Post on 22-Dec-2015
Accounting Principles, 5e Weygandt, Kieso, & Kimmel
Accounting Principles, 5e Weygandt, Kieso, & Kimmel
John Wiley & Sons, Inc.
Prepared byMarianne Bradford, Ph.D.
Bryant College
CHAPTER 20 MANAGERIAL ACCOUNTING
CHAPTER 20 MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:1 Explain the distinguishing features of
managerial accounting.2 Identify the 3 broad functions of management.3 Define the 3 classes of manufacturing costs.4 Distinguish between product and period costs.5 Explain the difference between a
merchandising and a manufacturing income statement.
CHAPTER 20 MANAGERIAL ACCOUNTING
CHAPTER 20 MANAGERIAL ACCOUNTING
After studying this chapter, you should be able to:
6 Indicate how cost of goods manufactured is determined.
7 Explain the difference between a merchandising and a manufacturing balance sheet.
PREVIEW OF CHAPTER 20PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Managerial Accounting Basics
Comparing managerial and financial accounting
Ethical standards
Management functions
Managerial Cost Concepts
Manufacturing costs
Product versus period costs
PREVIEW OF CHAPTER 20PREVIEW OF CHAPTER 20
MANAGERIAL ACCOUNTING
Manufacturing Costs in Financial Statements
Income statement
Balance sheet
Cost Concepts: a review
Contemporary Developments in Managerial Accounting
Service industry trends
Value chain management
STUDY OBJECTIVE 1STUDY OBJECTIVE 1
Explain the distinguishing features of managerial accounting.Explain the distinguishing features of 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.
The activities that are part of managerial accounting are as follows:
1 Explaining manufacturing and nonmanufacturing costs and how they are reported in the financial statements.
2 Computing the cost of providing a service or manufacturing a product.
3 Determining the behavior of costs and expenses as activity levels change and analyzing cost-volume-profit relationships within a company.
MANAGERIAL ACCOUNTING BASICS
MANAGERIAL ACCOUNTING BASICS
4 Assisting management in profit planning and formalizing these plans in the form of budgets.
5 Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and
standard costs.
6 Accumulating and presenting relevant data for management decision making.
MANAGERIAL ACCOUNTING BASICS
MANAGERIAL ACCOUNTING BASICS
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Primary Users of Reports
External users: stockholders, creditors, and regulatory.
Types and Frequency of Reports
Classified financial statements.
Issued quarterly and annually.
Purpose of Reports
General-purpose information for all users.
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Content of Reports
Pertains to business as a whole and is highly aggregated (condensed).
Limited to double-entry accounting system and cost data.
Reporting standard is generally accepted accounting principles.
Verification Process
Annual independent audit by certified public accountant.
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Primary Users of Reports
Internal users: officers, department heads, managers, and supervisors.
Types and Frequency of Reports
Internal reports.
Issued as frequently as needed.
Purpose of Reports
Special-purpose information for a particular user for a specific decision.
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
ILLUSTRATION 20-1 DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Content of Reports
Pertains to subunits of the entity and may be very detailed.
May extend beyond double-entry accounting system to any type of relevant data.
Reporting standard is relevance to the decision to be made.
Verification Process
No independent audits.
ETHICAL STANDARDS FOR MANAGERIAL ACCOUNTANTS
ETHICAL STANDARDS FOR MANAGERIAL ACCOUNTANTS
Managerial accountants recognize that they have an ethical obligation to their companies and the public.
The Institute of Management Accountants (IMA) has developed a code of ethical standards, entitled Standards of Ethical Conduct for Management Accountants.
This code divides the managerial accountant’s responsibilities into 4 areas:1 competence,2 confidentiality,3 integrity, and4 objectivity.
STUDY OBJECTIVE 2STUDY OBJECTIVE 2
Identify the three broad functions of management.Identify the three broad functions of management.
