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  • In presentations for each chapter in this text, we will provide you with sound to go along with the material on your screen. There will be sound on every slide you view. Please make sure your computer speakers are setup properly when viewing the material. Good luck and we hope you enjoy this new format.
  • Previous chapters focused on the financial accounting system, whose main purpose is to prepare general-purpose financial statements. However, this information is incomplete for internal decision makers who manage organizations. This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information.
  • The purpose of both managerial and financial accounting is providing useful information to decision makers. Both areas of accounting report monetary information, although managerial accounting includes the practice of reporting non-monetary information. The focus of managerial and financial accounting are different, however.
  • Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.
  • Managers often need different cost classifications for different decisions. We will discuss each of these types of cost classifications individually.
  • Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.
  • Cost objects may be products, services, departments, or customers to which costs are assigned
  • Managers at higher levels in the organization have a greater degree of control over costs than do managers at lower levels in the organization. Classifying costs by controllability is an important part of assigning cost, responsibility, and evaluating a manager’s cost control performance.
  • Costs can be classified by relevance by identifying it as a sunk cost or an out-of-pocket cost
  • Out of pocket costs require a future outlay of cash and should be considered in decisions.
  • Opportunity costs are always relevant to a selection decision.
  • Product costs are incurred to manufacture a product. Product costs are not expensed as they are incurred. Instead, they are assigned to inventory and do not become expenses until the product is sold. Inventory is reported at cost as an asset on the balance sheet.
  • Direct materials can be separately and readily traced to the individual units of product being manufactured. Direct materials are sufficiently significant in amount to justify the separate tracing. Direct materials that are used in production become product expenses and flow to the income statement, while any direct materials still on hand are considered inventory costs on the balance sheet.
  • Direct labor is the effort of employees who actually convert materials into a finished product. Direct labor costs are the wages of direct labor employees. Direct labor costs can be separately and readily traced to the individual units of product being manufactured.
  • Factory overhead is all manufacturing costs other than direct material and direct labor. Factory overhead costs are indirect manufacturing costs that support the major manufacturing activities. As indirect costs, they cannot be separately and readily traced to the individual units of product.
  • Manufacturers carry several unique assets and usually have three inventory accounts instead of the single inventory that merchandisers carry. The three inventory accounts are raw materials, goods in process, and finished goods. The accounting for these inventories can be a little bit more tricky because of the nature of the operations of a merchandiser. Period costs, like selling and administrative expenses are still expensed in the period incurred. Take a close look at the flow of costs for a manufacturer from start to finish. We suggest you come back to this slide again to review. Starting on the left side of this flow chart of costs, we see that costs incurred are categorized as either period costs or product costs. Period costs flow directly to the current year’s income statement as they are expensed in the period incurred. Product costs are first assigned to the inventory account. Later, when the inventory is sold, product costs flow from the inventory account to cost of goods sold on the income statement for the year in which the products are sold.
  • Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials. Remember that merchandisers typically have only one type of inventory, whereas manufacturers generally have at least three types of inventory accounts.
  • Direct labor and direct material are called the prime costs of manufacturing. Direct labor and manufacturing overhead are called conversion costs.
  • The finished goods inventory of a manufacturer is the equivalent of a merchandiser’s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.
  • The inventory cost flows are similar for both merchandisers and manufacturers. Beginning inventory plus additions equals goods available for sale. Subtracting ending inventory from goods available for sale results in cost of goods sold.
  • Starting on the left side of this flow chart, we see that material purchases are combined with the materials beginning inventory. Materials are then either used or they remain in inventory. In the center portion of the flow chart, we see the materials being used are combined with labor, overhead, and the goods in process beginning balance. As goods are finished, they are transferred out of the goods in process inventory account into the finished goods inventory account. The cost of the goods finished in the period is called cost of goods manufactured. Finished goods are either sold, called cost of goods sold, or they remain in the finished goods inventory account.
  • The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.
  • The information for Rocky Mountain Bikes is taken from your textbook. Here you see the manufacturing statement for Rocky Mountain Bikes in a highly summarized form. We will build each of the major parts of the statement starting with materials.
  • Material purchases for the current year are added to the beginning balance of materials inventory. The beginning balance of materials inventory for the current year is the ending balance of materials inventory from last year. Materials are either used or they remain in inventory. Subtracting the amount of materials on hand in inventory at the end of the year results in the cost of materials used for the current year.
  • Direct labor costs are the wages of direct labor employees who actually convert materials into a finished bike.
  • Factory overhead costs are indirect manufacturing costs that support the manufacturing activities. The eight factory overhead items in this example, totaling thirty thousand dollars, are commonly encountered in many manufacturing companies.
