principles of accounting chapter 16 ppt

Copyright © 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Management AccountingManagement AccountingA Business PartnerA Business Partner

Chapter 16

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Accounting system s help to identifyw ho has authority over assets.

Accounting inform ation supportsplanning and decision-making.

Accounting reports provide a means ofm onitoring, evaluating, and rew arding performance.

M anag em en t accou ntin g andass ig n ing dec isio n-m ak ing auth ority.

Management Accounting:Management Accounting:Basic FrameworkBasic Framework

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Management Accounting Management Accounting System FrameworkSystem Framework

Budget Plans: Future

Budget Plans: Future

Top ManagementTop Management

AssignDecision Making

AssignDecision Making

Actual Results:Current

Actual Results:Current

SupportDecision Making

SupportDecision Making

PerformanceEvaluation: Past

PerformanceEvaluation: Past

EvaluateDecision Making

EvaluateDecision Making

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Demand for Accounting Demand for Accounting InformationInformation

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The cost to produce a unit of product includes:

Direct materialDirect laborManufacturing overhead

Accounting for Accounting for Manufacturing OperationsManufacturing Operations

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Raw materials & component

parts that become an

integral part of finished products.

Can be traced directly and conveniently to products.

Direct MaterialsDirect Materials

If materials cannot be traced directly to products, the materials are considered indirect and are part

of manufacturing overhead.

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Includes the payroll cost of direct workers.

Direct LaborDirect Labor

Those employees who work directly

on the goods being manufactured.

The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.

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All manufacturing costs other than direct materials and direct labor.

Includes: Indirect materials. Indirect labor.Machinery and equipment

costs.Cost of regulatory

compliance.

Manufacturing OverheadManufacturing Overhead

Does not include selling or general

and administrative expenses.

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Direct Materials

Purchased

Direct Materials

Used

Direct Labor

Manufacturing Overhead

Finished Goods

Goods Sold

MegaLoMart

Flow of Physical Goods in Flow of Physical Goods in ProductionProduction

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DirectMaterials

DirectMaterials

DirectLaborDirectLabor

PrimeCost

ConversionCost

Manufacturing costs are oftencombined as follows:



Flow of Physical Goods in Flow of Physical Goods in ProductionProduction

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Balance Sheet

Current assets and finished

goods inventory

Product Costs (manufacturing

costs)

Income Statement

RevenueCOGSGross marginPeriod expensesOperating profit

When goods

are sold

as incurred

Period Costs (operating

expenses and income taxes)

as incurred

Product Costs versus Period Product Costs versus Period CostsCosts

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Ethics, Fraud, and Ethics, Fraud, and Corporate GovernanceCorporate Governance

Product costs are capitalized as part of inventory and only charged to expense

when the inventory is sold.

Income will be artificially inflated if period costs are capitalized.

Period costs are chargedto expense as incurred.

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Raw materials - inventory on hand and available for use.

Work in process - partially

completed goods.

Finished goods-

completed goods awaiting

sale.

Inventories of a Inventories of a Manufacturing BusinessManufacturing Business

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Direct materials

purchased

Materials Inventory

$$$ $$$

Flow of Costs Associated Flow of Costs Associated With ProductionWith Production

Direct materials

used

Work in Process Inventory

$$$ $$$

Direct labor &Manufacturing Overhead

Cost of goods manufactured

Finished Goods Inventory

$$$ $$$

Cost of Goods Sold

$$$

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Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, of this year. During the year, Pure-Ice

purchased $586,000 of additional direct materials. At December 31 of this year $78,000 of the direct materials were still

on hand.How much direct material was placed into production during

the year?

Accounting for Accounting for Manufacturing CostsManufacturing Costs

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?


?

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!


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In addition to the direct materials, Pure-Ice incurred $306,000 of direct labor cost during the year. Manufacturing overhead

for the year was $724,000.Pure-Ice started the year with $132,000 in work in process. During the year, units costing $1,480,000 were transferred to

finished goods inventory.What is the balance in work in

process at the end of the year?


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!


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Direct costsCosts that can be

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

Examples: direct material anddirect labor

Indirect costsCosts cannot be

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

Example: manufacturing overhead

Direct Costs and Indirect Direct Costs and Indirect CostsCosts

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A schedule of the cost of finished goods manufactured is

prepared to provide managers with an

overview of manufacturing

activities during a period.

Determining the Cost of Determining the Cost of Finished Goods Finished Goods ManufacturedManufactured

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The cost of goods completed during the period is used to compute COGS

for the period.

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Financial Statements of a Financial Statements of a Manufacturing CompanyManufacturing Company

Income Statement

Balance Sheet

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The income statement is prepared using established financial accounting procedures.

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Manufacturers have three inventory accounts.

Financial Statements of a Financial Statements of a Manufacturing CompanyManufacturing Company

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End of Chapter 16End of Chapter 16