Accounting principles 11e kieso kimmel chapter 019

Managerial Cost Concepts Raw Materials  Basic materials and parts used in manufacturing process.. Direct Materials  Raw materials that can be physically and directly associated with th

Prepared by Coby Harmon University of California, Santa Barbara

Westmont College

Learning Objectives

After studying this chapter, you should be able to:

[1] Explain the distinguishing features of managerial accounting.

[2] Identify the three broad functions of management.

[3] Define the three classes of manufacturing costs.

[4] Distinguish between product and period costs.

[5] Explain the difference between a merchandising and a manufacturing

income statement.

[6] Indicate how cost of goods manufactured is determined.

[7] Explain the difference between a merchandising and a manufacturing

balance sheet.

[8] Identify trends in managerial accounting.

Accounting

Preview of Chapter 19

Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

Managerial accounting provides economic and financial

information for managers and other internal users

Crucial activities for companies would include:

Managerial Accounting Basics

 The need for accurate information about the cost of each

product to know whether the company is making a profit (Chapters 20 and 21)

 The need to adjust the quantity it produces in light of changes in

economic conditions and consumer tastes The need to understand how changes in the quantity produced impacts its production costs and profitability (Chapter 22)

LO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting Basics

 The need for managers to consider alternative courses of

action (Chapter 26).

 The preparation of budgets in order to plan for the future

(Chapter 23).

 Comparing budgeted numbers with actual results to evaluate

performance and identify areas that need to change (Chapters

24 and 25)

 The need to make substantial investment decisions, such as

the building of a new plant or the purchase of new equipment (Chapter 26).

Crucial activities for companies would include:

LO 1 Explain the distinguishing features of managerial accounting.

19-6 LO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial

Accounting

Illustration 19-1

Managerial Accounting Basics

Managerial accounting:

a Is governed by generally accepted accounting

principles

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

LO 1 Explain the distinguishing features of managerial accounting.

Managerial Accounting Basics

Question

19-8 LO 2 Identify the three broad functions of management.

 Implement planned objectives.

 Provide incentives to motivate employees

 Hire and train employees.

 Produce running operation.

smooth- 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.

Managerial Accounting Basics

19-9

19-10 LO 2

Illustration 19-2

Organization charts show the

interrelationships of activities and

the delegation of authority and

responsibility within the company.

Organizational

Structure

Managerial Accounting Basics

19-11 LO 2 Identify the three broad functions of management.

Business Ethics

 All employees are expected to act ethically

 Many organizations have codes of business ethics

 Past financial frauds:

19-12 LO 2

Creating Proper Incentives

 Systems and controls sometimes create incentives for

managers to take unethical actions.

 Controls need to be effective and realistic.

Managerial Accounting Basics

Business Ethics

Boeing Plagued by a series

of scandals attributed to an evaluation system that gave employees the impression that they needed to succeed no matter what actions were required to do so.

Boeing Plagued by a series

of scandals attributed to an evaluation system that gave employees the impression that they needed to succeed no matter what actions were required to do so.

Schering-Plough

Pharmaceutical manufacturer, found that employees were so concerned with meeting production quantity standards that they failed

to monitor the quality of the product, and as a result the dosages were often wrong.

Schering-Plough

Pharmaceutical manufacturer, found that employees were so concerned with meeting production quantity standards that they failed

to monitor the quality of the product, and as a result the dosages were often wrong.

19-13 LO 2 Identify the three broad functions of management.

Sarbanes-Oxley Act (SOX)

 Clarifies top management’s responsibilities.

 Requires certifications by CEO and CFO.

 Selection criteria for Board of Directors and Audit

Committee.

 Substantially increased penalties for misconduct.

Code of Ethical Standards

Managerial Accounting Basics

Business Ethics

The management of an organization performs several broad

functions They are:

a Planning, directing, and selling

b Directing, manufacturing, and controlling

c Planning, manufacturing, and controlling

d Planning, directing, and controlling

LO 2 Identify the three broad functions of management.

