you can see this, but let’s
say that I manufacture this chair right here, my company manufactures this chair, and they
also manufacture these kind of wooden podium things. That’s the two things we produce, okay? Now, some examples of some direct costs. If I purchase fabric, I clearly know it’s
going towards production of chairs, correct? If I purchase lumber, clearly for the production
of podiums. Those are direct costs, okay? Right? Now, let’s say that Jeremiah assembles chairs. Well he would be a direct cost ‘cause you
are assembling chairs, right? Let’s say that you only know how to put
podiums together.

That would be a direct cost ‘cause it’s
clearly going to podium. Now listen here. Let’s say that Daniel knows how to produce
podiums, and he also knows how to produce chairs. I want you to understand that even though
he can produce both, he would still be direct labor and a direct cost, because I can clearly
tell at any point what he’s doing. He’s either working on podiums, or he’s
working on chairs. Does that make sense? So all three of you would be direct labor. Let’s say Lingpha, though, is your supervisor. She doesn’t produce chairs or tables, she
walks around, she might answer questions as needed. She fills out, you know, purchasing orders. She maybe now and then she’ll clean up,
or something like that. She just kind of manages the factory. Do you see where she would be an indirect
cost? Because at any given point in time it’s
not directly clear, is this going towards podiums or chairs? You with me? Does that make sense? Okay? We’ll talk about direct versus indirect
costs a lot more in the next chapter.

But I at least want to touch upon it here. Okay? Let’s go toward the next way we can classify
costs, which is by controllability. This is how much control that you have on
a specific cost. There are some costs in our life that we have
a lot of control over. Same way with a business. And there are other costs that we have very
little control over, in our personal lives, and in a business as well. And then there’s certainly a lot that fall
in the middle there, okay? Okay, let’s go back to the example of Matt
and his wife. Matt, let’s say that you’re having a lean
month money-wise. What is a cost that you have a lot of control
over that you could decrease drastically, or maybe even eliminate for a period of time? Is there certain costs in your life that you
could do that with? >>Kind of like going out to eat? >>Going out to eat is the classic one, right? If my wife and I are ever short on money,
we say well, we’re not gonna go out to eat this month, right? You have a lot of control over that, correct? Now, think in your life, so that would be,
looking at this illustration, that would be up here.

You have a lot of control over that. That’d probably be right up here, right? Okay? Now, what would be a cost in your life that
you have very, very little control over? >>Rent on my lease. >>Very, very good example. Your monthly rent, right? If you’re in an apartment, and you’re
paying $900 a month, well you’re locked into that lease for two years, you don’t
have a lot of control over that, do ya? Now, I guess you could try to break the lease,
but that would be a lot bigger deal than just saying we’re not gonna eat out, right? >>Right.

>>So that would be, looking at this little
pyramid, that would be down here, right? You have very little control over it, okay? Now, there’s some examples of things in
the middle that you have some control over, but not ultimate control over. I think two examples of that might be your
groceries, okay? Now you can cut down on the groceries that
you eat. Maybe you can use coupons, maybe you can go
to Aldi’s instead of Hy-Vee, right? But ultimately you have to eat, right? You do have to eat, okay? Same way with gasoline and your fuel costs
for the month. You might decide not to go visit your grandmother
in Iowa, okay, ‘cause you don’t want to pay the gas costs, okay? But you still have to drive to work and drive
to school, right? So you have some control over it, but not
ultimate control over it.

Does that make sense? It’s the same way with a business. Businesses have certain things like, “Man,
this is a lean year, we’re not gonna have the holiday party that we usually have. We’re gonna save that money.” And then there’s other things like, “Well,
we’re renting our factory for 10 years at this contractual cost.” Then there’s a lot of things in the middle.

You with me? Okay? So one way we can classify costs is how well
we can actually control them, okay? Another way we can classify costs is by relevance. I think this is a fascinating area. Opportunity costs. Now, you may have talked about opportunity
costs in Econ. And I don’t know, I don’t remember enough
of my econ classes where they might treat this a little bit differently, okay? But opportunity costs in accounting is the
potential benefit that’s given up when you choose one alternative over another, okay? Is that in the way econ does it? >>Mm-hmm. >>Okay. For example, what are you giving up to be
here at class today? Think about this, come off there.