MANAGEMENT FUNCTIONS
MANAGEMENT FUNCTIONS
The management of an organization performs (3) broad functions:
1 Planning
2 Motivating and Directing
3 Controlling
MANAGEMENT FUNCTIONS PLANNING
MANAGEMENT FUNCTIONS PLANNING
Planning requires management to
1 look ahead and
2 establish objectives. A key modern management objective is to add
value to the business under its control. Value is usually measured by
1 the trading price of the company’s stock and
2 the potential selling price of the company.
MANAGEMENT FUNCTIONS ORGANIZING AND DIRECTINGMANAGEMENT FUNCTIONS ORGANIZING AND DIRECTING
Motivating and directing involves coordinating diverse activities and human resources to
produce a smooth-running operation. This function relates to implementing of
planned objectives. Most companies prepare organization charts to
show1 the interrelationship of activities and2 the delegation of authority and responsibility
within the company.
MANAGEMENT FUNCTIONS CONTROLLING
MANAGEMENT FUNCTIONS CONTROLLING
Controlling is the process of keeping the firm’s activities on track.
In controlling operations, managers determine1 whether planned goals are being met and2 when there are deviations from targeted objectives.
MANAGERIAL COST CONCEPTS
MANAGERIAL COST CONCEPTS
To perform the three management functions effectively, management needs information. One very important type of information is related to costs.
The following questions need answering:
1 What costs are involved in making the product or providing a service?
2 If production volume is decreased, will costs decrease?3 What impact will automation have on total costs?4 How can costs best be controlled?
STUDY OBJECTIVE 3STUDY OBJECTIVE 3
Define the three classes of manufacturing costs.Define the three classes of manufacturing costs.
MANAGERIAL COST CONCEPTS
MANAGERIAL COST CONCEPTS
Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing costs are usually classified as follows:
1 direct materials,2 direct labor, and3 manufacturing overhead.
ILLUSTRATION 20-2 CLASSIFICATIONS OF
MANUFACTURING COSTS
ILLUSTRATION 20-2 CLASSIFICATIONS OF
MANUFACTURING COSTS
DIRECT MATERIALS
DIRECT LABOR
MANUFACTURING OVERHEAD
MANUFACTURING COSTS DIRECT MATERIALS
MANUFACTURING COSTS DIRECT MATERIALS
Raw materials are the basic materials and parts that are to be used in the manufacturing process. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials.
Materials
MANUFACTURING COSTS INDIRECT MATERIALS
Some raw materials cannot be easily associated with the finished product. These are considered indirect materials – which are accounted for as part of manufacturing overhead and1 do not physically become part of the finished product or2 cannot be traced because their physical association with the finished product is too small in terms of cost.
MANUFACTURING COSTS DIRECT LABOR
MANUFACTURING COSTS DIRECT LABOR
Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
The wages of maintenance people, timekeepers, and supervisors are usually identified as indirect labor. Their efforts have no physical association with the finished product.
Like indirect materials, indirect labor is part of manufacturing overhead.
Factory Labor
MANUFACTURING COSTS MANUFACTURING OVERHEADMANUFACTURING COSTS
MANUFACTURING OVERHEAD Manufacturing overhead consists of costs that are indirectly
associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be
classified as direct materials or direct labor. Manufacturing overhead includes
1 indirect materials;2 indirect labor;3 depreciation on factory buildings and machines4 insurance, taxes, and maintenance on factory facilities.
Manufacturing Overhead
STUDY OBJECTIVE 4STUDY OBJECTIVE 4
Distinguish between product and period costs.Distinguish between product and period costs.
PRODUCT COSTS VERSUS PERIOD COSTS
PRODUCT COSTS VERSUS PERIOD COSTS
Product costs include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead); they are costs that are a necessary and integral part of producing the finished product. These costs are not expensed to cost of goods sold under the matching principle until the finished goods inventory is sold.
PRODUCT COSTS VERSUS PERIOD COSTS
Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product.
Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.
Period costs: a) are identifiable with a specific time period, b) relate to nonmanufacturing noninventoriable costs, and c) include selling and administrative expenses.