Question

Managerial Accounting Basics

Indicate whether the following statements are true or false

1 Managerial accountants have a single role within an

organization, collecting and reporting costs to management

2 Financial accounting reports are general-purpose and

intended for external users

3 Managerial accounting reports are special-purpose and

issued as frequently as needed

False

False

True

LO 2 Identify the three broad functions of management.

Indicate whether the following statements are true or false

4 Managers’ activities and responsibilities can be classified

into three broad functions: cost accounting, budgeting, and internal control

5 As a result of the Sarbanes-Oxley Act, managerial

accounting reports must now comply with generally accepted accounting principles (GAAP)

6 Top managers must certify that a company maintains an

adequate system of internal controls

DO IT!

>

19-17 LO 3 Define the three classes of manufacturing costs.

Managers should ask questions such as the following

1 What costs are involved in making a product or performing

a service?

2 If we decrease production volume, will costs decrease?

3 What impact will automation have on total costs?

4 How can we best control costs?

To answer these questions, managers need reliable and

relevant cost information.

Managerial Cost Concepts

19-18 LO 3 Define the three classes of manufacturing costs.

Manufacturing consists of activities and processes that

convert raw materials into finished goods

Classified as:

Manufacturing Costs

Managerial Cost Concepts

Direct Materials

LO 3 Define the three classes of manufacturing costs.

Managerial Cost Concepts

Raw Materials

 Basic materials and parts used in manufacturing

process

Direct Materials

 Raw materials that can be

physically and directly associated with the finished product during the manufacturing process

Indirect Materials

 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

Direct Materials

LO 3 Define the three classes of manufacturing costs.

Managerial Cost Concepts

Raw Materials

 Basic materials and parts used in manufacturing

process

Work of factory employees that can be

physically and directly associated with

converting raw materials into finished

 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

 Costs indirectly associated with the

manufacture of the finished product

LO 3 Define the three classes of manufacturing costs.

Manufacturing Overhead

Managerial Cost Concepts

 Includes manufacturing costs that cannot be classified as

direct materials and direct labor

 Includes indirect materials, indirect labor, depreciation on

factory buildings and machines, and insurance, taxes, and maintenance on factory facilities

19-23

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

Question

LO 3 Define the three classes of manufacturing costs.

Managerial Cost Concepts

 Components:

 Costs that are a necessary and integral part of

producing the product

 Recorded in “inventory” account

 Not an expense (COGS) until

the goods are sold

LO 4 Distinguish between product and period costs.

Product costs are also

called inventoriable costs.

Alternative Terminology

Product costs are also

called inventoriable costs.

 Charged to expense as incurred

 Non-manufacturing costs

 Includes all selling and administrative expenses

LO 4 Distinguish between product and period costs.

Period Costs

Product versus Period Costs

19-27 LO 4 Distinguish between product and period costs.

Illustration 19-3

Product versus Period Costs

19-28 LO 4

A bicycle company has these costs: tires, salaries of employees who

put tires on the wheels, factory building depreciation, lubricants, spokes, salary of factory manager, handlebars, and salaries of factory

maintenance employees Classify each cost as direct materials, direct

 Lubricants

 Factory depreciation

 Factory manager salary

 Factory maintenance employees salary

DO IT!

>

Under a periodic inventory system, the income statements

of a merchandiser and a manufacturer differ in the cost of

goods sold section.

LO 5 Explain the difference between a merchandising

and a manufacturing income statement.

Income Statement

“ Cost of Goods Sold ”

Manufacturing Costs in Financial Statements

Cost of Goods Sold Components – (Periodic Inventory System)

LO 5

Illustration 19-4

Cost of Goods Manufactured

Manufacturing Costs in Financial Statements

Cost of goods sold sections of merchandising and

manufacturing income statements

Illustration 19-5

LO 5 Explain the difference between a merchandising

and a manufacturing income statement.

