managerial accounting for managers

FACULTY OF BUSINESSNurturing professionals with high moral and ethical values

Assoc. Prof. Dr. Mohd Fuad Mohd [email protected]

21st. July 2012

Managerial AccountingBusiness Environment and

The Need of Managerial Accounting

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Nurturing professionals with high moral and ethical values

54% CEOs survey – unethical business is a common practice.

55% of 2000 employees surveyed observed unethical conduct.

Ethics a system of moral principles: the ethics of a culture. the rules of conduct recognized in respect to a particular class of human

actions or a particular group, culture, etc.: medical ethics moral principles, as of an individual: His ethics forbade betrayal of a

confidence. a philosophy dealing with values relating to human conduct, with respect

to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions.

Moral 2

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‘body of principles governing right and wrong’

may be merely to enable ex post facto,abstract judgements about good and evil

OR

might be instrumentalist

with volitional or motivational power

thereby influencing actors' behaviour

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Abandoning ethical standards in business would lead to a lower quality of life with less

desirable goods and services at higher prices.

Without ethical standards in business, theeconomy, and all of us who depend on it for

jobs, goods, and services, would suffer.

Ethical standards in business are essential for asmooth functioning advanced market economy.Ethical standards in business are essential for asmooth functioning advanced market economy.

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3 important things to build strong ethical culture:a. Concerned leaders who practice ethics as daily observation

b. Supervisors who emphasize integrity when working with direct report

c. Peers who encourage each other to act ethically.

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Moral (from Latin morālis) is a message conveyed or a lesson to be

learned from a story or event. The moral may be left to the hearer, reader or viewer to determine for themselves, or may be explicitly encapsulated in a maxim.

Moral Values the standards of good and evil, which govern an individual’s

behavior and choices. Individual’s morals may derive from society and government, religion, or self.

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Unisel’s Vision

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To be a renowned university that nurtures professionals and scholars with high moral and

ethical values.

Unisel is committed to provide excellent and conducive learning environment to develop

competent, upright and ethical professionals & scholars

Unisel’s Mission

Nurturing professionals with high moral and ethical values.

Unisel’s Core Values

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IntegrityAccountability

InnovationQuality & Excellence

AccessibilityCollegiality

Nurturing professionals with high moral and ethical values.

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Institutional objective of Universiti Selangor (Unisel) is to be a renowned university that nurtures professionals and scholars with high moral and ethical values

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1. Maintain integrity by presenting financial results accurately and objectively

do the right thing to be aware of your own conduct to become familiar with policies and procedures to

avoid misconduct. 2. Avoiding the potential for conflicts of interest

(COI)

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A strategyis a “game plan”

that enables a companyto attract customers

by distinguishing itselffrom competitors.

The focal point of acompany’s strategy should

be its target customers.

The focal point of acompany’s strategy should

be its target customers.

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Understand and respond toindividual customer needs.

Understand and respond toindividual customer needs.

CustomerIntimacyStrategy

OperationalExcellence

Strategy

Deliver products and servicesfaster, more conveniently,

and at lower prices.

Deliver products and servicesfaster, more conveniently,

and at lower prices.

ProductLeadership

StrategyOffer higher quality products.Offer higher quality products.

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PlanningPlanning

ControllingControlling

Directing and Motivating

Directing and Motivating

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DecisionMaking

Formulating long-and short-term plans

(Planning)

Formulating long-and short-term plans

(Planning)

Measuringperformance (Controlling)

Measuringperformance (Controlling)

Implementing plans (Directing and Motivating)

Implementing plans (Directing and Motivating)

Comparing actualto planned

performance (Controlling)

Comparing actualto planned

performance (Controlling)

Begin

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The system bywhich a company is directed

and controlled.

The system bywhich a company is directed

and controlled.

Board ofDirectorsBoard ofDirectors

TopManagement

TopManagement

StockholdersStockholders

To pursueobjectives of

Incentives andmonitoring for

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And the communities inwhich the company operates.

And the communities inwhich the company operates.

An effective corporate governance system should also protect the interests of the

company’s other stakeholders.

An effective corporate governance system should also protect the interests of the

company’s other stakeholders.

EmployeesEmployees CustomersCustomers SuppliersSuppliersCreditorsCreditors

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Managerial Accounting

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1. Direct Cost1. Direct Cost 2.Indirect Cost2.Indirect Cost

DirectMaterials

DirectMaterials

DirectLaborDirectLabor

ManufacturingOverhead


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Direct costs Costs that can be

easily and conveniently traced to a unit of product or other cost object.

Examples: direct material and direct labor

Indirect costs Costs that cannot be

easily and conveniently traced to a unit of product or other cost object.

Example: manufacturing overhead

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The ProductThe Product

DirectMaterials

DirectMaterials




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Integral part of the product and that can be conveniently traced directly to it.

DirectMaterials

DirectMaterials




Labor costs that can be easily traced to individual units of product.

Manufacturing costs that cannot be traced directly to

specific units produced.

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DirectMaterialDirect

MaterialDirectLaborDirectLabor



PrimeCost

ConversionCost

Manufacturing costs are oftenclassified as follows:

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Selling Costs

Selling Costs

AdministrativeCosts

AdministrativeCosts

Costs necessary to get the order and

deliver the product.