ILLUSTRATION 20-4 PRODUCT VERSUS PERIOD COSTSILLUSTRATION 20-4 PRODUCT VERSUS PERIOD COSTS
Prime Costs
Conversion Costs
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Period Costs
Selling Expenses
Administrative Expenses
{{{Manufacturing
Costs
{Nonmanufacturing Costs
STUDY OBJECTIVE 5STUDY OBJECTIVE 5
Explain the difference between a merchandising and a manufacturing income statement.
Explain the difference between a merchandising and a manufacturing income statement.
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
For a merchandiser, cost of goods sold is computed by adding the beginning merchandise inventory and the cost of goods purchased and subtracting the ending merchandise inventory.
For a manufacturer, cost of goods sold is computed by adding the beginning finished goods inventory and the cost of goods manufactured and subtracting the ending finished goods inventory.
COST OF GOODS SOLD COMPONENTS
COST OF GOODS SOLD COMPONENTS
Cost of Goods Sold
Manufacturer
Merchandiser
Beginning Merchandise
Inventory
Beginning Finished Goods
Inventory
Ending Merchandise
Inventory
Ending Finished Goods
Inventory
Cost of Goods Purchased
Cost of Goods Manufactured+
+ -
-
=
=
ILLUSTRATION 20-5 COST OF GOODS SOLD
COMPONENTS
ILLUSTRATION 20-5 COST OF GOODS SOLD
COMPONENTS
ILLUSTRATION 20-6 COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
ILLUSTRATION 20-6 COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
The cost of goods sold sections for merchandising and manufacturing enterprises that are presented illustrate the different presentations:
The cost of goods sold sections for merchandising and manufacturing enterprises that are presented illustrate the different presentations:
ILLUSTRATION 20-6 COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
ILLUSTRATION 20-6 COST OF GOODS SOLD SECTIONS OF
MERCHANDISING AND MANUFACTURING COMPANIES
STUDY OBJECTIVE 6STUDY OBJECTIVE 6
Indicate how cost of goods manufactured is determined.Indicate how cost of goods manufactured is determined.
ILLUSTRATION 20-7 COST OF GOODS MANUFACTURED
FORMULA
ILLUSTRATION 20-7 COST OF GOODS MANUFACTURED
FORMULA
=-Total Cost of Work in Process
Ending Work in Process Inventory Cost of Goods
Manufactured
Beginning Work in Process Inventory
+ =Total Current
Manufacturing Costs
Total Cost of Work in Process
The total cost of work in process for the year is equal to the sum of:
1 the cost of the beginning work in process inventory and
2 the total manufacturing costs for the current period. To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in process.
The total cost of work in process for the year is equal to the sum of:
1 the cost of the beginning work in process inventory and
2 the total manufacturing costs for the current period. To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in process.
ILLUSTRATION 20-8 COST OF GOODS MANUFACTURED
SCHEDULE
ILLUSTRATION 20-8 COST OF GOODS MANUFACTURED
SCHEDULE
The Cost of Goods Manufactured Schedule – as shown on the right is an internal financial schedule that shows each of the cost elements explained in Illustration 20-7.
The Cost of Goods Manufactured Schedule – as shown on the right is an internal financial schedule that shows each of the cost elements explained in Illustration 20-7.
STUDY OBJECTIVE 7STUDY OBJECTIVE 7
Explain the difference between a merchandising and a manufacturing balance sheet.
Explain the difference between a merchandising and a manufacturing balance sheet.
CURRENT ASSETS SECTIONS OF MERCHANDISING AND MANUFACTURING
BALANCE SHEETS
CURRENT ASSETS SECTIONS OF MERCHANDISING AND MANUFACTURING
BALANCE SHEETS
The balance sheet for a merchandiser shows just one inventory category.
In contrast, the balance sheet of a manufacturer may have 3 inventory accounts:
1 Finished Goods Inventory – shows the cost of completed goods on hand,
2 Work in Process Inventory – shows the cost applicable to units that have been started into production but are only partially completed, and
3 Raw Materials Inventory – shows the cost of raw materials on hand.
The balance sheet for a merchandiser shows just one inventory category.
