Managerial Accounting

Prepared by:

M.Com (numl)

MANAGERIAL ACCOUNTING

Managerial Accounting Basics• Comparing managerial and

financial accounting

• Ethical standards

• Management functions

Managerial Cost Concepts• Manufacturing costs

• Product versus period costs

MANAGERIAL ACCOUNTING

Managerial Accounting Basics

Managerial accounting (management accounting) is a field of accounting that provides economic and financial information for managers and other internal users.

Differences Between Financial and Managerial Accounting

FINANCIAL ACCOUNTING

MANAGERIAL ACCOUNTING

Primary Users of Reports

External users, who are stockholders, creditors, and regulatory agencies.

Internal users, who are officers, department heads, managers, and supervisors in the company.

Types and Frequency of Reports

Classified financial statements. Issued quarterly and annually.

Internal reports Issued as frequently as needed.

Purpose of Reports

To provide general-purpose information for all users.

To provide special-purpose information for a particular user for a specific decision.

Illustration 1-1a

Managerial Cost Concepts

To perform the three management functions effectively, management needs information. One very important type of information is related to costs. For example, questions such as the following need answering:– What costs are involved in making the product?– If production volume is decreased, will costs decrease?– What impact will automation have on total costs?– How can costs best be controlled in the organization?

MANAGERIAL ACCOUNTING

Define the three classes of manufacturing costs.

Managerial Cost Concepts

Manufacturing consists of activities and processes that convert raw materials into finished goods. Manufacturing costs are usually classified as follows:– Direct Materials– Direct Labor–Manufacturing Overhead

Manufacturing Costs:Direct Materials

• Raw materials represent the basic materials and parts that are to be used in the manufacturing process.

• Raw materials that can be physically and conveniently associated with the finished product during the manufacturing process are termed direct materials.

Manufacturing Costs:Indirect Materials

Some raw materials cannot be easily associated with the finished product. These are considered indirect materials.

Indirect materials– do not physically become part of the finished

product– Indirect materials are accounted for as part of

manufacturing overhead.

Manufacturing Costs:Direct Labor

Direct labor is the work of factory employees that can be physically and conveniently associated with converting raw materials into finished goods.

DIRECT LABOR

Manufacturing Costs:Indirect Labor

The wages of maintenance people, timekeepers, and supervisors are normally categorized as indirect labor

Like: Indirect materials, indirect labor is part of manufacturing overhead.

Manufacturing Costs: Manufacturing Overhead

Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product.

Manufacturing overhead includes– indirect materials;– indirect labor;– depreciation on factory buildings and machinery; and– insurance, taxes, and maintenance on factory

facilities.

MANUFACTURING OVERHEAD

Product Costs

Product costs (also called inventoriable costs) include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead). They are the costs that are a necessary and integral part of producing the finished product.

Product Costs:Prime and Conversion

Prime cost:

Conversion cost:

Direct Material

Direct Labour

Direct M.O.H

Direct Labour

All Costs

Product Versus Period Costs

Direct Materials

Direct Labor

Manufacturing Overhead

Selling Expenses

Administrative Expenses

Prime Costs

Conversion Costs

Product CostsManufacturing Costs(Go to Balance Sheet before

Income Statement)

Period CostsNonmanufacturing Costs(Go straight to Income Statement)

Illustration 1-4

Cost of Goods Manufactured Schedule

ABC COMPANYCost of Goods Manufactured Schedule

For the Year Ended December 31, 2013

Opening inventory $ 18,400Direct materials

Raw materials inventory, January 1 $ 16,700 Raw materials purchases 152,500

Total raw materials available for use 169,200 Less: Raw materials inventory, December 31 22,800

Direct materials used $ 146,400Direct labor 175,600

Manufacuring overhead Indirect labor 14,300 Factory repairs 12,600 Factory utilities 10,100 Factory depreciation 9,440 Factory insurance 8,360

Total manufacturing overhead 54,800Total manufacuring costs 376,800Total cost of work in process 395,200Less: Work in process, December 31 25,200

Cost of goods manufactured $ 370,000

Job order cost accounting

Cost Accounting SystemsJob Order Cost Flow• Accumulating Manufacturing

Costs

• Assigning Manufacturing Costs to Work in Process

• Assigning Costs to Finished Goods

• Assigning Costs to Cost of Goods Sold

• Summary

JOB ORDER COST

ACCOUNTING

Process Cost System

Process costing accounts for and accumulates product-related costs for a period of time, as opposed to assigning costs to specific products or jobs.

