CHAPTER 1 Fundamental Concepts - Professor Ahmed's …professorahmed.com/Download/Week-1.pdf · 1...

3/17/16

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Fundamental Concepts

CHAPTER 1

PowerPoint Presentation by

LuAnn BeanProfessor of AccountingFlor ida Institute of Technology

© 2012 Cengage Learn ing. All Rights Reserved. May not be c opied, sc anned, or duplicated, in whole or in part, ex c ept for use as permi tted in a l icense

d is tributed wi th a c erta in produc t or serv ic e or o therwis e on a password-protected websi te for c las s room use.

Managerial Accounting 11E

Maher/Stickney/Weil 2

1 Distinguish between managerial and financial accounting.

LEARNING OBJECTIVE

3

How did cost information help Domino’s Pizza

survive?

Domino’s dropped its 6-inch pizza when they discovered it

was losing money.

LO 1

MANAGERIAL APPLICATION

4

FINANCIAL ACCOUNTING: Definition

Reports to users (shareholders, creditors, financial analysts, etc.)

outside the organization.

LO 1

5

MANAGERIAL ACCOUNTING: Definition

Reports results of activities to insiders (managers, etc.).

LO 1

Click the button to skip Exercise 6

6

EXERCISE 6

Press “Enter” or click left mouse button for answer.

Managerial accounting is used for

a) Decision making

b) Planning

c) Control

d) All of the above

LO 1

d) All of the above

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2Understand how managers can use accounting information to implement strategies.

LEARNING OBJECTIVE

8

When a product is a “commodity” how do you

compete to achieve/maintain profitability?

Compete by differentiatingyourself from competition. Focus

on order fulfillment, cutting costs, etc.

LO 2

9

EXAMPLES OF DIFFERENTIATION

General Electric: created an accounting system to track costs subject to learning phenomenon.

Shelter-Us: accounting system tracks costs of shelter.

LO 2

10

Can/should the financial or tax accounting systems be used for

managerial accounting purposes?

NO! The objectives and therefore the information

available for decision making is different.

LO 2

Click the button to skip Questions from text.

11

QUESTIONS


Which questions are relevant to managerial accounting?a) What can I sell this old computer for?

b) What did the old computer cost?

c) How much will I get for the old computer if I trade it and pay cash for a new one?

d) What value does this old computer have as a backup if I buy a new one?

e) What is the computer’s book value?

f) What is the computer’s cost basis for tax purposes?

LO 2

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QUESTIONS


Which questions are relevant to financial or tax accounting?a) What can I sell this old computer for?

b) What did the old computer cost?

c) How much will I get for the old computer if I trade it and pay cash for a new one?

d) What value does this old computer have as a backup if I buy a new one?

e) What is the computer’s book value?

f) What is the computer’s cost basis for tax purposes?

LO 2

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3 Identify the key financial players in the organization.

LEARNING OBJECTIVE

14

Who are the key financial players in the

corporation?

Key financial players are Financial Vice President,

Controller, Treasurer, Cost Accountants/Managers, and

Internal Audit.

LO 3

15

EXHIBIT 1.1

LO 3

The financial areas of the corporation

report to the President through the Financial VP.

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FINANCIAL PROFESSIONALS¯Financial VP: in charge of all accounting and

finance¯ Controller: manages cost and managerial

accounting¯Treasurer: manages cash flows; raises cash¯Cost accountants/managers: analyze,

manage costs¯Internal audit: provides auditing, consulting

services

LO 3


17

EXERCISE 7


The controller oversees:

a) Production processes

b) Management of cash

c) Providing accounting information to managers

LO 3

c) Providing accounting information to managers

18

4Understand managerial accountants’ professional environment and ethical responsibilities.

LEARNING OBJECTIVE

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19

What is the ethical and regulatory framework for managerial accountants?

The ethical and regulatory framework is made up of

standards boards, professional organizations, and professional

certifications.