All of you are giving up something to be with
me here today. And we have full attendance today, everybody
decided to be here. What are some of the things that you have
given up to be here? >>Sleep. >>Sleep, right? You’ve given up sleep, correct? Okay? So you’re giving up something. What else have you given up? >>Time to work. >>Time to work. Let me ask you this, is there anybody here
that if I would have cancelled class today and told ya last class period, “No class
today.” Is there anybody here that literally would
be at work now? Okay? Okay, Daniel, all right.

Where do you work? >>Jose Peppers. >>Okay. So, I don’t know how much you make at Jose
Peppers, and I don’t want you to tell me, okay? But let’s just say its $12 an hour, okay? Well, I know that you at least feel like being
here is worth more than $12 an hour, correct? Otherwise you’d be at Jose Peppers, am I
right? Okay? So, you are giving up roughly $12 to be here
for this class hour, okay? Now what if your boss would have told you
on Wednesday, “Daniel, I need you to come in on Friday.” Which is today. “I need you to be at Jose Peppers today,
can you skip that class?” You say, “I don’t want to skip it, it’s
my favorite class.

My professor, he’s brilliant. He’s probably the best teacher I’ve ever
had, I don’t want to miss it.” And your boss said, at Jose Peppers, “I
tell you what, Daniel, I really need you to skip that class and come in to work. If you come in, if you skip that class, if
you’ll come work that shift and miss your class, I’ll give you a $500 bonus.” Now, would there be anybody in your chair
today? >>Nope.

>>No! Because the opportunity cost became too great. So I don’t know what I’m worth in your
life, but I know it’s more than $12 an hour and less than $500. It’s somewhere in there, and if we really,
if we really analyzed it we could, you see what I’m saying? That’s fascinating to me, okay? But we all do this, we do this all the time
in life. We do this hundreds of times a day without
even thinking about it, right? Mackenzie, there are times that you miss class
because of what? You have to play soccer, because the cost
of you skipping a game and having the coach be mad at you, it’s not worth it, correct? Am I right? There’s a reason LeBron James didn’t go
to college. There is a reason Andrew Wiggins decided to
only play one year at KU. Because the opportunity cost of Andrew Wiggins
coming back for a second year of college was just too much, right? It was just too much, okay? But we do this all the time, every decision
we make, we do a cost benefit on.

What’s the opportunity cost of me making
this decision? And it’s kind of just fascinating to me
how we do that, okay? Does that make sense? Is that the way econ describes it? I don’t know what they’re doing over there
in econ anymore, all right? All right, another fascinating subject to
me is the concept of sunk costs. Sunk costs, what is a sunk cost? It is a cost that is incurred in the past. It cannot be changed by any decision now,
or made in the future. And thus the interesting thing is, is sunk
costs should not even be considered when we make decisions. You with me? Let me give you an example. Now, they tested this, and I’m not sure
how they actually tested this little example that I’m gonna tell you about it, but I
read about this ‘cause this is an interesting subject to me, okay? Okay, does anybody here like to snow ski,
okay? Michael, Luke, you guys like to snow ski? Okay, Luke, let’s say that you purchased,
let’s go to the document camera, let’s say you purchased an all-inclusive ski trip
for the first week of February, okay? And that was, let’s say that was to Winter
Park, okay? I’ve been to Winter Park ski area, right? It’s a very nice ski area.

And let’s say that you paid $700 for this,
okay? For the first week of February, okay? You’ve paid that already, it’s non-refundable,
you can’t transfer it to somebody else, you can’t get it moved to a different date. You with me, okay? Now you love skiing so much, that you also
booked a ski trip for the third week of February, and that was to Vale, okay? Anybody ever skied at Vale? It’s a little more ritzy, isn’t it, okay? And let’s say that you paid $900 for that
all-inclusive trip, okay? Once again, you have paid that, you can’t
get it refunded, you can’t get it transferred to somebody else, you can’t sell it, you
can’t change the weekends, or anything.

So you understand your situation here, Luke? But here’s the catch. You made a mistake. You thought you were booking this for the
third week, but you made a mistake and you actually booked this for the same weekend
as this one, okay? Now these are far enough apart where you can
only do one. Now, let’s say that when push comes to shove
you actually enjoy Winter Park Ski Resort more than Vale. You have more fun there, you like the people
there, you like the ski slopes better. You like Winter Park more than you like Vale. But you could only go to one of these places. Do you know what statistically Luke will probably
choose to go to? >>Winter Park. >>Vale. >>Vale. He’ll choose to go to Vale, even though
he enjoys Winter Park more, he’ll choose to go to Vale because he paid more for it.

