ACCT 2102 1nd Edition Lecture 2 Outline of Last Lecture II The Differences Between Financial and Managerial Accounting III Types of Accounting A Public Accounting B Private Accounting IV Ethics A Ethical Principles B Ethical Standards Outline of Current Lecture V Profit A Three Basic Business Models VI Costs A The Value Chain B Cost Object VII Income Statement Forumulas Current Lecture Profit In older generations businesses only cared about one thing profit However the bottom line of profit has turned into a triple bottom line This bottom line includes the people planet and profit In general there are two ways to generate more profit The first being the business can cut costs and the other being the business can increase prices to increase their revenue Three Basic Business Models The first business model is the service company A service company performs a service for a customer A service company does not hold inventory The only cost the company has is running the business and performing the service The second business model is the merchandise company A merchandise company buys merchandise from another company and then resells the items for a profit An example is a These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute department store like Target or Dillard s A merchandise company does hold inventory therefore it s cost includes running the business and purchasing inventory The third business model is the manufacturing company The manufacturing company creates and sells the merchandise A manufacturing company has the costs of running the company plus three different types of merchandise inventories The first is Raw Materials Inventory which is the cost of unused material the next is Work in Progress Inventory which is the cost of unfinished units during the production stage and the last is the Finished Goods Inventory which is the cost of unsold units Costs A company incurs costs from multiple stages of its production and or service There are two types of costs discussed in managerial accounting product and period Product costs are those involved in the production or purchase or the company This means that product costs are only involved with the merchandise and manufacturing companies Service companies do not have product costs The next type of cost is period costs which are involved with the value chain listed in the next section The Value Chain The value chain is the added value to the company s products It lists all stages where costs can incur for a company The costs are Research and Development Design Production and Purchase Marketing Distribution and Customer Service As you can see product costs deals with the Production and Purchasing stage therefore period costs involve the other catergories Cost Object The cost object is what we want to find the cost of and is normally in units Costs are either classified as direct or indirect Direct is when finding the cost is eary and convenient Indirect is when finding the trace of the cost is difficult and inconvenient These two branches of direct and indirect can be found in both product and period costs however in this course we only deal with direct and indirect with product costs Branching out from the direct product costs is two more branches Direct Materials and Direct Labor Direct Material is raw material that is integral to the company Direct labor is the workers that actually touch the material or touch the machinery that creates the material This excludes supervisors security guards etc If the product is indirect then it is automatically a Manufacturing Overhead Income Statement Formulas For a service company the equation for the income statement is sales revenue selling general and administrative expenses operating income For a manufacturing and merchandising company the formula is a little more complex Sales revenue the cost of goods sold gross profit Then we take the gross profit and subtract the selling general and administrative expenses to find the operating income