principles of accounting/ financial and managerial accounting chapter 16

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© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Management Accounting: A Business Partner Chapte r 16

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Page 1: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Management Accounting:A Business Partner

Chapter

16

Page 2: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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

Accounting inform ation supportsplanning and decision-m aking.

Accounting reports provide a m eans ofm onitoring, evaluating, and rew arding perform ance.

M anagem ent accounting andass igning dec is ion-m ak ing authority.

Management Accounting:Basic Framework

Management Accounting:Basic Framework

Page 3: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Comparing Financial Accounting and Management Accounting

Comparing Financial Accounting and Management Accounting

Page 4: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Cost of goods sold.

Cost of goods sold.

Direct labor and manufacturing

overhead costs.

Direct labor and manufacturing

overhead costs.

Direct materials

costs.

Direct materials

costs.

Steps in the Manufacturing Process:

Convert raw materials into

finished goods.

Convert raw materials into

finished goods.

Sell finished goods.

Sell finished goods.

Accounting for Manufacturing Operations

Accounting for Manufacturing Operations

Buy raw materials.

Buy raw materials.

Page 5: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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.

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

of manufacturing overhead.

Page 6: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Includes the payroll cost of direct workers.Includes the payroll cost of direct workers.

Direct LaborDirect Labor

Those employees who work directly

on the goods being

manufactured.

Those employees who work directly

on the goods being

manufactured.

Page 7: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Includes the payroll cost of direct workers.Includes the payroll cost of direct workers.

The cost of employees who do

not work directly on the goods is

considered indirect labor and is part of

manufacturing overhead.

The cost of employees who do

not work directly on the goods is

considered indirect labor and is part of

manufacturing overhead.

Direct LaborDirect Labor

Those employees who work directly

on the goods being

manufactured.

Those employees who work directly

on the goods being

manufactured.

Page 8: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

All manufacturing costs other than direct materials and direct labor.

All manufacturing costs other than direct materials and direct labor.

Includes:Indirect materials.Indirect labor.Machinery and

equipment costs.Cost of regulatory

compliance.

Includes:Indirect materials.Indirect labor.Machinery and

equipment costs.Cost of regulatory

compliance.

Manufacturing OverheadManufacturing Overhead

Page 9: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

All manufacturing costs other than direct materials and direct labor.

All manufacturing costs other than direct materials and direct labor.

Does not include selling or general

and administrative expenses.

Does not include selling or general

and administrative expenses.

Manufacturing OverheadManufacturing Overhead

Includes:Indirect materials.Indirect labor.Machinery and

equipment costs.Cost of regulatory

compliance.

Includes:Indirect materials.Indirect labor.Machinery and

equipment costs.Cost of regulatory

compliance.

Page 10: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The cost to produce a unit of product includes:

Direct materialDirect laborManufacturing overhead

The cost to produce a unit of product includes:

Direct materialDirect laborManufacturing overhead

Manufacturing OverheadManufacturing Overhead

Page 11: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The cost to produce a unit of product includes:

Direct materialDirect laborManufacturing overhead

The cost to produce a unit of product includes:

Direct materialDirect laborManufacturing overhead

Manufacturing OverheadManufacturing Overhead

Manufacturing overhead must be mathematically allocated to each unit of

product using a predetermined overhead

application rate.(This will be discussed later in this chapter.)

Manufacturing overhead must be mathematically allocated to each unit of

product using a predetermined overhead

application rate.(This will be discussed later in this chapter.)

Page 12: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Balance SheetBalance Sheet

Current assets and inventory

Current assets and inventory

Product Costs (manufacturing

costs)

Income Statement

Income Statement

RevenueCOGSGross profitExpensesNet income.

RevenueCOGSGross profitExpensesNet income.

When goods are sold.

When goods are sold.

as incurred

Period Costs (operating

expenses and income taxes.)

as incurred

Product Costs Versus Period CostsProduct Costs Versus Period Costs

Page 13: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Raw materials - inventory on hand and available for use.

Raw materials - inventory on hand and available for use.

Work in process - partially

completed goods.

Work in process - partially

completed goods.

Finished goods-

completed goods awaiting

sale.

Finished goods-

completed goods awaiting

sale.