LO 4

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ETHICAL, REGULATORY FRAMEWORK

¯Standard setting¯Cost Accounting Standards Board sets cost accounting

standards¯ Professional organizations

¯ Institute of Management Accounts (IMA) sponsors professional certifications

¯Certifications¯Certified Management Accountant (CMA)¯Certified Public Accountant (CPA)¯Canadian certifications

¯Chartered Accountant (CA)¯Certified General Accountant (CGA)

LO 4

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WHITE COLLAR CRIME

Many managers have spent time in jail for activities (e.g., price fixing, sharing information) to benefit their companies, not themselves.

LO 4E!!!

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PREVENTING WHITE COLLAR CRIME

¯Sarbanes-Oxley Act¯Passed in the aftermath of the Enron scandal¯Includes

¯Making CEOs and CFOs sign and accept responsibility for financial statements

¯Making CEOs and CFOs responsible for the company’s system of internal controls

¯Creating the Public Company Accounting Oversight Board to oversee public auditors

LO 4

23

What helped J&J respond quickly to the

Tylenol poisoning incident?

The J&J Credo guided management’s response

“Responsibility to healthcare, customers, employees, and

shareholders.”

LO4


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5 Master the concept of cost.

LEARNING OBJECTIVE

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COST: Definition

Is a sacrifice of resources.

LO 5

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TYPES OF COSTS¯Opportunity costs

¯ Is the forgone income from using an asset in its best alternative

¯Direct costs¯Relate directly to the cost object for which cost is to be

measured¯Indirect costs

¯Are indirectly related to the cost of a cost object¯Variable costs

¯Change in total as the level of activity changes¯Fixed costs

¯Do not change in total with changes in the level of activity

LO 5


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EXERCISE 8


Zappa, a mechanic, left his $25,000-a-year job at Joe’s Garage to start his own body shop. Zappa now draws an annual salary of $15,000. Can you identify his opportunity costs?

LO 5

$25,000

28

How do costs and expenses differ?

LO 5

While a cost is the sacrifice of resources, an expense is a “gone” asset.

29

6Compare and contrast income statements prepared for managerial use and those prepared for external reporting.

LEARNING OBJECTIVE

30

How do financial and managerial income statements differ?

LO 6

Managerial income statements present variable and fixed costs separately while financial income statements do not make this distinction.

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EXH

IBIT

1.3

EXHIBIT 1.2

Variable and fixed costs are presented

separately for managerial purposes.

LO 6

Variable and fixed costs lumped together

for financial purposes.

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7 Understand the concepts useful for managing costs.

LEARNING OBJECTIVE

33

MANAGING COSTS

Effective cost control requires managers to understand how producing a product requires activities that generate costs.

LO 7

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ACTIVITY BASED MANAGEMENT (ABM): Definition

Examines activities and their associated costs as a means of developing efficiencies and reducing non-value-added

costs.

LO 7

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What are “non-value-added” activities?

LO 7

Non-value-added activities are activities that can be

eliminated without reducing a product’s service potential to

the customer.

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What are “value-added”activities?

LO 7

Value-added activities are activities that increase a product’s service to the

customer.

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VALUE CHAIN: Definition

Describes a linked set of activities that increase the

usefulness (value) of products/services of an

organization.

LO 7

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EXHIBIT 1.4

LO 7

Functions of the value chain help

management identify value-added

activities.

39

How do strategicand tactical cost management

decisions differ?

LO 7

Strategic decisions choose between production

alternatives. Tactical decisions make a particular production

alternative more cost efficient.

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STRATEGY and VALUE CHAIN

Strategic cost analysis identifies parts of the value chain that generate most profits, enabling management to position their business at the best profit points.

LO 7

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STRATEGY and VALUE CHAIN: Winery Example

LO 7

Lone Tree Winery’s CFO conducted an analysis to help determine whether current strategy (producing and selling either grapes or wine to distributors) was working profitably. Data for analysis includes the following:Grapes to produce 14,000 cases of wineWeighted cost of capital, 10%Sale price grapes, $15 per caseSale price wine, $115 per case

42

ECONOMIC DEPRECIATION: Definition

Measures decline in value of assets during a period

using either sales value or replacement cost.

LO 7

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COST OF CAPITAL: Definition

Is the amount a firm could earn on its assets by

putting them to their best alternative use.

