Managerial accounting


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  • Dear, Beloved in God l am interested to your art work please read my message bellow and get back to me,
    I am Mrs. Sarah Williams from France But I married to late Mr. Mark Williams in Ghana West Africa after our marriage for quite 11years we couldn’t produce any child. And my late husband was an international business man, may his soul rest in peace. Before his death two years ago
    I have been suffering from cancer of breast, which have took me so much money and nothing was done to cure it after all the treatment I have been taking, to my greatest surprise some days ago my doctor told me that I may not live more than two months and die as the result of the sickness. And We deposit the amount of $20.Million US dollars in one of the International Security Company Bank here in Ghana West Africa for our business investment before my late husband died, And I have donated part of this money to less privileges like poor widows, orphans disables and build churches in AMERICA ,EUROPEAN AND AFRICA AND ASIA.
    But now I decided to donate this amount $4.5Million US Dollars for the help of the less privileges ,poor widows, orphans disables and build churches in your country As result of my short stay on earth, since we couldn’t produce any child to inherit the money as next of kin and our properties now I was touched in spirit to donate the money to you for the good work of God despite that you are an Artist and we have never see each other before but God know the reason why he chosen you to handle this project for him because through your help to me the poor and others in needs will be save and survived and your Artist business will be establish because I am willing and ready to give you 25% of the money after the security company transfer the money to you in your country. So if you are interested to help me as God chosen you , please send me your contact details ,Your Home address or your office address together with your photos and telephone number so that I will know who you are very well and send my own details to you to me know me and after that I will introduce you to the Bank where my late husband deposited the fund and I will give them other to transfer this fund direct to you in your country for the God project .
    Am looking forward to your prompt reply (

    Mrs. Sarah Williams.
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Managerial accounting

  1. 1. Managerial Accounting:Concepts and Principles
  2. 2. OutlineWhat is managerial accounting?Comparison between managerial accounting and financial accountingCost classifications in different waysFlow of manufacturing activitiesJob order cost accounting systems and process cost accounting systemsCost allocation 2
  3. 3. Introduction The previous presentations focus on the financial accounting topics Please summarize the basic points of financial accounting →Users/ Time focus/ Emphasis/ Importance/ Subject focus/ Requirements Thinking →Is the information provided by financial accounting enough for an enterprise to conduct its operation and management? →If not, how to satisfy this demand for the internal used information? →Have you ever heard ―managerial accounting‖? 3
  4. 4. What is Managerial Accounting?An activity that provides financial and nonfinancial information to managers and other internal decision makersIs quite important to planning, control, and decision making activities 4
  5. 5. The Environment of Managerial Accounting Complexity and size of organizations Regulatory Emphasisenvironment on quality Environment of Managerial Accounting Competition Development of technology 5
  6. 6. Managerial Accounting and Financial Accounting Financial Managerial Accounting Accounting1. Users Investors, creditors, and Managers, employees, and other external users other internal users2. Time focus Historical perspective Future emphasis3. Emphasis Objectivity and Relevance Verifiability for planning and control4. Importance Precision of information Timeliness of information5. Subject focus Summarized data for Detailed segment reports the whole organization of an organization6. Requirements Structured and often Relatively flexible controlled by GAAP (no GAAP) 6
  7. 7. Cost ClassificationsCosts can be classified by: Relevance Behaviour Controllability Traceability Function 7
  8. 8. Costs Classification by Relevance Relevant  If costs influence a decision →Costs that are applicable to a particular decision. →Costs that should have a bearing on which alternative a manager selects. →Costs that are avoidable. →Future costs that differ between alternatives. Irrelevant  If costs do not influence a decision 8
  9. 9. Costs Classification by Relevance Sunk Costs All costs incurred in the past that cannot be changed by any decision made now or in the future. should not be considered in decisions. Irrelevant Example: You bought an automobile that cost $30,000 two years ago. The $30,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $30,000 cost. 9
  10. 10. Costs Classification by Relevance Out-of-pocket costs  require future outlays of cash  associated with a particular decision  relevant for future decisions  Example: Considering the decision to take a vacation or stay at home, if you choose a vacation, you will only have travel costs (out-of- pocket costs). 10
  11. 11. Costs Classification by RelevanceOpportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college or university, you could be earning $25,000 per year. Your opportunity cost of attending college or university for one year is $25,000. 11