In contrast, the balance sheet of a manufacturer may have 3 inventory accounts:
1 Finished Goods Inventory – shows the cost of completed goods on hand,
2 Work in Process Inventory – shows the cost applicable to units that have been started into production but are only partially completed, and
3 Raw Materials Inventory – shows the cost of raw materials on hand.
ILLUSTRATION 20-10 CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-10 CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-10 CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-10 CURRENT ASSETS SECTIONS OF MERCHANDISING AND
MANUFACTURING BALANCE SHEETS
ILLUSTRATION 20-11 ASSIGNMENT OF
COSTS TO COST CATEGORIES
ILLUSTRATION 20-11 ASSIGNMENT OF
COSTS TO COST CATEGORIES
Product Costs
Direct Direct Manufacturing Period Prime ConversionCost Item Materials Labor Overhead Costs Costs Costs
1. Material cost ($10 per door) X X2. Labor costs ($8 per door) X X X3. Depreciation on new equipment ($25,000 per year) X X4. Property taxes ($6,000 per year) X X5. Advertising costs ($30,000 per year) X6. Sales commissions ($4 per door) X7. Maintenance salaries ($28,000 per year) X X8. Salary of plant manager ($70,000) X X9. Cost of shipping pre-hung doors ($12 per door) X
The manufacturing and selling costs can be assigned to the various categories shown below. The manufacturing and selling costs can be assigned to the various categories shown below.
ILLUSTRATION 20-12 COMPUTATION OF TOTAL
MANUFACTURING COSTS
ILLUSTRATION 20-12 COMPUTATION OF TOTAL
MANUFACTURING COSTS
Total manufacturing costs are the sum of the product costs – direct materials, direct labor, and manufacturing overhead costs. Northridge Company produces 10,000 pre-hung wooden doors the first year. The total manufacturing costs are:
Total manufacturing costs are the sum of the product costs – direct materials, direct labor, and manufacturing overhead costs. Northridge Company produces 10,000 pre-hung wooden doors the first year. The total manufacturing costs are:
M a n u f a c t u r i n gC o s t N u m b e r a n d I t e m C o s t
1 . M a t e r i a l c o s t ( $ 1 0 X 1 0 , 0 0 0 ) $ 1 0 0 , 0 0 02 . L a b o r c o s t ( $ 8 X 1 0 , 0 0 0 ) 8 0 , 0 0 03 . D e p r e c i a t i o n o n n e w e q u i p m e n t 2 5 , 0 0 04 . P r o p e r t y t a x e s 6 , 0 0 07 . M a i n t e n a n c e s a l a r i e s 2 8 , 0 0 08 . S a l a r y o f p l a n t m a n a g e r 7 0 , 0 0 0 T o t a l m a n u f a c t u r i n g c o s t s $ 3 0 9 , 0 0 0
CONTEMPORARY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
CONTEMPORARY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
Global competition has intensified. Today, contemporary business managers demand from managerial accountants different and better information than they needed just a few years ago.
Service Industry Trends – in some respects the challenges for managerial accounting are greater in service companies than in manufacturing companies.
ILLUSTRATION 20-13SERVICE INDUSTRIES AND COMPANIES
ILLUSTRATION 20-13SERVICE INDUSTRIES AND COMPANIES
What are the questions faced by service company managers in these industries?
Transportation Package delivery services Telecommunications Professional services Financial institutions Health Care
CONTEMPORARY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
VALUE CHAIN
CONTEMPORARY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
VALUE CHAIN The value chain is the term that describes all
activities associated with providing a product or service.
Activities included in the value chain include: Research and development Ordering raw materials Manufacturing Marketing Delivery Customer relations.
CONTEMPORARY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
VALUE CHAIN
A number of factors affect efforts to manage the value chain and supply chain. Technological changeJust-in-time inventory methodsQualityFocus on activities
COPYRIGHTCOPYRIGHT
Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
CHAPTER 20 MANAGERIAL ACCOUNTING
CHAPTER 20 MANAGERIAL ACCOUNTING