Chapter 1-1 Managerial Accounting, Sixth Edition Managerial Accounting 1.

Chapter 1-1

Managerial Accounting, Sixth Edition

Managerial AccountingManagerial Accounting

1

Chapter 1-2

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 differences between a merchandising and a manufacturing income statement.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 1-3

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

6. Indicate how cost of goods manufactured is determined.

7. Explain the difference between a merchandising and a manufacturing balance sheet.

8. Identify trends in managerial accounting.

Chapter 1-4

Chapter 1-5

Managerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting BasicsManagerial Accounting Basics

Managerial accounting provides economic and Managerial accounting provides economic and financial information for managers and financial information for managers and

other internal users.other internal users.

Definition of Managerial Accounting

Chapter 1-6

Comparing Managerial and Financial Comparing Managerial and Financial AccountingAccounting


Both managerial and financial accounting deal with economic events of a business –

Thus, interests overlap.

Both require that economic events be quantified and communicated tointerested parties –

Determining unit cost is part of managerial accounting,

Reporting cost of goods manufactured is a part of financial accounting.

Similarities

LO 1 Explain the distinguishing features of managerial accounting.LO 1 Explain the distinguishing features of managerial accounting.

Chapter 1-7



LO 1 Explain the distinguishing features of managerial accountingLO 1 Explain the distinguishing features of managerial accounting ..

Illustration 1-1

Chapter 1-8

Managerial accounting:Managerial accounting:

a.a. Is governed by the Securities and Exchange Commission.

b. Places emphasis on special-purpose information.

c. Pertains to the entity as a whole and is highly Pertains to the entity as a whole and is highly aggregatedaggregated.

d. Is limited to cost data.

Review Review QuestionQuestion


LO 1 Explain the distinguishing features of managerial LO 1 Explain the distinguishing features of managerial accounting.accounting.

Chapter 1-9


Management’s activities and responsibilities Management’s activities and responsibilities can be classified into the following three can be classified into the following three

broad functions:broad functions:

Planning,Planning, Directing, andDirecting, and

Controlling.Controlling.

Management Functions

LO 2 Identify the 3 broad functions of management.LO 2 Identify the 3 broad functions of management.

Chapter 1-10

Management FunctionsManagement FunctionsManagement FunctionsManagement Functions

Look ahead and establish objectives such as-

Maximize short-term profit and market share.

Commit to environmental protection and LOcial

programs.

Key Objective: Add value to the business -

Value measured by trading price of stock and

by potential selling price of the company.

Planning


Chapter 1-11


Coordinate diverse activities and human resources.

Implement planned objectives.

Provide incentives to motivate employees.

Hire and train employees including executives, managers, and supervisors.

Produce smooth-running operation.

Directing


Chapter 1-12


Process of keeping activities on track.

Determine whether goals are met.

Decide changes needed to get back on track.

May use an informal or formal system of evaluations.

Decision making is not a separate management function, but the OUTCOME of the exercise of

good judgment in planning, directing, and controlling.

Controlling


Chapter 1-13

Within a company, an organization chart shows:

The interrelationships of activities andThe delegation of authority and

responsibility.

Organizational StructureOrganizational StructureOrganizational StructureOrganizational Structure

Illustration 1-2

Chapter 1-14

Business Ethics:

All employees are expected to act ethically.

An increasing number of organizations have codes of business ethics.

Good Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good BusinessGood Ethics – Good Business


Chapter 1-15

Creating Proper Incentives:

Companies like IBM, and Nike expend substantial reLOurces to monitor and evaluate the actions of employees and managers.

Monitoring can have the negative result of producing incentives for unethical actions.

Employees may feel that they must succeed no matter what.

Ineffective and unrealistic controls may also result in declining product quality.



Chapter 1-16

Sarbanes-Oxley Act (2002)

Clarifies management’s responsibilities.

Certifications by CEO and CFO -Fairness of financial statements and adequacy of

internal control.

Selection criteria for Board of Directors and Audit Committee.

Substantially increased penalties for misconduct.

IMA Statement of Ethical Professional Practices.

Provides guidance for managerial accountants.