  • Total manufacturing costs for the current period are added to the beginning balance of goods in process. The beginning balance of goods in process for the current year is the ending balance of goods in process from last year.
  • Subtracting the ending balance of the goods in process account from the total cost of goods in process results in the cost of goods manufactured for the current year. Cost of goods manufactured is cost of goods completed and transferred to finished goods for the current year.
  • Changes in business environments can be rapid. The increased emphasis on customers is pivotal to success and has become one of the most important constituents of common business practices. Such Lean business practices include total quality management and just-in-time manufacturing. Continuous improvement rejects the notion of “good enough” or “acceptable” and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.
  • Total quality management focuses on quality improvement and applies this standard to all aspects of business activities. Awards such as the Malcolm Baldrige National Quality Awards encourage an emphasis on quality.
  • A just-in-time manufacturer acquires inventories and produces goods only when needed. Companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customer’s requirements on time.
  • A just-in-time system is one that acquires inventories and produces only when needed. It is based on a demand-pull system. There are advantages and disadvantages. This system can create a value chain and can increase efficiencies and profit.
  • As newer manufacturing practices help companies become leaner and more profitable, it is important for companies to asses how well they are reducing manufacturing time and increasing efficiency. Two measures which help them gauge their progress are called cycle time and cycle efficiency. Take a moment to look at the components that make up cycle time. Of these items, the only value added activity is the process time. Companies strive to reduce non-value added time to improve the cycle efficiency or CE ratio. If a company has a ratio of 1, it means that the time is spent only on value added activities. If the CE is low, then the company should evaluate its production process to see if can reduce non-value added activities.
  • Fraud, and the role of ethics in reducing fraud, are important factors in running business operations. The most common type of fraud, where employees steal or misuse the employer’s resources results in an average loss of $175,000 per occurrence. The frequency and the cost of fraud has increased over they years. There are many types of fraud. In all cases, fraud increases a business’s costs.
  • Combating fraud and other dilemmas requires ethics in accounting. Identifying the correct ethical path can be difficult. The preferred path is a course of action that avoids casting doubt on one’s decisions. A code of ethical belief’s can be used to resolve ethical conflicts.
  • Now that we have mastered some of the basic concepts and principles of managerial accounting, we are ready to put this knowledge to work.

Transcript

  • 1. Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
  • 2. Chapter 14 Managerial Accounting Concepts and Principles
  • 3. Managerial accounting provides financial and non-financial information for managers of an organization and other decision makers Financial accounting provides general purpose financial information to those who are outside the organization. Managerial and Financial Accounting C 1 14-6
  • 4. 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 constraints) 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 14-7
  • 5. Behavior Traceability Controllability Relevance Function Managerial Cost Concepts C2 14-8
  • 6. Cost behavior means how a cost will react to changes in the level of business activity. Classification by Behavior C 2 A fixed cost does not change with changes in the volume of activity A variable cost changes in proportion to changes in the volume of activity A mixed cost refers to a combination of fixed and variable 14-9
  • 7. Direct costs  Costs traceable to a single cost object.  Examples: material and labor cost for a product. Indirect costs  Costs that cannot be traced to a single cost object.  Example: maintenance expenditures benefiting two or more departments. Classification by Traceability C 2 14-10
  • 8. The degree of control depends on the level of management in the organization. M ore Control MoreControl Very little control Classification by Controllability C 2 14-11
  • 9. All costs incurred in the past that cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost. Classification by Relevance: Sunk Costs C 2 14-12
  • 10. Classification by Relevance: Out-of-Pocket Costs C2 A cost that requires a future outlay of cash. Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future 14-13
  • 11. The potential benefit lost by choosing a specific action from two or more alternatives Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000. Classification by Relevance: Opportunity Costs C2 14-14
  • 12. The Product Classification by Function: Product Costs Direct Material Direct Labor Manufacturing Overhead C 3 14-15
  • 13. Direct Materials Materials that are separately and readily traced to a particular product. Direct Materials Materials that are separately and readily traced to a particular product. Example: Steel used to manufacture the automobile. Example: Steel used to manufacture the automobile. Direct Materials Used C5 14-20
  • 14. Direct Labor Labor costs that are separately and readily traced to finished product. Direct Labor Labor costs that are separately and readily traced to finished product. Example: Wages paid to an automobile assembly worker. Example: Wages paid to an automobile assembly worker. Income Statement of a Manufacturer C5 14-21