Whereas that’s a fallacy of thinking. The way that he should consider this is that
he spent $1,600, and there is nothing that he can do. Unless he invents a time machine, like Marty
McFly, do you guys even know that movie? Okay, thank you. Unless you invent a time machine, you spent
$1,600, there’s nothing you can do, it doesn’t matter what you spent for each, you spent
$1,600 and you can go to this one or this one, you should go to whichever one you enjoy
most. Does that make sense? Okay? Sunk costs fascinate me because there are
people in life, and there are people in businesses, who will continue to make bad decisions based
on something that they did in the past. All right? For example, I’ve known people who were
in married relationships, and they’re like, “I should not have married this guy. This guy is a jerk.

We do not get along, we fight all the time,
the marriage stinks. I made a bad decision five years ago.” And I’ll say, ”Okay, well, what are you
gonna do about it?” “Well, I think we’re gonna try to have
a baby. Maybe that will bring us together.” That’s a bad decision. Now we laugh, but people do these things. Here’s another one. I’ve talked to people who are seniors in
their chosen major, and they go, “I hate this major.

I do not want to do this for a living, I hate
it, I hate it, I hate it.” I go, “Why are you doing it? Why are you gonna finish out the year, and
why are you gonna graduate in this?” “Well, I have to, because I’ve already
gone through these first three years.” No, you don’t have to, this isn’t a communist
country, right? You don’t have to do that. But there are people who will continue down
a road, do you see this? Because of something that they have done in
the past. Well there’s nothing you can do about that,
right? Okay? I’ll try not to get too preachy here. I won’t get my reverend hat on. But I have people who, I’ve taught for many
years, and I’ve had people who come into my office, had more people cry in my office,
including me, than I even can count. But I’ll have somebody come in, like a 20
year old, who, and she’ll say, “I’ve made all these bad decisions in life. There’s nothing I can do, all my mistakes,
you can’t make up.” I’m like, “Okay, all your mistakes, you’re
young, you’ve got plenty of time to make up for them.” Maybe they went through a bad marriage, or
maybe they had a kid that wasn’t planned, or maybe, you know, whatever, okay? Or maybe they dug themselves a GPA hole, or
maybe they have some debt.

And I always try to tell them, “Okay, we
can talk about the past for a little bit, but there’s nothing we can do about it. Every decision here is from what you do from
this point on in your life. That we control, right? So don’t spend energy ruing all those things
that you wished you wouldn’t have done, let’s go forward. What can we now to make your situation better?” Does that make sense? This all has to do with sunk costs, and it’s
very relevant, okay? See how managerial accounting is more touchy-feely,
okay? I feel like we should have a group hug when
the cameras stop rolling. Okay, maybe not. All right. Now, let’s talk about something, and I know
your minds are tired. At home, pause if you want, okay? Go take a little walk around your house and
then start us up again. ‘Cause this is an important topic that we’re
gonna go to now.

This is the concept of product versus period
costs, okay? This is so important, please give me your
brains for 10 more minutes, okay? Okay, we can classify costs as product costs,
and we can classify costs as period costs. Product costs are costs incurred to manufacture
the product. Factory costs sometimes we call them. Period are not, okay? There are three types of product costs. There is direct materials, which I’ll abbreviate
DM. There is direct labor, which I’ll abbreviate
DL. And there is manufacturing overhead, which
I will abbreviate MOH. Now sometimes that’s called factory overhead,
and that’s the same thing, okay? But those are the three product costs.

We can classify it this way or this way, if
it’s a product cost it has to be one of those. Are you with me? Okay, let’s go back to the slides. There are our three product costs, direct
materials, direct labor, MOH. What are direct materials? These are raw materials that become an integral
part of the product, and they can be conveniently traced to it. Such as the tires on an automobile, right? Tires on an automobile are direct materials
for it. They become part of the auto, and they can
be easily traced to it, right? You have four tires on an auto, correct? Direct labor are the labor costs of the people
who are producing or assembling the product. Sometimes we call this touch labor, because
these are the people actually touching the product, like this guy working on this car. When I talked about you guys working at the
podium and the chair factory, you guys are direct labor. You are assembling it. And then there’s this other category called
manufacturing overhead.