Costs necessary to get the order and

deliver the product.

All executive, organizational, and clerical costs.

All executive, organizational, and clerical costs.

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Product costs include direct materials, direct labor, and manufacturing

overhead.

Period costs include all selling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Sale

Expense

IncomeStatement

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Which of the following costs would be considered a period rather than a product cost in a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.D. Electrical costs to light the production

facility.E. Sales commissions.

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Which of the following costs would be considered a period rather than a product cost in a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.D. Electrical costs to light the production

facility.E. Sales commissions.

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Merchandisers . . . Buy finished goods. Sell finished goods.

Manufacturers . . . Buy raw materials. Produce and sell

finished goods.

Care4you

Manufacturing Company of Malaysia

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Merchandiser

Current assetsCashReceivablesPrepaid

ExpensesMerchandise

Inventory

Manufacturer

Current Assets Cash Receivables Prepaid Expenses Inventories

• Raw Materials

• Work in Process

• Finished Goods

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Merchandiser

Current assetsCashReceivablesPrepaid

ExpensesMerchandise

Inventory

Manufacturer Current Assets

Cash Receivables Prepaid Expenses Inventories

• Raw Materials

• Work in Process

• Finished Goods

Partially complete products – some material,

labor, or overhead has been added.

Completed products awaiting sale.

Materials waiting to be processed.

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Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

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$

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Beginningbalance

Beginningbalance

Additionsto inventoryAdditions

to inventory++ == EndingbalanceEndingbalance

Withdrawalsfrom

inventory

Withdrawalsfrom

inventory++

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FinishedGoods

Cost of GoodsSold

Selling andAdministrative

Period CostsSelling andAdministrative


Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

Material Purchases Raw Materials

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Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

A. $276,000B. $272,000C. $280,000D. $ 2,000

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Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

A. $276,000B. $272,000C. $280,000D. $ 2,000

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Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?A. $ 20,000.B. $740,000.C. $780,000.D. $760,000.

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Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?A. $ 20,000.B. $740,000.C. $780,000.D. $760,000.

$130,000 + $760,000 = $890,000$890,000 - $150,000 = $740,000

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How a cost will react to changes in the

level of activity within the relevant range.

Total variable costs change when activity changes.

Total fixed costs remain unchanged when activity changes.

How a cost will react to changes in the

level of activity within the relevant range.

Total variable costs change when activity changes.

Total fixed costs remain unchanged when activity changes.

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Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges

of activity.

Fixed Total fixed cost remains Average fixed cost per unit goesthe same even when the down as activity level goes up.

activity level changes.

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Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)

A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.

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Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)

A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.

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Every decision involves a choice between at least two alternatives.

Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored.

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Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Differential revenue is: $2,000 – $1,500 = $500

Differential cost is: $300

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The potential benefit that is given up when

one alternative is selected over another.Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.

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Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored

when making decisions.

Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

Saga

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Suppose you are trying to decide whether to drive or take the train to Ipoh to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Ipoh?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

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Suppose you are trying to decide whether to drive or take the train to Ipoh to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Ipoh?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is not relevant.

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Suppose you are trying to decide whether to drive or take the train to Ipoh to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

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Suppose you are trying to decide whether to drive or take the train to Ipoh to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.

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Suppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.

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Suppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.

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Financial reporting Predicting cost behavior Assigning costs to cost objects Decision making

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The labor costs incurred during idle time are ordinarily treated as manufacturing overhead.

Machine Breakdowns

Material Shortages

Power Failures

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The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead.

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Fringe benefits include employer paid costs for insurance programs, retirement plans, supplemental unemployment programs,

Social Security, Medicare, workers’ compensation and unemployment taxes.

Some companies include all of these

costs in manufacturing

overhead.

Other companies treat fringe benefit

expenses of direct laborers as additional

direct labor costs.

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When the overwhelming majority of products produced conform to design specifications and are free from defects.

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Prevention Costs

Support activities whose purpose is to

reduce the number of defects

Appraisal Costs

Incurred to identify defective products

before the products are shipped

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Internal Failure Costs

Incurred as a result of identifying defects

before they are shipped

External Failure Costs

Incurred as a result of defective products being delivered to

customers

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Prevention Costs• Quality training• Quality circles• Statistical process control activities

Appraisal Costs• Testing & inspecting incoming materials• Final product testing• Depreciation of testing equipment

Internal Failure Costs• Scrap• Spoilage• Rework

External Failure Costs• Cost of field servicing & handling complaints• Warranty repairs• Lost sales

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When quality of conformance is low, total quality cost is high and consists mostly of internal and

external failure.

Total quality costs drop rapidly as the quality of conformance increases.

Companies reduce their total quality costs by focusing their efforts on prevention and appraisal because the cost savings from

reduced defects usually overwhelm the costs of additional prevention and appraisal.

Total quality costs are minimized when the quality of conformance is slightly less than 100%.

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Help managers see the financial significance of defects.

Help managers identify the relative importance of the quality problems.

Help managers see whether their quality costs are poorly distributed.

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Simply measuring quality cost problems does not solve

quality problems.

Results usually lag behind quality improvement

programs.

The most important quality cost, lost sales, is often

omitted from quality cost reports.

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