chapter 14 managerial accounting concepts and principles

Chapter 14

Managerial Accounting Concepts and Principles

14-2

Conceptual Learning ObjectivesC1: Explain the purpose and nature of managerial

accounting.C2: Describe the lean business model.C3: Describe fraud and the role of ethics in managerial

accounting. C4: Describe accounting concepts useful in classifying

costs.C5: Define product and period costs and explain how

they impact financial statements.C6: Explain how the balance sheets and income

statements for manufacturing and merchandising companies differ.

C7: Explain manufacturing activities and the flow of manufacturing costs.

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A1: Compute cycle time and cycle efficiency, and explain their importance to production management.

Analytical Learning Objectives

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P1: Compute cost of goods sold for a manufacturer.

P2: Prepare a manufacturing statement and explain its purpose and links to financial statements.

Procedural Learning Objectives

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Managerial accountingprovides financial and

non-financial informationfor managers of an

organization and other decision makers

Financial accountingprovides generalpurpose financial

information to thosewho are outsidethe organization.

Managerial and Financial Accounting

C 1

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Financial Accounting Managerial Accounting

1. Users and Investors, creditors and Managers, employees and decision makers other external users other internal users

2. Purpose of Making investment, credit Planning and

information and other decisions control decisions

3. Flexibility Structured and often Relatively flexible

of practice controlled by GAAP (no GAAP constraints)

4. Timeliness of Often available only Available quickly without

information after audit is complete need to wait for audit

5. Time dimension Historical information Many projections with some predictions and estimates

6. Focus of Emphasis on Projects, processes and

information whole organization segments of an organization

7. Nature of Monetary Monetary and

information information nonmonetary information

Nature of Managerial Accounting

C 1

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Lean Business Model

Customer Orientation

GlobalEconomy

LeanBusiness

Model

Eliminationof Waste

Satisfy theCustomer

PositiveReturn

C 2

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Lean Practices

CustomerOrientationin a GlobalEconomy

C 2

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on

Quality improvementapplied to all aspects of

business activities.

Seek and uncover waste.

Employees encouragedto try new methodsto improve quality.

Company emphasizesvalue of quality through

quality awards.

Total Quality ManagementC 2

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Complete productsjust in time to

ship to customers.

Complete partsjust in time for

assembly into products.

Receive materialsjust in time for

production.

Scheduleproduction.

Receivecustomer

orders.

Just-In-Time (JIT) Manufacturing

C 2

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Just-In-Time (JIT) Manufacturing

C 2

To accomplish just-in-time manufacturing:

Processes must be aligned to eliminate

delays and inefficiencies

Companies must establish good relations with

suppliers

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Implications of Lean Manufacturing

C 2

Understand the nature and

sources of cost

Measure value provided to customers

Determine price

customers pay

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Fraud in Accounting

Fraud is the use of one’s job for personal gain through the deliberate misuse of the employer’s assets.

It is estimated that 5% of annual revenues are lost to fraud.

All fraud is committed to provide direct or indirect benefit to the perpetrator, violates the employee’s duty to his/her employer, costs the employer money, and is carried out in secret.

C 3

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Ethics in Accounting

Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior.

The IMA’s Statement of Ethical Professional Practice requires management accountants to be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner.

The Sarbanes-Oxley Act requires each issuer ofsecurities to disclose whether it has adopted a code of ethics for its senior officers and the content of that code.

C 3

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Behavior

Traceability

Controllability

Relevance

Function

Managerial Cost ConceptsC 4

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Cost behavior means how a cost will react to changes in the level of business activity.

Classification by BehaviorC 4

A fixed cost does not change with changes in the volume of activity. Example: Depreciation of Equip, Plant Rent

A variable cost changes in proportion to changes in the volume of activity: Example: Sales Commission based on % of Sales

A mixed cost refers to a combination of fixed and variable. Example: Equipment Rental: $10K + $1

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Direct costs Costs traceable to a

single cost object. Examples: material

and labor cost for a product.

Indirect costs Costs that cannot be

traced to a single cost object.

Example: -maintenance expenditures benefiting two or more departments.

-Production Floor Supplies

Classification by TraceabilityC 4

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The degree of control depends on thelevel of management in the organization.

Investment in Equipment, Labor Overtime

More C

ontrolM

ore

Con

trol

Very little control

Classification by ControllabilityC 4

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All costs incurred in the past that cannot be avoided or changed.

Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.

Classification by Relevance:Sunk Costs

C 4

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Classification by Relevance:Out-of-Pocket Costs

C 4

A cost that requires a future outlay of cash.

Out-of-pocket costs should be considered in decisions.

Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future

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The potential benefit lost by choosing a specific action from two or more alternatives

Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

Classification by Relevance: Opportunity Costs

C4

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TheProduct

Classification by Function:Product Costs

–Capitalized in Inventory

DirectLabor

DirectMaterial

Manufacturing Overhead

C 5

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Product vs. Period Costs Product Cost:

Identifiable with the product.Capitalized in Inventory.Example: DM, DL, OH

Period Cost: Expenses identified more with the time period than with the product.Example: Selling & Admin Expenses

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Period Costs(Expenses)

Product Costs(Inventory)

Inventory Not Sold in 2010

OperatingExpenses

Cost ofGoods Sold

Raw MaterialsGoods in ProcessFinished Goods

Cost ofGoods Sold

2010 CostsIncurred

2010 IncomeStatement

2011 IncomeStatement

2010 BalanceSheet Inventory

InventorySold in 2010

Period and Product Costsin Financial Statements

C 5

Exercise 6 (Page 620)

Exercise 8 (Page 620)

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Completedproductsfor sale.

Materialswaiting to beprocessed.

Can be director indirect.

Partially completeproducts.

Material to whichsome labor and/or

overhead havebeen added.

Balance Sheet of a Manufacturer

RawMaterials

FinishedGoods

Goods inProcess

C 6

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Beginning Merchandise

Inventory

Beginning Finished Goods

Inventory

Cost of Goods Purchased

Cost of GoodsManufactured

Ending Merchandise

Inventory

EndingFinished Goods

Inventory

Cost of Goods Sold

Merchandiser Manufacturer

+

_

+

==

_

The major difference

Income Statement of a Manufacturer

P1

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Manufacturing Company

Cost of goods sold: Beg. finished goods inv. $11,200 + Cost of goods manufactured 170,500 = Goods available for sale 181,700 - Ending finished goods inventory (10,300) = Cost of goods sold 171,400$

Merchandising Company

Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 = Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$

Cost of goods (CGS) sold for manufacturers differs only slightly from CGS for merchandisers.


P1

Exercise 10 (page 621)

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Direct Materials

Materials that are separately and readily traced to a particular product.

Direct Materials

Materials that are separately and readily traced to a particular product.

Example:Steel used tomanufacture

the automobile.

Example:Steel used tomanufacture

the automobile.


C7

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Direct Labor

Labor costs that are separately and readily traced to finished product.

Direct Labor

Labor costs that are separately and readily traced to finished product.

Example:Wages paid to an

automobile assemblyworker.

Example:Wages paid to an

automobile assemblyworker.


C7

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Factory Overhead

All manufacturing costs exceptdirect material and direct labor

Factory costs that cannot beseparately or readily traced directly to

products.

Factory Overhead

All manufacturing costs exceptdirect material and direct labor

Factory costs that cannot beseparately or readily traced directly to

products.Examples:

Indirect labor – maintenanceIndirect material – cleaning supplies

Factory utility costsSupervisory costs


C7

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DirectMaterial

DirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:


C7

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Finished GoodsBeginning Inventory

Cost of GoodsManufactured

FinishedGoodsEnding

Inventory

RawMaterials

BeginningInventory

RawMaterials

Purchases

Raw MaterialsEnding Inventory

Costof

GoodsSold

Goods in ProcessBeginning Inventory

Direct Labor

FactoryOverhead

Raw MaterialsUsed

Sales activityProduction activity-WIP Inventory

Materialsactivity

Flow of Manufacturing Activities

Goods in ProcessEnding Inventory

C 7

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Summarizes the types and amounts of costsIncurred in a company’s manufacturing process.

Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured

Manufacturing StatementP2

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ROCKY MOUNTAIN BIKES

Manufacturing Statement

For Year Ended December 31, 2009

Direct materials used in production 85,500$

Direct labor 60,000

Total factory overhead costs 30,000

Total manufacturing costs for the period 175,500$

Add: Beginning goods in process inventory 2,500

Total cost of goods in process 178,000$

Deduct: Ending goods in process inventory 7,500

Cost of goods manufactured 170,500$

P2


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Direct labor 60,000







Computation of Cost of Direct Material Used

Beginning raw materials inventory 8,000$

Add: Purchases of raw materials 86,500

Cost of raw materials available for use 94,500$

Deduct: Ending raw materials inventory 9,000

Cost of direct materials used in production 85,500$

P2

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Direct labor 60,000







Include all direct labor costs incurred during the

current period.

P2


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Direct labor 60,000








Computation of Total Manufacturing Overhead

Indirect labor 9,000$

Factory supervision 6,000

Factory utilities 2,600

Property taxes, factory building 1,900

Factory supplies used 600

Factory insurance expired 1,100

Depreciation, building and equipment 5,300

Other factory overhead 3,500

Total factory overhead costs 30,000$

P2

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Direct labor 60,000







Beginning work in process inventory is carried over from the

prior period.

P2


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Direct labor 60,000







Ending work in process inventory contains the cost of unfinished

goods, and is reported in the current assets section of the balance sheet.

P2


Exercise 11 (Page 621)Exercise 13 (Page 622)Exercise 14 (page 622)

chapter 14 managerial accounting concepts and principles

Documents

financial accounting

suppliers slide

accounting fraud

time manufacturing

accounting ethics

time jit manufacturing

managerial accounting

financial statements