Now, also called factory overhead, these are
all factory costs that cannot be traced to specific units produced. In other words, these are all factory costs
that aren’t DM or DL. These are all product costs that are not direct
materials or direct labor. Okay? Some examples are factory utility costs, okay? They have to cool this factory. That would be a product cost and it would
be manufacturing overhead. Factory maintenance costs, like this guy cleaning
up. That’s a factory cost, that’s a product
cost. He’s not assembling the product so it’s
not direct labor, it’s not direct material, so it’s gotta be MOH. Indirect materials and indirect labor are
always part of MOH. They are product costs and part of MOH. What are indirect materials and indirect labor? Well, an example of indirect material might
be, let’s say you buy some Armor All, and when you’re done with your automobile, you
shine it on these, you spray it on these tires, and you shine those tires all up.

Well the cost of that Armor All, it’s what
we call an indirect material. Technically it does become part of the car,
doesn’t it? But can it be conveniently traced to it, like
the tires can? No. So it would be an indirect material. It’d be a product cost but it’d be part
of MOH. Indirect labor would be the factory supervisor,
such as Lyngpha in the earlier example. She’s not producing the product, but she’s
supervising the factory, okay? Now, let me give you a Dave Krug special here,
this is not in your book. One of the most important things you’re
gonna do is classify costs as product or period, okay? If you see one of these four words here, you
know it is a product cost. You know, you know, you know. If you see the word factory, if you see the
word manufacturing, if you see the word assembly, or if you see the word production. If you see one of those four words in the
cost description, you know it is a product cost.

Now listen to what I’m saying, and I want
you to hear what I am not saying. This is important. I am not saying that all product costs have
these words in it. But I am saying if you see one of those words
in it, you know it’s a product cost. Can you tell the difference between what I
just said? Okay? If you see one of these four words, you know
it is a product cost. And then once it’s a product cost, you’ve
decided that, then you just need to determine which one of these it is.

Let me give you some examples. Let me list out some cost items, and you tell
me if they’re product costs. Toilet paper used in the factory bathroom. >>Yes. >>Yes, because you heard the word factory. And as soon as you hear the word factory,
you know it is a product cost. Now, is it direct materials? Does it become part of, no. Is it direct labor? Of course not. So it’s gotta be part of the MOH. A lot of times things become MOH because we
know that they’re a product cost, but they’re clearly not direct materials or direct labor. Does that make sense? Like a broom used in the factory. That’s a product cost, ‘cause you heard
the word factory. It’s not direct materials, because it doesn’t
become part of the product we produce. It’s not direct labor. It’s gotta be MOH. Okay? Toilet paper used in the accounting bathroom? That’s not a product cost, okay? We’ll see that’s a period cost.

And the accounting bathroom’s usually nicer
than the factory bathroom, too. Just as motivation for you to get your accounting
degree. Okay? But do you see what I’m saying? If you see one of these four words, if you
see one of these four words, it is a product cost. One of these, okay? Now, what are period costs? Your period costs are your selling and your
general administrative costs, okay? So, your period costs are your general and
administrative, and your selling. Let’s go to the slide. They kind of describe this. Selling costs are those necessary to get the
order and deliver the product, such as advertising. General administrative, this would be like
your accounting department, your human resource department, all your executive salaries, those
sort of things, clerical things. You with me? Cool? So, so, so, so, so important to be able to
classify between product and period costs, and I will tell you why next time. Let’s do a real, in the minute we have left,
don’t play the music or anything, but let’s look at this slide, and in your brain answer
this question.

Which of the following costs would be considered
a period rather than a product cost in a manufacturing company? Okay, go through that, just take 15 seconds
in your brain. Okay, let’s just go through these. First one, is that a product or period? I see the word manufacturing, the argument
is over, it’s a product cost. Second one, property taxes on corporate headquarters? >>Period. >>That is a period cost. Direct materials costs.

>>Product cost. >>That’s product cost. Electrical lights to light the production
facility? >>Product. >>Product. Sales commission? >>Period. >>Period. Okay? So the only two period costs were B and E,
okay? All right. Here’s what I want you to do for homework,
folks. I want you to do this handout, I’ll give
this to you when the cameras are done rolling, guys. You folks at home, you have this as well. I want you to do the product versus period
costs handout. Do the whole handout. And I also want you to do Exercise 18.1.

So do this handout and Exercise 18.1, and
remember to do those little mini projects on Connect for Chapter 16 and 17. Don’t put those off, go get those done,
okay? Look at the due dates on Connect, okay? Any questions? Have a good one, guys, I’ll see you later,

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