Managerial accounting tool for business decision making chapter 01

period costs Service- industry trends Managerial accounting practices Manufacturing Costs in Financial Statements Manufacturing Costs in Financial Statements Income statement Cost of Goo

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CHAPTER 1

MANAGERIAL ACCOUNTING

Managerial Accounting, Fifth Edition

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1. Explain the distinguishing features of managerial

accounting

2. Identify the 3 broad functions of management

3. Define the 3 classes of manufacturing costs

4. Distinguish between product and period costs

5. Explain the differences between a merchandising

and a manufacturing income statement

Study Objectives

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8. Identify trends in managerial

accounting

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Managerial Cost Concepts

Managerial Accounting Today

Product vs

period costs

Service- industry trends Managerial accounting practices

Manufacturing Costs in Financial Statements

Income statement Cost of Goods Manuafctured Balance sheet Cost concepts –

A review Product Costing for Service

Industries

Managerial Accounting

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Managerial Accounting Basics

A field of accounting that provides economic and financial information for managers and other

internal users.

Also called Management Accounting Management Accounting.

Definition of Managerial Accounting

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Applies to all types of business

-Service, Merchandising, and Manufacturing.

Applies to all forms of business organizations –

Proprietorships, Partnerships, and Corporations.

Applies to not-for-profit as well as profit-oriented companies.

Distinguishing Features

SO 1 Explain the distinguishing features of managerial accounting.

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Changed role in collecting and reporting costs to

management as a result of increasingly automated

business environment.

Now more responsible for strategic cost management –

assisting in evaluating how well resources are employed by

the company.

Teams with people from production, marketing,

engineering, etc.

Aid in making critical strategic decisions.

Distinguishing Features (Continued)

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Comparing Managerial and Financial Accounting

Both managerial and financial accounting deal with

economic events of a business –

Thus, interests overlap.

Both require that economic events be

quantified and communicated to

interested parties –

Determining unit cost is part of managerial accounting,

Reporting cost of goods manufactured

is a part of financial accounting.

Similarities

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Comparing Managerial and Financial Accounting

Differences

SO 1 Explain the distinguishing features of managerial accounting.

Illustration 1-1

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b Places emphasis on special-purpose information

c Pertains to the entity as a whole and is highly

aggregated

d Is limited to cost data.

Review Question

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Management’s activities and responsibilities can be classified into the following three broad functions:

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Management Functions

Look ahead and establish objectives such as-

Maximize short-term profit and market share.

Commit to environmental protection and social programs.

-Value measured by trading price of stock and

by potential selling price of the company.

Planning

SO 2 Identify the 3 broad functions of management.

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Coordinate diverse activities and human resources.

Implement planned objectives.

Provide incentives to motivate employees.

Hire and train employees including executives, managers,

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Process of keeping activities on track.

Determine whether goals are met.

Decide changes needed to get back

on track.

May use an informal or formal system of evaluations.

Decision making is not a separate management function, but the outcome of the exercise of good judgment in planning, directing, and controlling.

Controlling

SO 2 Identify the 3 broad functions of management.

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Within a company, organization charts show:

The interrelationships of activities and

The delegation of authority and responsibility.

Organizational Structure

Illustration 1-2

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Business Ethics:

All employees are expected to act ethically

An increasing number of organizations have codes

of business ethics

Despite organizational efforts:

Business scandals have caused massiveinvestment losses and employee layoffs

Corporate fraud has increased 13% in last 5 years

Employee fraud – 60% of all fraud

Intentional misstatement of financial reports

(Financial reporting fraud is most costly )

Good Ethics – Good Business

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Creating Proper Incentives:

Companies like Motorola, IBM, and Nike expend substantial resources to monitor and evaluate the actions of employees & managers

Monitoring can have the negative result of producing incentives for unethical actions

Employees may feel that they must succeed no

matter what

Ineffective and unrealistic controls may also

result in declining product quality

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Sarbanes-Oxley Act of 2002

Clarifies management’s responsibilities

Certifications by CEO and CFO

-fairness of financial statements and adequacy of

Code of Ethical Standards

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The management of an organization performs several

broad functions They are:

a Planning, directing, and selling Planning, directing, and selling

b Directing, manufacturing, and controlling

c Planning, manufacturing, and controlling.

d Planning, directing, and controlling

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Manufacturing Costs

Manufacturing consists of activities and processes

to convert raw materials into finished goods

In contrast, a merchandising firm sells goods in the form in which they were purchased

Manufacturing costs are typically classified as:

Managerial Cost Concepts

SO 3 – Define the three classes of manufacturing costs.