LO 7

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LONE TREE WINERY: Grape and Wine Alternatives (per case)

Income ActivityTotal for Grapes

Total for Wine

Revenue $15.00 $80.00

Less

Cost of sales 15.00

Operating costs 11.43 50.71

Depreciation 1.00 6.43

Cost of capital (@ 10% 3.57 12.86

Economic loss $(1.00) $ (5.00)

LO 7

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LONE TREE WINERY: Estimated Profits (per case)

Income Activity Distributor RetailerRevenue $115 $ 150

Less

Cost of sales 80 115

Gross margin $ 35 $ 35

Operating costs total 20 30

Cost of capital (@ 10% 5 4

Economic profit $ 10 $ 1

LO 7

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LONE TREE ANALYSIS

Lone Tree’s losses raise the following questions.

¯Does Lone Tree sell their wine for less than other wineries?

¯Should Lone Tree’s owners sell the vineyards?

LO 7

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8Describe how managerial accounting supports modern production environments.

LEARNING OBJECTIVE

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KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING

¯Integrated information systems¯Tie managerial accounting, financial reporting, customer

databases, supply chain management and other databases together

¯Examples: ERPS, SAP¯Web hosting

¯Allows companies to focus on core competencies while outsourcing portions of information systems

¯Just-in-Time (JIT) and lean production¯Eliminate inventory between production departments and

focus on quality and efficiency

LO 8

Continued

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KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING (cont.)¯Total quality management (TQM)

¯Measures product reliability and service delivery as well as profitability while attempting excelling in all dimensions

¯Theory of constraints (TOC)¯ Identifies the weakest part of the process chain (constraint)

and attempts to improve it¯Benchmarking and continuous improvement

¯Benchmarking: continuous process of measuring products, services, activities against best performance levels, engaging in continuous improvement

¯Fads

LO 8

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9Understand the importance of effective communication between accountants and users of managerial accounting information.

LEARNING OBJECTIVE

51

INFORMATION

Information is not free. Management must consider costs and benefits of information when designing an optimal accounting system.

LO 9

52

10Understand the ethical standards that make up the Institute of Management Accountants’ Code of Ethics (Appendix 1.1)

LEARNING OBJECTIVE

53

The Institute of Management Accountants promulgated the following standards of ethical conduct for management accountants.

1. COMPETENCE - ongoing development of their knowledge and skills in preparing complete reports with relevant and reliable information.

2. CONFIDENTIALITY – do not disclose confidential information acquired in the course of their work, except when authorized.

3. INTEGRITY - Avoid actual or apparent conflicts of interest.

4. OBJECTIVITY - Communicate information fairly and objectively.

LO 10

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RESOLUTION OF ETHICAL CONFLICT1. Discuss such problems with the immediate superior except when

it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level.

2. If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners.

3. Clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action.

4. If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.

LO 10

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Measuring

Product Costs

CHAPTER 2

Managerial Accounting 11E

Maher/Stickney/Weil

© 2012 Cengage Learn ing. All Rights Reserved. May not be c opied, sc anned, or duplicated, in whole or in part, ex c ept for use as permi tted in a l icense

d is tributed wi th a c erta in produc t or serv ic e or o therwis e on a password-protected websi te for c las s room use.

PowerPoint Presentation by

LuAnn BeanProfessor of Accounting

Flor ida Institute of Technology

56

EXHIBIT 2.8

Where are we on the value chain in CHAPTER 2?

57

1 Understand the nature of manufacturing

costs.

LEARNING OBJECTIVE

58

DIRECT MATERIALS: Definition

Can be easily traced directly to a product.

LO 1

59

DIRECT LABOR: Definition

Is labor of workers who transform materials into a

finished product.

LO 1

60

MANUFACTURING OVERHEAD: Definition

Includes all other costs of transforming the materials

to a finished product.

LO 1

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How are materials, labor not directly traceable to a product

categorized?

All costs, including materials and labor, not directly traceable to a

product are categorized as Manufacturing Overhead.

LO 1

62

2Explain the need for recording costs by

department and assigning costs to

products.

LEARNING OBJECTIVE

63

RESPONSIBILITY CENTER: Definition

Is any organizational unit with its own manager or

managers.