Code of Ethical Standards


Chapter 1-17

The management of an organization performs The management of an organization performs several broad functions. They are:several broad functions. They are:

a.a. Planning, directing, and sellingPlanning, directing, and selling.

b. Directing, manufacturing, and controlling.

c. Planning, manufacturing, and controlling.

d. Planning, directing, and controlling.




Chapter 1-18

Manufacturing Costs

Manufacturing consists of activities and processes to convert raw materials into finished goods.

In contrast, a merchandising firm sells goods in the form in which they were purchased.

Manufacturing costs are typically classified as:

Direct material

Direct labor

Manufacturing Overhead

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

LO 3 – Define the 3 classes of manufacturing costs.LO 3 – Define the 3 classes of manufacturing costs.

Chapter 1-19

Manufacturing Costs - MaterialsManufacturing Costs - MaterialsManufacturing Costs - MaterialsManufacturing Costs - Materials

LO 3 Define the 3 classes of manufacturing costs.LO 3 Define the 3 classes of manufacturing costs.

Raw Materials:Basic materials and parts used

in the manufacturing process.

Direct Materials :Raw materials that can be

physically and directly associated with the finished product during the manufacturing process.

Materials

Chapter 1-20

Manufacturing Costs - MaterialsManufacturing Costs - MaterialsManufacturing Costs - MaterialsManufacturing Costs - Materials


Indirect Materials:

Raw materials that cannot be easily associated with the finished product.

Not physically part of the finished product or they are an insignificant part of finished product in terms of cost.

Considered part of manufacturing overhead.

Chapter 1-21

Manufacturing Costs - LaborManufacturing Costs - LaborManufacturing Costs - LaborManufacturing Costs - Labor


Direct Labor:Work of factory employees

that can be physically and directly asLOciated with converting raw materials into finished goods.

Indirect Labor:Work of factory employees that has no

physical association with the finished product or for which it is impractical to trace costs to the goods produced.

Chapter 1-22

Manufacturing Costs – Manufacturing Manufacturing Costs – Manufacturing OverheadOverhead

Manufacturing Costs – Manufacturing Manufacturing Costs – Manufacturing OverheadOverhead


Costs that are indirectly associated with manufacturing the finished product.

Includes all manufacturing costs except direct materials and direct labor.

Allocation of manufacturing overhead to products can present problems.

Also called factory overhead, indirect manufacturing costs, or burden.

Chapter 1-23

Which of the following is Which of the following is notnot an element an element of manufacturing overhead?of manufacturing overhead?

a.a. Sales manager’s salary.Sales manager’s salary.

b. Plant manager’s salary.

c. Factory repairman’s wages.

d. Product inspector’s salary.


Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs


Chapter 1-24

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Product Costs

Components: Direct material cost, direct labor cost, and manufacturing overhead.

Costs that are a necessary and integral part of producing the product.

Recorded as inventory when incurred, thus may be called inventoriable costs.

When the finished goods inventory is LOld, it then becomes an expense called cost of goods LOld.

Chapter 1-25


LO 4 Distinguish between product and period costs.LO 4 Distinguish between product and period costs.

Period Costs

Matched with revenue of a specific time period and charged to expense as incurred.

Non-manufacturing costs.

Deducted from revenues in period incurred to determine net income.

Includes all selling and administrative expenses.

Chapter 1-26


LO 4 Distinguish between product costs and period LO 4 Distinguish between product costs and period

costscosts..

Illustration 1-3

Chapter 1-27

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements


LO 5 Explain the difference between a LO 5 Explain the difference between a merchandising and a manufacturing income merchandising and a manufacturing income

statement.statement.

Income Statement

The income statement for a manufacturer is similar to that of a merchandiser except

for the cost of goods Sold section.

Chapter 1-28



Cost of Goods Sold ComponentsMerchandiser versus Manufacturer



Illustration 1-4

Chapter 1-29



Cost of Goods Sold Section of the Income Statement


statementstatement..

Illustration 1-5

Chapter 1-30

For the year, Red Company has cost of goods For the year, Red Company has cost of goods manufactured of $600,000, beginning balance manufactured of $600,000, beginning balance of finished goods inventory of $200,000, and of finished goods inventory of $200,000, and ending balance of finished goods inventory of ending balance of finished goods inventory of $250,000. $250,000.

The cost of goods LOld is:The cost of goods LOld is:a.a. $450,000.$450,000.

b. $500,000.

c. $550,000.

d. $600,000.