Illustration 1-3

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Materials

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Not physically part of the finished product or

they are an insignificant part of finished product in terms of cost

Considered part of manufacturing overhead

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associated with converting raw

Indirect Labor:

Work of factory employees that has no physical association with the finished product

or for which it is impractical to trace costs to

the goods produced

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Manufacturing Costs Manufacturing Costs

SO 3 Define the three classes of manufacturing costs.

Manufacturing Overhead

Costs that are indirectly associated with

manufacturing the finished product

Includes all manufacturing costs except direct

materials and direct labor

Allocation of overhead to products can present

problems

Also called factory overhead, indirect

manufacturing costs, or burden

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Which of the following is not an element of manufacturing overhead?

a Sales manager’s salary.

b Plant manager’s salary

c Factory repairman’s wages.

d Product inspector’s salary

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Product Versus Period Costs

SO 4 Distinguish between product and period costs.

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SO 4 Distinguish between product and period costs.

Period Costs

Matched with revenue of a specific time period and charged to expense as incurred

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SO 4 Distinguish between product costs and period costs.

Illustration 1-4

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SO 5 Explain the difference between a merchandising

and a manufacturing income statement.

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Cost of Goods Sold Components

Merchandiser versus Manufacturer

Illustration 1-5

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Cost of Goods Sold Section of the Income Statement

and a manufacturing income statement.

Illustration 1-6

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For the year, Red Company has cost of goods manufactured of $600,000, beginning balance of finished goods inventory of $200,000, and ending balance of finished goods inventory of $250,000 The cost of goods sold is:

Cost of Goods Manufactured 600,000

$800,000 Minus Ended Finished Goods 250,000

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Determining the Cost of Goods Manufactured

SO 6 Indicate how cost of goods manufactured is determined.

direct labor costs, and manufacturing overhead; all incurred in the current period.

Illustration 1-7

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SO 6 Indicate how cost of goods manufactured is determined.

Illustration 1-8

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Balance Sheet - Inventories

SO 7 Explain the difference between a merchandising and a

manufacturing balance sheet.

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Balance Sheet - Inventories

SO 7 Explain the difference between a merchandising and a

manufacturing balance sheet

Illustration 1-10

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A cost of goods manufactured schedule shows

beginning and ending inventories for:

a Raw materials and work in process only

b Work in process only.

c Raw materials only.

d Raw materials, work in process, and finished goods.

Review Question

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Managerial Accounting Today Managerial Accounting Today

SO 8 Identify trends in management accounting.

Service Industry Trends

U.S economy, in general, has shifted toward an

emphasis on providing services rather than goods

Over 50% of U.S workers are now employed by

service companies

Trend is expected to continue in the future

Most of the techniques learned for manufacturing firms are applicable to service companies

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Managerial Accounting Practices

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Technological Change

Enterprise Resource Planning (ERP) – software

programs designed to manage all major business

processes

Computer-Integrated Manufacturing (CIM) –

manufacturing products with increased automation

Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured

or purchased just in time for sale

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Quality

Increased emphasis on product quality because

goods are produced only as needed

Total Quality Management (TQM)

- a philosophy of zero defects

Activity-Based-Costing (ABC)

Allocates overhead based on use of activities

Results in more accurate product costing and

scrutiny of all activities in the value chain

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Evaluates operations in an integrated fashion

Uses both financial and non-financial measures

Links performance measures to overall company objectives

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Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in way that leads to more accurate product costs?

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All About You

Outsourcing and Jobs

To reduce costs and remain competitive many companies are turning to outsourcing.

“Outsourcing means hiring an outside supplier to provide elements of a product rather than producing them internally.”

While outsourcing can be to another provider within the U.S., many professional services as well as

manufacturing jobs have become candidates for

outsourcing to foreign providers

By 2015, it has been predicted that 3.3 million service jobs will have been outsourced offshore

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All About You

Outsourcing and Jobs – What do you think?

Do you think outsourcing really reduces costs?

If costs are reduced, do you think that it justifies the loss of jobs to U.S workers?

What would you say to your employees whose jobs have been outsourced?

Do you think that outsourced professional services

performed in a foreign country or parts manufactured offshore will have the same quality and standards as those performed/manufactured in the U.S.?

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Chapter Review - Brief Exercise 1-5

a Windshield b Engine

c Wages of assembly line worker d Depreciation of factory machinery e Factory machinery lubricants

f Tires g Steering wheel h Salary of painting supervisor

DMDMDLMOMODMDMMO

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Identify whether each of the following costs should be classified as product costs or period costs.

Chapter Review - Brief Exercise 1-6

a Manufacturing overhead b Selling expenses

c Administrative expenses d Advertising expense

e Direct labor f Direct material

ProductPeriodPeriodPeriodProductProduct

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