  • 15. Factory Overhead All manufacturing costs except direct material and direct labor Factory costs that cannot be separately or readily traced directly to products. Factory Overhead All manufacturing costs except direct material and direct labor Factory costs that cannot be separately or readily traced directly to products. Examples: Indirect labor – maintenance Indirect material – cleaning supplies Factory utility costs Supervisory costs Income Statement of a Manufacturer C5 14-22
  • 16. Period Costs (Expenses) Product Costs (Inventory) Inventory Not Sold in 2011 Operating Expenses Cost of Goods Sold Raw Materials Goods in Process Finished Goods Cost of Goods Sold 2011 Costs Incurred 2011 Income Statement 2012 Income Statement 2011 Balance Sheet Inventory Inventory Sold in 2011 Period and Product Costs in Financial Statements C3 14-16
  • 17. Completed products for sale. Materials waiting to be processed. Can be direct or indirect. Partially complete products. Material to which some labor and/or overhead have been added. Balance Sheet of a Manufacturer Raw Materials Finished Goods Goods in Process C 4 14-17
  • 18. Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often combined as follows: Income Statement of a Manufacturer C5 14-23
  • 19. Beginning Merchandise Inventory Beginning Finished Goods Inventory Cost of Goods Purchased Cost of Goods Manufactured Ending Merchandise Inventory Ending Finished Goods Inventory Cost of Goods Sold Merchandiser Manufacturer + _ + == _ The major difference Income Statement of a Manufacturer C4 14-18
  • 20. Manufacturing Company Cost of goods sold: Beg. finished goods inv. $11,200 + Cost of goods manufactured 170,500 = Goods available for sale 181,700 - Ending finished goods inventory (10,300) = Cost of goods sold 171,400$ 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$ Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Income Statement of a Manufacturer P1 14-19
  • 21. Finished Goods Beginning Inventory Cost of Goods Manufactured Finished Goods Ending Inventory Raw Materials Beginning Inventory Raw Materials Purchases Raw Materials Ending Inventory Cost of Goods Sold Goods in Process Beginning Inventory Direct Labor Factory Overhead Raw Materials Used Sales activityProduction activityMaterials activity Flow of Manufacturing Activities Goods in Process Ending Inventory C5 14-24
  • 22. Summarizes the types and amounts of costs Incurred in a company’s manufacturing process. Direct Materials Used + Direct Labor + Factory Overhead = Total Manufacturing Costs + Beginning Work in Process – Ending Work in Process = Cost of Goods Manufactured Manufacturing Statement P2 14-25
  • 23. ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2011 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$ P2 Manufacturing Statement 14-26
  • 24. ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2011 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$ 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 14-27
  • 25. ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2011 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$ Include all direct labor costs incurred during the current period. P2 Manufacturing Statement 14-28
  • 26. ROCKY MOUNTAIN BIKES Manufacturing Statement 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$ Manufacturing Statement 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 14-29
  • 27. ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 2009 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$ Beginning work in process inventory is carried over from the prior period. P2 Manufacturing Statement 14-30
  • 28. ROCKY MOUNTAIN BIKES Manufacturing Statement For Year Ended December 31, 20009 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$ Ending work in process inventory contains the cost of unfinished goods, and is reported in the current assets section of the balance sheet. P2 Manufacturing Statement 14-31
  • 29. Lean Practices Customer Orientation in a Global Economy C 6 14-32
  • 30. on Quality improvement applied to all aspects of business activities. Seek and uncover waste. Employees encouraged to try new methods to improve quality. Company emphasizes value of quality through quality awards. Total Quality Management C 6 14-33
  • 31. Complete products just in time to ship to customers. Complete parts just in time for assembly into products. Receive materials just in time for production. Schedule production. Receive customer orders. Just-In-Time (JIT) Manufacturing C 6 14-34
  • 32. Just-In-Time (JIT) Manufacturing C 6 To accomplish just-in-time manufacturing: Processes must be aligned to eliminate delays and inefficiencies Companies must establish good relations with suppliers 14-35
  • 33. Cycle Time and Cycle Efficiency A1 14-36
  • 34. Fraud in Accounting  Fraud is the use of one’s job for personal gain through the deliberate misuse of the employer’s assets.  It is estimated that 7% of annual revenues are lost to fraud.  All fraud is committed to provide direct or indirect benefit to the perpetrator, violates the employee’s duty to his/her employer, costs the employer money, and is carried out in secret. C 1 14-37
  • 35. Ethics in Accounting  Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior.  The IMA’s Statement of Ethical Professional Practice requires management accountants to be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner.  The Sarbanes-Oxley Act requires each issuer of securities to disclose whether it has adopted a code of ethics for its senior officers and the content of that code. C 1 14-38
  • 36. End of Chapter 14 14-39