managerial accounting

Managerial Accounting

Dr. BaldwinUniversity of Arkansas – Fort

SmithFall 2010

CHAPTER 14

Managerial Accounting Concepts & Principles

___________ accounting provides financial and non-financial information for managers of an organization and other internal decision makers

_________ accounting provides general purpose financial information to those who are outside the organization.

Managerial & Financial Accounting

C 1

Activities of a Managerial Accountant

• Determining costs of products– Predicting Future Costs– Product Pricing– Profitability Analysis– Make or Buy Decisions

• Planning– Strategic Plans – long term– Budgeting - Short Terms Plans

• Controlling costs• Applying Cost-Volume-Profit techniques• Standard costing and variance analysis

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)

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

Internal Reporting• Management functions include the

following:– Planning – set goals, budgets– Executing – carrying out plans– Reviewing – monitoring progress towards

goals.– Reporting – to outside parties

• Management accountants provide information to facilitate these processes.

Goal of Lean Business?

Provide high product at low .

Implementing a lean business model allows companies to focus on their core competencies (what they do best) which will help them achieve these two goals.

Lean Business Model

Customer Orientation

GlobalEconomy

LeanBusiness

Model

Quality whileeliminating

Waste

Satisfy theCustomer

PositiveReturn

C 2

Continuous Improvement• The following ideas have

emerged to deal with increasing competition and the need to continually improve business practices. – Just-in-time Operations– Total Quality Management– Activity-based Management

(and costing)

Just-in-Time…• JIT involves the reduction of

inventories and the purchase and production of merchandise only when needed. (Demand – pull system)

• Operations become much more _________ and waste is virtually eliminated.

• Quality of the products typically improves as well.

Total Quality Management• In an effort to drive down the cost

of poor quality, firms have decided to build quality into their products. – They have been able to reduce total

costs and improve their products at the same time.

• This same approach can be applied to all business functions and settings.

Activity Based Management• This approach requires that

management identify value-added and non-value-added activities.

• The goal is to reduce or eliminate non-value-added costs and activities.

• In doing so, the company becomes more efficient and can devote more time and energy to value-added activities.

Understanding Costs• Common Questions to consider:

– What costs are incurred in making our product?

– How do these costs behave?– What factors affect these costs?– How can we control costs, without our

quality suffering?

What Next?• Once we understand our costs, we

can use that information to determine– Budgets– Setting prices– Value of inventory– Performance evaluation– What products to make

Classification of CostsMany ways to classify costs in order

to understand them…• Direct versus ______ costs• Variable versus _____ costs• Product versus _____ costs• Controllable versus ___________

costs.• ______ versus out-of-pocket costs

versus ___________ costs.

C 3

Classification by BehaviorIn planning, we must understand how costs

behave. For example, do costs change as production activity changes or do they stay the same?

• Variable cost – costs that ______ as production activity increases (direct materials, direct labor)

• Fixed cost – costs that ____________ over a range of activity levels (depreciation, rent)

• Mixed cost – costs that have ____ a fixed and variable component

Classification by Traceability• We need to be able to associate costs

with particular cost objects (units of product or department).

• Costs can either be considered:– ____ costs can be easily traced to an

object (some materials or labor).– ______ costs are allocated to objects

because they cannot be easily traced (plant depreciation, rent of equipment).

Classification by Relevance• ______Costs – already incurred and can not

be avoided or changed – always irrelevant to short term decision analysis

• Out-of-pocket costs – require future outlay of cash – possibly relevant to short term decision making

• ____________costs – benefit or revenue lost when choosing one alternative over another– relevant to short term decision analysis

Classification by FunctionProduct costs• include all costs associated with

making or buying a product for resale (COGS)– Direct Materials (DM)– Direct Labor (DL)– Manufacturing or Factory Overhead (FOH)

• Costs attach to _________ and are expensed only when items are _____.

C 4

Classification by FunctionPeriod Costs• Selling Costs

– Costs incurred to obtain customer orders and to deliver finished goods to customers

• General & Administrative Expenses– Non-manufacturing costs of staff support and

administrative functions – accounting, data processing, personnel, research and development.

• These costs _____attach to inventory.• They are expensed in the ________ in which

they are incurred or used up.– Advertising, insurance, interest etc.

Manufacturing CostsThree categories of product costs for

manufacturing companies:• Direct ________

– the cost of specific parts or materials that can be directly traced to a product (raw materials)

• Direct ________– the labor costs that can be directly traced

to individual units or batches of products• _________

Manufacturing Costs…

Manufacturing overhead costs: all other costs of production which cannot be directly traced to individual units or batches of products

• Indirect _______ – supervisory salaries• Indirect _______ – grease,

nails, etc.• Other – depreciation,

insurance, maintenance

Other Cost Terminologyprime costs versus conversion costs• ________ costs include the direct costs of

production.– Material and Labor

• ________ costs include– Labor and Overhead.

• Obviously these categories are not mutually exclusive.

Selling and

Administrative

Selling andAdministrative

Cost ofGoods Sold

Cost ofGoods Sold

FinishedGoods

Inventory

FinishedGoods

Inventory

Work inProcess

Inventory

Work inProcess

Inventory

Balance Sheet

Raw MaterialsInventory

Raw MaterialsInventory

Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



Costs

Period costs flow directly to the

income statement

Period costs flow directly to the

income statement

C5

P1

Mfg. Cost Flow & Classifications

Cost of Materials Used…• Some of the key relationships need to

be defined.• Cost of Materials Used =

– Beg RM inventory + Materials purchased during the period – End RM inventory

• Manufacturing Costs Incurred = – Direct materials used + direct labor for the

period + Overhead Applied to products• NOTE: all three types of product costs here!

P2

Cost of Goods Manufactured• Cost of Goods ____________ =

– Beg WIP inventory + Manufacturing Costs Incurred – End WIP inventory

• Cost of Goods ____________ =– beg FG inventory– + cost of goods manufactured– - ending FG inventory

Flow of Costs in Perpetual Inventory Accounts

DM

Materials Work in Process Finished Goods

Wages Payable

DL

Factory Overhead

Cost of Goods Sold

IM

SOLD

IL

DM

IM

DL

FOHA

IL

OFOH

COGMCOGM SOLDMaterialsPurchased

TotalWages

Based on predetermined overhead rate

FOHA

Summary of cost flows

FOHA = Factory Overhead Applied COGM = Cost of Goods Manf.

Let’s take a look at Rocky Mountain Bikes’ Manufacturing Statement.

P2

Manufacturing Statement

ROCKY MOUNTAIN BIKES


For Year Ended December 31, 2008

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$

Exh. 18-16

P2






Direct labor 60,000







Exh. 18-16

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





Direct labor 60,000







Include all direct labor costs incurred during the

current period.

Exh. 18-16

P2






Direct labor 60,000







Manufacturing StatementExh. 18-16

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





Direct labor 60,000







Beginning work in process inventory is carried over from the

prior period.

Exh. 18-16

P2






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.

Exh. 18-16

P2


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