  12. 12. Costs Classification by BehaviorCost behavior refers to how a cost will react to changes in the level of business activity.Fixed costs do not change when activity changes.Variable costs change in proportion to changes in the volume of activity 12
  13. 13. Costs Classification by Behavior Total fixed costs remain unchanged when activity changes within a relevant range. Fixed costs per unit decline as activity increases. Fixed costs per unit Total fixed costs Volume of Activity Volume of Activity 13
  14. 14. Costs Classification by BehaviorTotal variable costs change when activity changes.Variable costs per unit do not change as activityincreases. Variable costs per unit Total variable costs Volume of activity Volume of activity 14
  15. 15. Costs Classification by Behavior Mixed costs contain a combination of fixed and variable costs. Total Compensation Variable Sales Commissions Fixed Monthly salary Sales 15
  16. 16. Costs Classification by Behavior Step-Wise Costs remain fixed over limited ranges of volumes but increase by a lump sum when volume increases beyond maximum amounts. Example: additional production supervisors must be added when another shift is added. Supervisory Salaries Production Volume 16
  17. 17. Costs Classification by ControllabilityControllable vs. not controllable depends upon the employee’s responsibilities. Example: A lower level manager may have control over overtime costs but not over the purchase of high-cost machinery. 17
  18. 18. Costs Classification by TraceabilityManagement often traces costs to cost objects To obtain a better measure of their total cost Cost objects include →Products →Services →Departments →Divisions →Customer groups 18
  19. 19. Costs Classification by TraceabilityTraceable costs are classified as Direct costs →can be conveniently traced to a unit of product or other cost objective. →Examples: salaries of production workers, salary of maintenance department employees. Indirect costs →must be allocated to a unit of product or other cost objective. →Examples: factory rent, factory light and heat, factory accounting costs. 19
  20. 20. Costs Classification by FunctionManufacturing Costs are necessary and integral to the production of finished goods. Examples: direct labour, direct materials, and manufacturing overhead.Non-Manufacturing Costs are not integral to the manufacture of finished goods. Examples: selling and administrative expenses. 20
  21. 21. Costs Classification by Function Direct Direct Manufacturing Material Labour Overhead Manufacturing Costs 21
  22. 22. Costs Classification by Function Direct materials Materials that are clearly and easily identified with a particular product. Example: Steel used to manufacture an automobile Direct labour Labour costs that are clearly traceable to, or readily identifiable with, the finished product. Example: Wages paid to an automobile assembly worker. 22
  23. 23. Costs Classification by FunctionManufacturing overhead All manufacturing costs except direct material and direct labour. Manufacturing costs that cannot be traced directly to specific units produced. Examples: →Indirect labour – maintenance →Indirect material – cleaning supplies →Factory utility costs →Supervisory costs 23
  24. 24. Costs Classification by Function Manufacturing costs are often combined as follows: Direct Direct ManufacturingMaterial Labour Overhead Prime Conversion Cost Cost 24
  25. 25. Costs Classification by FunctionNon-Manufacturing costs (period costs) are expenses not charged to the product. Selling Costs →Costs incurred to obtain customer orders and to deliver finished goods to customers —advertising and shipping. Administrative Costs →Non-manufacturing costs of staff support and administrative functions —accounting, data processing, personnel, research and development. 25
  26. 26. Discussions ABC company manufactures a portable radio designed for mounting on the wall of the bathroom. The following list represents some of the different types of costs incurred in the manufacture of these radios: 1. The plant managers salary. 2. The cost of heating the plant. 3. The cost of heating executive offices. 4. The cost of printed circuit boards used in the radios. 5. Salaries and commissions of company salespersons. 26
  27. 27. Discussions6. Depreciation on office equipment used in the executive offices.7. Depreciation on production equipment used in plant.8. Wages of janitorial personnel who clean the plant.9. The cost of insurance on the plant building.10. The cost of electricity to light the plant.11. The cost of electricity to power plant equipment.12. The cost of maintaining and repairing equipment in the plant.13. The cost of printing promotional materials for trade shows.14. The cost of solder used in assembling the radios.15. The cost of telephone service for the executive offices. 27
  28. 28. DiscussionsRequired: Classify each of the items above as product cost or period costs. 28
  29. 29. Discussions: the answer1 Product 6 Period 11 Product2 Product 7 Product 12 Product3 Period 8 Product 13 Period4 Product 9 Product 14 Product5 Period 10 Product 15 Period 29
  30. 30. Flow of Manufacturing Activities Materials Activity Production Activity Marketing Activity (raw materials) (goods in process) (finished goods) Goods in Process Raw Materials Finished Goods Beginning Inventory Beginning Inventory Beginning Inventory Raw Materials Used Raw Materials Goods Purchases Manufactured Direct Labour Used Factory Overhead UsedFinancial Reports Raw Materials Goods in Process Finished Goods Cost of Goods Ending Inv. Ending Inv. Ending Inv. Sold (income statement) (balance sheet) (balance sheet) (balance sheet) 30
