19-1 prepared by coby harmon university of california, santa barbara westmont college

19-1

Prepared byCoby Harmon

University of California, Santa BarbaraWestmont College

19-2

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.

19 Managerial Accounting

19-3

Preview of Chapter 19

Accounting PrinciplesEleventh Edition

Weygandt Kimmel Kieso

19-4

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.

19-5


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:


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

Comparing Managerial and Financial Accounting

Illustration 19-1


19-7

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.



Question

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

Management Functions

PlanningPlanning

Maximize short-term profit and market share

Commitment to environmental protection

Contributing to social programs.

Add value to the business.

DirectingDirecting ControllingControlling

Coordinate diverse activities and human resources.

Implement planned objectives.

Provide incentives to motivate employees

Hire and train employees.

Produce smooth-running operation.

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.


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



Business Ethics

All employees are expected to act ethically.

Many organizations have codes of business ethics.

Past financial frauds:

► Enron,

► Global Crossing,

► WorldCom


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.


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.


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


Business Ethics

19-14

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


19-15

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

True

True


DO IT!>

19-16

False

False

True


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


19-19

Direct Materials

LO 3 Define the three classes of manufacturing costs.


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.

19-20

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



Raw Materials

Basic materials and parts used in manufacturing

process.

19-21

Work of factory employees that can be

physically and directly associated with

converting raw materials into finished

goods.


Direct Labor


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.

19-22

Costs indirectly associated with the

manufacture of the finished product.


Manufacturing Overhead


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.

19-24

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



19-25

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 Direct materials Direct labor Manufacturing overhead

Product versus Period Costs

Alternative TerminologyProduct costs are alsocalled inventoriable costs.

Alternative TerminologyProduct costs are alsocalled inventoriable costs.

19-26

Charged to expense as incurred.

Non-manufacturing costs.

Includes all selling and administrative expenses.

LO 4 Distinguish between product and period costs.

Period Costs


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

Illustration 19-3


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

labor, or overhead.

Direct MaterialsDirect Materials

Tires

Spokes

Handlebars

Direct LaborDirect Labor OverheadOverhead

Salaries of employees who put tires on the wheels

Lubricants

Factory depreciation

Factory manager salary

Factory maintenance employees salary

DO IT!>

19-29

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

19-30

Cost of Goods Sold Components – (Periodic Inventory System)

LO 5

Illustration 19-4

Cost of Goods Manufactured


19-31

Cost of goods sold sections of merchandising and

manufacturing income statementsIllustration 19-5



19-32

a. $450,000.

b. $500,000.

c. $550,000.

d. $600,000.

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 isBeginning Inventory $200,000

+ COGs Manufactured 600,000

Goods Available for Sale 800,000

- Ending Inventory 250,000

Cost of Goods Sold $550,000

Question



19-33

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


19-34

Illustration 19-8

Illustration 19-7

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

DO IT!>

19-36 LO 6


Advance slide in presentation mode to reveal answers.

19-37LO 7 Explain the difference between a merchandising

and a manufacturing balance sheet.

Illustration 19-8Inventory accounts for a manufacturer

The balance sheet for a merchandising company shows just one category of inventory.

Balance Sheet




Illustration 19-9

Current assets sections of merchandising and manufacturing

balance sheets


Balance Sheet

19-39

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




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:



19-41

Illustration 19-10


LO 7

19-42

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

would be the total manufacturing costs?


Illustration 19-11



19-43

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



19-45

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


19-46

Just-In-Time Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for sale.


Reduce defects in finished products, with the goal of zero defects.

Total Quality Management (TQM)


Identification of “bottlenecks”—constraints within the value chain that limit a company’s profitability.

Theory of Constraints

19-47

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



Allocates overhead based on use of activities in making the product.

Activity-Based Costing (ABC)

19-48

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



19-49

Which of the following managerial accounting techniques

attempts to allocate manufacturing overhead in a more

meaningful manner?

a. Just-in-time inventory.

b. Total-quality management.

c. Balanced scorecard.

d. Activity-based costing.


Question


19-50

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.

e

a

d


DO IT!>

19-51

4. ______ A performance-

measurement approach that uses

both financial and nonfinancial

measures, tied to company

objectives, to evaluate a

company’s operations in an

integrated fashion.

b

c5. ______ Inventory system in which goods are manufactured or

purchased just as they are needed for use.


Match the descriptions that follow with the corresponding terms.

DO IT!>

19-52

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19-1 prepared by coby harmon university of california, santa barbara westmont college

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