Process Cost System: Compact Disc Production

Relatively similar products are produced over a specified time period.

1. Oil is pumped. 2. Benzene is removed.

3. The benzene is made into pellets...

4. ...from which compact discs are made.

Illustration 2-2

Process Cost System

Job Order Cost Flow

There are 2 major steps in the flow of costs:– accumulating the manufacturing costs incurred

and– assigning the accumulated costs to the work

done.

Job Order Cost Accounting System

Flow of CostsFlow of Costs

Accumulation Assignment1. Purchase raw materials 4. Raw materials are used2. Incur factory labor 5. Factory labor is used3. Incur manufacuring 6. Overhead is applied

overhead 7. Completed goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:

Factory Labor(2) 32,000 (5) 32,000

Raw Materials Inventory(1) 42,000 (4) 30,000Bal. 12,000

Manufacturing Overhead(3) 13,800 (6) 22,400(4) 6,000(5) 4,000Bal. 1,400

Finished Goods Inventory(7) 39,000 (8) 39,000

Work in Process Inventory(4) 24,000 (7) 39,000(5) 28,000(6) 22,400Bal. 35,400

Cost of Goods Sold(8) 39,000

7

5

84

6

Illustration 2-4

Job Cost Sheet

• A separate job cost sheet is kept for each job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account.

• Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

Job Cost SheetJob No. _________________________________ Quantity ________________________________Item ___________________________________ Date Requested __________________________For ____________________________________ Date Completed __________________________

Direct Direct ManufacturingDate Materials Labor Overhead

Cost of completed job Direct materials $ Direct labor Manufacturing overheadTotal cost $

Unit cost (total dollars ÷ quantity) $

Job Cost Sheet

A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit cost of the completed job. Postings to job cost sheets are made daily.

Illustration 2-6

Assigning Manufacturing Costs to Work in Process

Raw materials costs are assigned to

jobs when the materials are issued by the

storeroom.

Bob Kadler

M.Cher

Time Ticket

Labor costs are assigned to jobs on the basis of time tickets. The time ticket should indicate the employee, the hours worked, the account and job to be charged, and the total labor cost.

Illustration 2-10

Estimated Annual Overhead Costs

Expected Annual Operating Activity÷ = Predetermined

Overhead Rate

Predetermined Overhead Rate

XActivity Base Predetermined Overhead Rate

is assigned

to

Work in Process

Job 1 Job 2 Job 3

Using Predetermined Overhead Rates

Illustration 2-13

Completed Job Cost Sheet

When a job is completed, the manufacturing costs are summarized and the lower portion of the applicable job cost sheet is completed. • If Job No. 101 is completed on January 31, the job cost sheet will be as shown to the right.

Illustration 2-16

Journalizing Finished Goods

The entry to transfer the cost of the completed job from Work in Process Inventory to Finished Goods Inventory for Wallace Manufacturing Company is:

Date Account Titles and Explanation Debit Credit

(7)

Jan. 31 Finished Goods Inventory

Work in Process Inventory

(To record completion of Job No. 101)

39,00039,000

JournalizingCost of Goods Sold

• On January 31 Wallace Manufacturing Company sells Job No. 101 (costing $39,000) for $50,000 on account. The entries are:

Date Account Titles and Explanation Debit Credit(8)

Jan. 31 Accounts Receivable Sales (To record sale of Job No. 101)

31 Cost of Goods Sold Finished Goods Inventory (To record cost of Job No. 101)

50,00050,000

39,00039,000

Flow of Documents

Materials Requisition Slips

Labor Time Tickets

Predetermined Overhead Rate

Job Cost Sheet

Jobs Are Charged Through

Cost of Jobs is Summarized on a

Job Order Cost System Flow Of Documents

The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Jobs completed are transferred to Finished Goods to await sale.

Illustration 2-18b