Beginning Inventory $200,000Cost of Goods Manufactured 600,000 $800,000Minus Ending Finished Goods 250,000Cost of Good Sold $550,000

Chapter 1-31



Determining the Cost of Goods Manufactured

LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

Work in Process – partially completed units of product.

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period.

Illustration 1-6

Chapter 1-32



LO 6 Indicate how cost of goods manufactured is determinedLO 6 Indicate how cost of goods manufactured is determined ..

Illustration 1-7

Chapter 1-33



Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.manufacturing balance sheet.

Merchandising Company

One category of inventory:

Merchandise Inventory

Manufacturing Company

May have three inventory accounts:

Raw Materials Work in ProcessFinished Goods

Chapter 1-34



LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.manufacturing balance sheet.

Illustration 1-8

Chapter 1-35

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Balance Sheet - Inventories

LO 7 Explain the difference between a merchandising and a LO 7 Explain the difference between a merchandising and a manufacturing balance sheetmanufacturing balance sheet

Illustration 1-9

Chapter 1-36

A cost of goods manufactured schedule shows A cost of goods manufactured schedule shows

beginning and ending inventories for:beginning and ending inventories for: a.a. Raw materials and work in process only. Raw materials and work in process only.

b. Work in process only.

c. Raw materials only.

d. Raw materials, work in process, and finished goods.




Chapter 1-37

Managerial Accounting TodayManagerial Accounting TodayManagerial Accounting TodayManagerial Accounting Today

LO 8 Identify trends in management accounting.LO 8 Identify trends in management accounting.

Service Industry Trends

U.S. economy, in general, has shifted toward an emphasis on providing services rather than goods.

Over 50% of U.S. workers are now employed by service companies.

Trend is expected to continue in the future.

Most of the techniques learned for manufacturing firms are applicable to service companies.

Chapter 1-38



Managerial Accounting Practices

Value Chain

Refers to all activities associated with providing a product or service.

For a manufacturing firm these include the following:

Illustration 1-12

Chapter 1-39




Technological Change

Enterprise ReLOurce Planning (ERP) – LOftware programs designed to manage all major business processes.

Computer-Integrated Manufacturing (CIM) – manufacturing products with increased automation.

Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured or purchased just in time for sale.

Chapter 1-40




Quality

Increased emphasis on product quality because goods are produced only as needed.

Total Quality Management (TQM) - a philoLOphy of zero defects.

Activity-Based-Costing (ABC)

Allocates overhead based on use of activities.

Results in more accurate product costing and scrutiny of all activities in the value chain.

Chapter 1-41




Theory of Constraints

Constraints (“bottlenecks” ) limit the company’s potential profitability.

A specific approach to identify and manage these constraints in order to achieve company goals.

Balanced Scorecard

Evaluates operations in an integrated fashion.

Uses both financial and non-financial measures.

Links performance measures to overall company objectives.

Chapter 1-42

Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in way that leads to more accurate product costs?

a. Using direct labor hours

b. Using machine hours

c. Traditional costing

d. Activity-based costing.



LO 8 Identify trends in management LO 8 Identify trends in management accounting.accounting.

Chapter 1-43

Indicate whether each of the following Indicate whether each of the following costs of an automobile manufacturer would costs of an automobile manufacturer would be classified as direct materials, direct be classified as direct materials, direct labor, or manufacturing overhead.labor, or manufacturing overhead.

Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5Chapter Review - Brief Exercise 1-5

______ a. Windshield______ b. Engine______ c. Wages of assembly line worker______ d. Depreciation of factory machinery______ e. Factory machinery lubricants______ f. Tires______ g. Steering wheel______ h. Salary of painting supervisor

DMDMDLMOMODMDMMO

Chapter 1-44

Identify whether each of the following costs Identify whether each of the following costs should be classified as product costs or should be classified as product costs or period costs.period costs.

Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6Chapter Review - Brief Exercise 1-6

____________ a. Manufacturing overhead____________ b. Selling expenses____________ c. Administrative expenses____________ d. Advertising expense____________ e. Direct labor____________ f. Direct material

ProductPeriodPeriodPeriod

ProductProduct

Chapter 1-45

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Chapter 1-1 Managerial Accounting, Sixth Edition Managerial Accounting 1.

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