  31. 31. Job Order Cost Accounting SystemsJob Order Cost Accounting Systems The production of products in response to special orders. quite flexible in the number of products they can produce. →Jobs involving the production of more than one unit of product are called job lots. 31
  32. 32. Job Order Cost Accounting Systems DirectMaterials Indirect Factory Allocate Goods in Completed FinishedOverhead Process Goods Indirect Delivered Cost of Direct Labour Goods Sold 32
  33. 33. Job Order Cost Accounting Systems DirectMaterials Finished Cost per unit Job No. 1 for Job No. 1 Goods Direct Labour Finished Cost per unit Job No. 2 for Job No. 2 Goods FactoryOverhead 33
  34. 34. Process Cost Accounting SystemsProcess Cost Accounting Systems Used for production of small, identical, low- cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product. 34
  35. 35. Process Cost Accounting Systems DirectMaterials Finished Process 1 Process 2 Goods Direct Labour Cost per Cost per Total cost equivalent equivalent per Factory unit for unit for equivalentOverhead Process 1 Process 2 unit 35
  36. 36. Process Cost Accounting SystemsUnit cost To determine the cost of goods transferred from department to department and to finished goods, we need to calculate unit cost. Unit cost is computed by dividing the accumulated costs by the number of equivalent units produced in the period. Cost per Product costs for the period equivalent unit = Equivalent units for the period 36
  37. 37. Process Cost Accounting SystemsCosts are accumulated for a period of time by process or department.Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Example: Three one-third full pitchers are equivalent to one full pitcher. Equivalent units may be different for material and labour and overhead at different stages of a process. 37
  38. 38. Comparing Job Order and Process ProductionSimilarities Same objective →to determine the cost of products Same inventory accounts →raw materials, goods in process, and finished goods Same overhead assignment method →predetermined rate times actual activity 38
  39. 39. Comparing Job Order and Process Production Differences Job Order Systems  Process Systems Custom orders Repetitive production Heterogeneous Homogeneous offerings products High output volume Low output volume Low product flexibility High flexibility High standardization Low to medium standardization 39
  40. 40. Cost Allocation Methods of Overhead Cost Allocation Plant-wide Overhead Rate Low Complexity Two-stage Cost Allocation Activity-based Costing High 40
  41. 41. Cost AllocationPlant-wide Overhead Rate A single plant-wide overhead rate is relatively easy to use but may result in inaccurate product costs 41
  42. 42. Cost AllocationTwo-stage Cost Allocation more accurate method than plant-wide Stage 1: Allocate service department costs to production departments. Service department costs are assigned to operating (or production) departments. Stage 2: Allocate production department costs to cost objects. Costs accumulated within operating (or production) departments are assigned to cost objects. 42
  43. 43. Cost Allocation Service Departments Janitorial Maintenance Factory AccountingStage 1 Machining Assembly Department DepartmentStage 2 Job 236 Job 237 Job 238 43
  44. 44. Cost AllocationActivity-based Costing Attempts to better allocate costs to the desired cost objects by focusing on activities consumed by the cost objects. Many activities within a department drive overhead costs. →Products require activities. →Activities consume resources. 44
  45. 45. Cost Allocation Activity-based Costing: Procedures  Identify activities that consume resources.  Assign costs to a cost pool for each activity.  Identify cost drivers associated with each activity.  Compute overhead rate for each cost pool. Estimated overhead costs in activity cost poolRate = Estimated number of activity units Allocate overhead cost: Overhead × Actual Rate Activity 45
  46. 46. Cost Allocation Activity-based Costing: Identifying Cost Drivers Most cost drivers are related to either volume or complexity of production. Examples: purchasing, invoicing, quality inspection, product design. Three factors in choosing a cost driver: → Causal relationship → Benefits received → Reasonableness. 46
  47. 47. Cost AllocationActivity-based Costing: Cost and Cost Driver Cost Cost DriverMaterials purchasing Number of purchase ordersMaterials handling Number of materials requisitionsPersonnel Number of employeesEquipment amortization Number of products produced or hours of useQuality inspection Number of units inspectedIndirect labour in setting up Number of setups requiredequipment 47
  48. 48. Cost AllocationActivity-based Costing: Benefits More detailed measures of costs Better understanding of activities More accurate product costs for . . . →Pricing decisions →Product elimination decisions →Managing activities that cause costs Benefits should always be compared with costs of implementation 48
  49. 49. Summary Managerial accounting is quite important to planning, control, and decision making activities. Managerial accounting and financial accounting are different in users, time focus, requirements, etc. Costs can be classified by relevance, behavior, controllability, traceability, and function. Flow of manufacturing activities. Similarities and differences between job order and process cost accounting systems The methods of cost allocation: plant-wide overhead rate, two stage cost allocation, activity-based costing 49