Manufacturing Costs in Financial Statements

For the year, Red Company has cost of goods manufactured

of $600,000, beginning finished goods inventory of $200,000,

and ending finished goods inventory of $250,000 The cost of

goods sold is

Beginning Inventory $200,000 + COGs Manufactured 600,000 Goods Available for Sale 800,000

- Ending Inventory 250,000 Cost of Goods Sold $550,000

Question

LO 5 Explain the difference between a merchandising

and a manufacturing income statement.

Manufacturing Costs in Financial Statements

Cost of Goods Manufactured

Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period.

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year.

LO 6 Indicate how cost of goods manufactured is determined.

Illustration 19-6

Manufacturing Costs in Financial Statements

Illustration 19-8

Illustration 19-7

19-35 LO 6 Indicate how cost of goods manufactured is determined.

DO IT!

>

19-36 LO 6

Manufacturing Costs in Financial Statements

Advance slide in presentation mode to reveal answers.

19-37 LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

Illustration 19-8

Inventory accounts for a manufacturer

The balance sheet for a merchandising company shows just one category

of inventory.

Balance Sheet

Manufacturing Costs in Financial Statements

19-38 LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

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

A cost of goods manufactured schedule shows beginning and

ending inventories for:

LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

Question

Manufacturing Costs in Financial Statements

19-40 LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

Illustration 19-10

Illustration: Suppose you started your own snowboard factory,

Diamond Snowboards Here are some of the costs that your

snowboard factory would incur Assign the following costs:

Manufacturing Costs in Financial Statements

Advance slide in presentation

mode to reveal answers.

Illustration 19-10

Manufacturing Costs in Financial Statements

LO 7

If Diamond produces 10,000 snowboards the first year, what

would be the total manufacturing costs?

LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

Illustration 19-11

Manufacturing Costs in Financial Statements

Advance slide in presentation mode to reveal answers.

 Much of the U.S economy has shifted toward an

emphasis on providing services.

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

companies

 Like a manufacturer, service companies need to keep

track of the costs of its services in order to know whether

it is generating a profit

Product Costing for Service Industries

LO 7 Explain the difference between a merchandising and

a manufacturing balance sheet.

Manufacturing Costs in Financial Statements

19-44

Refers to all business processes associated with providing

a product or performing a service

For a manufacturing firm these include the following:

LO 8 Identify trends in managerial accounting.

Focus on the Value Chain

Illustration 19-12

Product versus Period Costs

Just-In-Time Inventory Methods

 Inventory system in which goods are manufactured or

purchased just in time for sale

LO 8 Identify trends in managerial accounting.

 Reduce defects in finished products, with the goal of

zero defects

Total Quality Management (TQM)

Product versus Period Costs

 Identification of “bottlenecks”—constraints within the

value chain that limit a company’s profitability

Theory of Constraints

 A comprehensive, centralized, integrated source of

information to manage all major business processes—

from purchasing, to manufacturing, to sales, to human resources

Enterprise Resource Planning (ERP) systems

LO 8 Identify trends in managerial accounting.

Product versus Period Costs

 Allocates overhead based on use of activities in making

the product

Activity-Based Costing (ABC)

 Uses both financial and non-financial measures to

evaluate all aspects of a company’s operations in an integrated fashion

 Links performance to overall company objectives

Balanced Scorecard

LO 8 Identify trends in managerial accounting.

Product versus Period Costs

Which of the following managerial accounting techniques

attempts to allocate manufacturing overhead in a more

3 Systems implemented to reduce defects in finished

products with the goal of achieving zero defects.

1 All activities associated

with providing a product or

performing a service.

2 A method of allocating

overhead based on each

product’s use of activities in

making the product.

Match the descriptions that follow with the corresponding terms

4 A

performance-measurement approach that uses

both financial and nonfinancial

measures, tied to company

5 Inventory system in which goods are manufactured or

purchased just as they are needed for use.

LO 8 Identify trends in managerial accounting.

Match the descriptions that follow with the corresponding terms

DO IT!

>