LO 2

64

Responsibility center

(department)

Records costs &assigns to products

Direct materials

Direct labor

Overhead

Management comparescosts to standards

LO 2

65

3Understand how the

Work-in-Process account both describes the

transformation of inputs into outputs in a company

and accounts for costs incurred in the process.

LEARNING OBJECTIVE

66

ACCOUNTING SYSTEM PURPOSES

1) To record costs by responsibility for performance evaluation and control.

2) To assign manufacturing costs to units produced for product costing.

LO 3

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BASIC COST FLOW EQUATIONLO 3

Beginning + Transfers = Transfers + EndingBalance In Out Balance

BB + TI = TO + EB*

*Recall from financial accounting:

Beginning Balance + Additions - Withdrawals = Ending Balance


EXERCISE 19


Mark Landman’s accountant resigned and left the books in a mess. Mark is trying to compute unknown values in inventory

accounts of three stores. Can you help him?

LO 3

Midwest BB =

Midwest Northeast Southeast

BB $ 60,000

TI $200,000 200,000 $160,000

TO 180,000 220,000 150,000

EB 60,000 40,000

$40,000

?

69

EXERCISE 19




LO 3

Northeast EB =


BB $ 60,000

TI $200,000 200,000 $160,000

TO 180,000 220,000 150,000

EB 60,000 40,000

$40,000?

70

EXERCISE 19




LO 3

Southeast BB =


BB $ 60,000

TI $200,000 200,000 $160,000

TO 180,000 220,000 150,000

EB 60,000 40,000

$30,000

?

71

How did the Gravins Division manager

commit fraud?

The manager overstated ending inventory to improve his profit.

LO 3


72

How did top management catch the

fraud?

Top management caught the fraud when they realized that recorded

inventory had outgrown the freezer where it was stored.

LO 3


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4 Compare and contrast normal costing and

actual costing.

LEARNING OBJECTIVE

74

Name two approaches to determining overhead cost.

Two approaches to determining overhead cost are: (1) normal costing and (2) actual costing

LO 4

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COMPARING NORMAL and ACTUAL COSTING

¯Normal costing advantages¯Smoothes seasonal and other fluctuations that

don’t relate directly to activity levels¯More timely than actual because of estimating

process

LO 4

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USING NORMAL COSTING

¯Select a cost driver (allocation base) to apply overhead

¯Estimate dollar amount of overhead and level of activity for period

¯Compute predetermined (normal) overhead rate

¯Apply overhead to production

LO 4

Click the button to skip Example

77

EXAMPLEPlantimum Builders manually assembles small modular

homes. Using prior year data, Plantimum estimated variable manufacturing overhead at $100,000, 50,000 direct labor hours, and $50,000 fixed manufacturing overhead.

What is Plantimum’s variable overhead rate?

LO 4

$100,000 / 50,000 dlh = $2.00 per direct labor hour

$ 50,000 / 50,000 dlh = $1.00 per direct labor hourWhat is Plantimum’s fixed overhead rate?

78

EXAMPLEActual direct labor hours for the month was 4,500.How much variable overhead did Plantimum charge to

production for the month?

LO 4

4,500 dlh X $2.00 per direct labor hour = $9,000

4,500 dlh X $1.00 per direct labor hour = $4,500

How much fixed overhead did Plantimum charge to production for the month?

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5Know various

production methods and the different

accounting systems each requires.

LEARNING OBJECTIVE

80

COST SYSTEMS

¯An effective cost system must have¯Decision focus: meets needs of decision makers¯Different costs for different purposes

¯Variable costing for decision making¯Full absorption for financial reporting

¯Cost-benefit test: benefits from cost system must exceed its costs

LO 5

81

COST SYSTEMS: Examples

¯Job costing¯For custom production jobs¯Users: accounting and consulting firms, health care

organizations¯Process costing

¯For standardized production¯Users: drink makers (e.g., Coca Cola, etc.)

¯Operation costing¯A hybrid of job and process combined¯Users: Levi Strauss, Dell

LO 5

82

6 Compare and contrast job costing and process

costing systems.

LEARNING OBJECTIVE

83

PLANTIMUM PRODUCTION

Plantimum produced 3 modular homes during the month. Plantimum wonders whether they should use job order costing or process costing? What do you think?

