managerial accounting

John Wiley & Sons, Inc. © 2005

Managerial AccountingTool for Business Decision Making

Third Edition

Prepared byPrepared byDan R. WardDan R. Ward

Suzanne P. WardSuzanne P. WardUniversity of Louisiana at LafayetteUniversity of Louisiana at Lafayette

Managerial AccountingManagerial AccountingWeygandt Weygandt •• Kieso • Kimmel Kieso • Kimmel

CHAPTER 1 MANAGERIAL ACCOUNTING

Study ObjectivesExplain the distinguishing features of managerial accounting.

Identify the 3 broad functions of management.

Define the 3 classes of manufacturing costs.

Distinguish between product and period costs.

Study Objectives: Continued

Explain the difference between a merchandising and a manufacturing income statement.

Indicate how cost of goods manufactured is determined.

Explain the difference between a merchandising and a manufacturing balance sheet.

Identify trends in managerial accounting.

MANAGERIAL ACCOUNTING BASICS

Definition of Managerial Accounting

A field of accounting that provideseconomic and financial information

for managers and other internal users

Also called Management Accounting

MANAGERIAL ACCOUNTING BASICSManagerial Activities

Explain manufacturing and non-manufacturing costs and how they are reported.

Compute cost of providing a service or manufacturing a product.

Determine behavior of costs and expenses as activity changes.


Managerial Activities: Continued

Gather and present relevant data for management decision making.

Evaluate effect of alternative ways to cost inventory.

Determine prices for external and internal transactions.

MANAGERIAL ACCOUNTING BASICSManagerial Activities:

Continued Assist in profit planning and formalizing plans in the form of budgets .

Help to control costs by comparing actual results with planned objectives and standard costs.

Collect and present data for capital expenditure decisions.


Distinguishing Features

Applies to all types of businesses – service, merchandising, and

manufacturing

Applies to all forms of businesses – proprietorships, partnerships, and corporations

Applies to not-for-profit and profit-oriented companies

MANAGERIAL ACCOUNTING BASICS Distinguishing Features: Continued

More responsible for strategic cost management.

Team includes members from production, marketing, engineering, etc.

Aid in making critical decisions.

COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING

Study Objective 1

Similarities

Both deal with economic events of a business.

Both require that economic events be quantified and communicated to interested parties.

COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING

Differences

MANAGEMENT FUNCTIONSStudy Objective 2

Management’s activities and responsibilities can be

classified into the following three broad functions:

PlanningDirecting

Controlling

Cost and management Accounting

Management’s roles include planning, directing and controlling. Cost data is used in each of these roles.

Planning: the use of budgets to predict costs, determine required resources, manage cash flow.

Directing: coordinating activities, identifying problem areas, motivating employees.

Controlling: comparing actual performance to budget and investigating significant variances.

Good decision making is the outcome of good judgment in planning, directing, and controlling.

ORGANIZATIONAL STRUCTUREOrganizational Chart

Assists in carrying out management’s functions

Prepared by most companies

Organizational charts show: The interrelationships of activities The delegation of authority The delegation of responsibility

A TYPICAL COMPANY’SORGANIZATIONAL CHART

MANAGERIAL COST CONCEPTSManufacturing Costs

Study Objective 3 Manufacturing consists of activities to convert raw materials into finished goods.

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

Typical Classification of Manufacturing Costs

MANAGERIAL COST CONCEPTSManufacturing Costs -

MaterialsDirect Materials

Raw materials - basic materials used in manufacturing.

Raw materials that can be physically and directly associated with the finished product are called direct materials.

Examples includeFlour in the baking of breadSyrup in the bottling of soft drinksSteel used in making automobiles

MANAGERIAL COST CONCEPTSManufacturing Costs- Materials

Indirect Materials Raw materials that cannot be easily associated with the finished product are called indirect materials.

Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost

Considered part of manufacturing overhead

MANAGERIAL COST CONCEPTSManufacturing Costs - Labor

Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods

Examples include Bottlers at Coca-Cola Bakers at Coopers Typesetters at a newspaper

MANAGERIAL COST CONCEPTSManufacturing Costs - Labor

Indirect Labor Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced

Examples include Wages of maintenance workers Supervisors Time-Keepers

MANAGERIAL COST CONCEPTSManufacturing Costs – Manufacturing

Overhead Costs that are indirectly associated with manufacturing the product

Examples includeIndirect materialsIndirect laborDepreciation on factory buildingsInsurance, taxes, maintenance on

factory facilities

Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

PRODUCT VERSUS PERIOD COSTSStudy Objective 4

Product Costs Consist of the direct material cost, the direct

labor cost, and the manufacturing overhead cost

A necessary and integral part of producing the product

Recorded as inventory when incurred

Do not become expenses until the finished goods inventory is sold

PRODUCT VERSUS PERIOD COSTS Period Costs

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

Non-manufacturing costs

Deducted from revenues in period incurred to determine net income

Include all Selling expenses General and Administrative expenses

FOR RENT

PRODUCT VERSUS PERIOD COSTS

MANUFACTURING COSTS INFINANCIAL STATEMENTS

Study Objective 5

Income Statement

The income statement for a manufacturer is similar to

that of a merchandiser except for the cost of goods sold section.


Cost of Goods Sold ComponentsMerchandiser versus Manufacturer


Cost of Goods Sold Section of the Income Statement

COST OF GOODS MANUFACTURED SCHEDULE

BALANCE SHEET - InventoriesStudy Objective 7

Merchandising Company One category of inventory: Merchandise

Inventory

Manufacturing Company May have three inventory accounts:

Raw Materials Work in Process Finished Goods

BALANCE SHEET - Inventories

Let’s ReviewLet’s ReviewDirect Materials are a:

Product Manufacturing Period

Cost Overhead Costa. Yes Yes Nob. Yes No Noc. Yes Yes Yesd. No No No

MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices

Value Chain Refers to all activities associated with providing a product or service.

For a manufacturing firm, these include the following:

MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices Technological Change

Computerization and automation Enterprise resource planning (ERP) - software systems that manage the value chain

In large companies an ERP system might replace as many as 200 individual software packages

Computer-integrated manufacturing (CIM) - make products untouched by human hands

Internet and business-to-business (B2B) e-commerce

MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices

Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or purchased just in time for use

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 specific activities or functions of the company (number of orders or number of machine set ups)

Results in more accurate product costing and scrutiny of all activities in the value chain

MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices Theory of Constraints

Used to identify and manage constraints or “bottlenecks”

Helps achieve overall goals of the company, particularly profits

Balanced Scorecard A performance-measurement approach to evaluate operations in an integrated fashionUses both financial and non-financial measures

Links performance measures to overall company objectives

Summary of Study Objectives Identify the three broad functions of management

PlanningDirectingControlling

Define the three classes of manufacturing costs

Direct MaterialsDirect LaborManufacturing Overhead

Distinguish between product and period costsProduct costs are

an integral part of producing the product also called inventoriable costs do not become expenses until the product is sold.

Period costs are identified with a specific time period rather than a product

selling and administrative expenses.

Summary of Study Objectives Explain the difference between a merchandising and a manufacturing income statement

Income statements are similar except for the cost of goods sold section. CGS section shows beginning and ending finished goods inventories and the cost of goods manufactured

Indicate how cost of goods manufactured is determined

Beginning work-in-process + total manufacturing costs for the period – ending work-in-process = cost of goods manufactured

Explain the difference between a merchandising and a manufacturing balance sheet

The difference is in the current asset sectionManufacturing firm - three inventories: finished goods, work-in-process, and raw materialsMerchandising firm - only one inventory account: merchandise inventory

Let’s ReviewLet’s ReviewWhich of the following is not

an element of manufacturing overhead?

a. Plant manager’s salary

b. Sales manager’s salaryc. Factory repairman’s wagesd. Product inspector’s salary

managerial accounting

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