Inventories of a Manufacturing Business

Inventories of a Manufacturing Business

Page 14: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Direct materials

purchased

Materials Warehouse

Finished goods

Finished goods Warehouse

Goods sold

Direct materials

used

Factory

Direct labor &Manufacturing overhead

The Flow of Physical GoodsThe Flow of Physical Goods

Page 15: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Direct materials

purchased

Direct materials

used

Cost of goods manufacturedCost of

Goods Sold

$$$

Materials Inventory

$$$ $$$

Finished Goods Inventory

$$$ $$$

Work in Process Inventory

$$$ $$$

The Flow of Manufacturing CostsThe Flow of Manufacturing Costs

Direct labor &Manufacturing overhead

Page 16: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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

2002. During the year, Pure-Ice purchased $586,000 of additional direct

materials. At December 31, 2002, $78,000 of the direct materials were still on hand.

How much direct material was placed into production during 2002?

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

2002. During the year, Pure-Ice purchased $586,000 of additional direct

materials. At December 31, 2002, $78,000 of the direct materials were still on hand.

How much direct material was placed into production during 2002?

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 17: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

?

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 18: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

!

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 19: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

In addition to the direct materials, Pure-Ice incurred $306,000 of direct labor cost during 2002. Manufacturing overhead for

2002 was $724,000.Pure-Ice started 2002 with $132,000 in work in process. During 2002, units

costing $1,480,000 were transfered to finished goods inventory.

What is the ending balance in work in process at December 31, 2002?

In addition to the direct materials, Pure-Ice incurred $306,000 of direct labor cost during 2002. Manufacturing overhead for

2002 was $724,000.Pure-Ice started 2002 with $132,000 in work in process. During 2002, units

costing $1,480,000 were transfered to finished goods inventory.

What is the ending balance in work in process at December 31, 2002?

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 20: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 21: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

!

The Flow of Manufacturing Costs Example

The Flow of Manufacturing Costs Example

Page 22: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The overhead application rate expresses an expected relationship between

manufacturing overhead costs and some activity base related to the production

process.

The overhead application rate expresses an expected relationship between

manufacturing overhead costs and some activity base related to the production

process.

Overhead Application RatesOverhead Application Rates

Page 23: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Overhead costs are estimated based on budgets and using mathematical

estimation techniques.

Overhead costs are estimated based on budgets and using mathematical

estimation techniques.

Overhead Application RatesOverhead Application Rates

Page 24: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The base is the activitiy that “drives” the cost, called the cost driver.

Direct labor hours and machine hours are commonly used cost drivers.

The base is the activitiy that “drives” the cost, called the cost driver.

Direct labor hours and machine hours are commonly used cost drivers.

Overhead Application RatesOverhead Application Rates

Page 25: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Big “T” Company produces engines for big trucks. Total

overhead for 2002 is estimated to be $2,600,000. Big “T” applies

overhead based on machine hours. Big “T” estimates machine hours

for 2002 to be 162,500 hours.Compute Big “T’s”

predetermined overhead rate for 2002.

Big “T” Company produces engines for big trucks. Total

overhead for 2002 is estimated to be $2,600,000. Big “T” applies

overhead based on machine hours. Big “T” estimates machine hours

for 2002 to be 162,500 hours.Compute Big “T’s”

predetermined overhead rate for 2002.

Overhead Application Rates Example

Overhead Application Rates Example

Page 26: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Overhead Application Rates Example

Overhead Application Rates Example

Page 27: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Overhead Application Rates Example

Overhead Application Rates Example

Page 28: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Some companies use different cost drivers for different manufacturing activities, a

process called ACTIVITY BASED COSTING.

Some companies use different cost drivers for different manufacturing activities, a

process called ACTIVITY BASED COSTING.

Overhead Application RatesOverhead Application Rates

Page 29: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

A schedule of the cost of finished goods manufactured is

prepared to assist managers in

understanding and evaluating the overall cost of manufacturing

products.

A schedule of the cost of finished goods manufactured is

prepared to assist managers in

understanding and evaluating the overall cost of manufacturing

products.

Determining the Cost of Finished Goods Manufactured

Determining the Cost of Finished Goods Manufactured

Page 30: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Page 31: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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

for the period.

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

for the period.

Page 32: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

The income statement is

prepared using

established financial

accounting procedures.

Page 33: Principles of Accounting/ Financial and Managerial Accounting Chapter 16

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

This is a great job, but the overhead is killing

my profit margin!

End of Chapter 16End of Chapter 16