Continued

LO 6

84

PLANTIMUM PRODUCTION COSTS: Using Job Order

JobsDirect

LaborDirect

MaterialsOverhead($3/dlh)

TotalCost

Job #1001 $ 8,000 $20,800 $1,200 $30,000Job #1002 6,000 18,100 900 25,000

Job #1003 5,000 11,250 750 17,000

$19,000 $50,150 $2,850 $72,000

LO 6

Continued

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PLANTIMUM PRODUCT COSTING: Using Process

LO 6

Unit costs =

Total manufacturing costs / Units produced

(DL + DM + Overhead) / 3

($19,000 + $50,150 + $2,850) / 3

Average unit cost is $24,000 per modular house

Continued

86

Which costing method, job order or process costing, do you think Plantimum

should use if record keeping costs for job order generally exceed record

keeping costs for process? Is there a cost benefit?

LO 6

87

7Compare and contrast

product costing in service organizations to that in manufacturing

companies.

LEARNING OBJECTIVE

88

COMPARING COST SYSTEMS

Nature of Production

Costing System Used

Heterogeneous Units

Each Unit Large

Job Costing

Homogeneous Units

Many Small Units

Continuous Process

Process Costing

LO 7

89

8 Understand the concepts of customer

costing and profitability analysis.

LEARNING OBJECTIVE

90

FLOW OF COSTS: A Service Company Example

LO 8

An accounting or consulting service firm collects costs by job or client and uses an accounting method similar to that used in manufacturing.

The flow of costs accounted for include:Materials and overhead costs are transferred into Work-in-

Process accounts for each job.Work-in-Process costs are transferred to Cost of Services Billed.

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FLOW OF COSTS REPORTING

The income statement reports: Revenue- Cost of services billed= Gross Margin- Expenses (e.g., unbilled direct labor,

underapplied overhead, marketing expenses)= Operating Profit

LO 8

92

9 Identify ethical issues in job costing.

LEARNING OBJECTIVE

93

MISREPRESENTING COSTS

Often costs are improperly assigned to jobs (or research, or defense contracts, etc.). Sometimes employees are encouraged to understate or misrepresent job costs. Because many of these events have been discovered, funding agencies and other payers now require audits of financial records.

LO 9E!!!

94

10Recognize components

of just-in-time (JIT) production methods and

understand how accountants adapt

costing systems to them.

LEARNING OBJECTIVE

95

CHARACTERISTICS OF JIT:(Just- in-Time Inventory)

JIT inventory methods attempt to obtain materials just in time for production or sale¯Reduces/eliminates inventory and carrying costs¯Leads to immediate correction of defective units¯Helps expose production problems¯Relies on high-quality materials, production¯Charges all costs directly to cost of goods sold

LO 10

96

What happens to inventory leftover after costs are charged to cost of goods sold in a JIT

system?

Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into

finished goods inventory.

LO 10

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How is spoilage treated in a JIT system?

Normal spoilage is a cost of work done. Abnormal

spoilage is expensed in the period.

LO 10

98

11Know how to compute end-of-period inventory

book value using equivalent units of

production (Appendix 2.1).

LEARNING OBJECTIVE

99

What are equivalent units?

Equivalent units (E.U.) represent the translation of

partially completed work into equivalent whole units.

LO 11

100

1. Summarize the Flow of Physical Units2. Compute Equivalent Units (For example, two

units, each 50 percent complete, represent one equivalent unit.)

3. Summarize Costs to Be Accounted For4. Compute Unit Costs for the Current Period5. Compute the Cost of Goods Completed and

Transferred Out of Work-in-Process and the Cost of Ending Work-in-Process Inventory

LO 11

The five steps required to compute product costs, the cost of ending Work-in- Process

Inventory, and the cost of finished goods using equivalent units are:

101

12Understand the flow of

production costs through accounts in a

manufacturing company (Appendix 2.2).

LEARNING OBJECTIVE

102

Costs flow from basic records of materials purchases, labor costs, and overhead costs to

Work-in-Process Inventory accounts that show the cost of ongoing work. When products are complete, they and their costs are transferred to Finished Goods Inventory. When sold, the

cost of the products is transferred out of Finished Goods Inventory to Cost of Goods Sold.

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