Managerial Accounting Concepts and Principles

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Managerial Managerial

Accounting Accounting

Concepts and

Concepts and

PrinciplesPrinciples

Chapter 16Chapter 16Chapter 16Chapter 16

Learning ObjectivesLearning Objectives

1.1. Describe managerial accounting and the role of Describe managerial accounting and the role of managerial accounting in a business.managerial accounting in a business.

2.2. Describe and illustrate the following costs: Describe and illustrate the following costs: • direct and indirect costsdirect and indirect costs• direct materials, direct labor, and factory overhead costsdirect materials, direct labor, and factory overhead costs• product and period costsproduct and period costs

3.3. Describe and illustrate the following statements for a Describe and illustrate the following statements for a manufacturing business: manufacturing business: • balance sheetbalance sheet• statement of cost of goods manufactured statement of cost of goods manufactured • income statementincome statement

4.4. Describe the uses of managerial accounting Describe the uses of managerial accounting information.information.


Learning Learning Objective

ObjectiveDescribe managerial accounting

Describe managerial accounting

and the role of managerial

and the role of managerial

accounting in a business.

accounting in a business.

11

FINANCIAL FINANCIAL ACCOUNTING AND ACCOUNTING AND

MANAGERIAL MANAGERIAL ACCOUNTINGACCOUNTING


Financial Accounting and Managerial Financial Accounting and Managerial AccountingAccounting

o Financial accounting information is Financial accounting information is reported at fixed intervals in general-reported at fixed intervals in general-purpose financial statements. These purpose financial statements. These financial statements are prepared financial statements are prepared according to GAAP.according to GAAP.


Financial Accounting and Managerial Financial Accounting and Managerial AccountingAccounting

o Financial accounting statements are used Financial accounting statements are used by external users such as the following:by external users such as the following: ShareholdersShareholders

CreditorsCreditors

Government agenciesGovernment agencies

The general publicThe general public


Managerial AccountingManagerial Accounting

o Managerial accountingManagerial accounting information is information is designed to meet the specific needs of a designed to meet the specific needs of a company’s management and includes company’s management and includes historical data, which provide historical data, which provide objective objective measuresmeasures of past operations, and of past operations, and estimated data, which provide estimated data, which provide subjective subjective estimatesestimates about future decisions. about future decisions.


Managerial AccountingManagerial Accounting

o Managerial accounting reports do Managerial accounting reports do notnot always have to be:always have to be: Prepared according to GAAP.Prepared according to GAAP.

Prepared at fixed intervals.Prepared at fixed intervals.

Prepared for the business as a whole.Prepared for the business as a whole.


The Management AccountantThe Management Accountant

o In most companies, departments or similar In most companies, departments or similar organizational units are assigned organizational units are assigned responsibilities for specific functions or responsibilities for specific functions or activities.activities.

o The operating structure of a company can The operating structure of a company can be shown in an be shown in an organization chartorganization chart. A . A partial organization chart is shown in partial organization chart is shown in Exhibit 2Exhibit 2 (next slide). (next slide).

THE THE MANAGEMENT MANAGEMENT ACCOUNTANTACCOUNTANT


Line and Staff DepartmentsLine and Staff Departments

o A A line departmentline department is directly involved in is directly involved in providing goods or services to the providing goods or services to the customers of the company. customers of the company.

o Line department positions:Line department positions: Senior Vice President—EquipmentSenior Vice President—Equipment

Plant Manager—Chicopee, MA PlantPlant Manager—Chicopee, MA Plant

Senior Vice President—Callaway BrandSenior Vice President—Callaway Brand

Managing Director, Callaway Golf EuropeManaging Director, Callaway Golf Europe



o A A staff department staff department provides services, provides services, assistance, and advice to the departments assistance, and advice to the departments with line or other staff responsibilities.with line or other staff responsibilities.

o Staff department positions:Staff department positions: Senior VP—Chief Administrative OfficerSenior VP—Chief Administrative Officer

Vice President, Human ResourcesVice President, Human Resources

Chief Financial OfficerChief Financial Officer

ControllerController



o The chief financial officer (CFO) and the The chief financial officer (CFO) and the controller occupy staff positions. In most controller occupy staff positions. In most companies, the companies, the controllercontroller is the chief is the chief management accountant.management accountant.



o The controller’s staff consists of a variety The controller’s staff consists of a variety of other accountants who are responsible of other accountants who are responsible for specialized accounting functions such for specialized accounting functions such as the following:as the following: Systems and proceduresSystems and procedures General accountingGeneral accounting Budgets and budget analysisBudgets and budget analysis Special reports and analysisSpecial reports and analysis TaxesTaxes Cost accountingCost accounting

THE THE MANAGEMENT MANAGEMENT

PROCESSPROCESSThe The management processmanagement process has five basic has five basic phases as shown in phases as shown in Exhibit 3Exhibit 3..


PlanningPlanning

o Management uses Management uses planning planning in developing in developing the company’s the company’s objectives (goals)objectives (goals) and and translating these objectives into courses of translating these objectives into courses of action.action.


PlanningPlanning

o Planning may be classified as follows:Planning may be classified as follows: Strategic planningStrategic planning is developing long-term is developing long-term

actions to achieve the company’s objectives. actions to achieve the company’s objectives. Long-term courses of action, called Long-term courses of action, called strategiesstrategies, , often involve periods of five to ten years.often involve periods of five to ten years.

Operational planningOperational planning develops short-term develops short-term actions for managing the day-to-day operations actions for managing the day-to-day operations of the company.of the company.


DirectingDirecting

o The process by which managers run day-The process by which managers run day-to-day operations is called to-day operations is called directingdirecting. . Examples:Examples: A production supervisor’s efforts to keep the A production supervisor’s efforts to keep the

production line moving without interruptions.production line moving without interruptions.

A credit manager’s development of guidelines A credit manager’s development of guidelines for assessing the ability of potential customers for assessing the ability of potential customers to pay their bills.to pay their bills.


ControllingControlling

o Monitoring operating results and Monitoring operating results and comparing actual results with the comparing actual results with the expected results is expected results is controllingcontrolling. .

o This This feedback feedback allows management to allows management to isolate areas for further investigation and isolate areas for further investigation and possible remedial action.possible remedial action.

o The philosophy of controlling by The philosophy of controlling by comparing actual and expected results is comparing actual and expected results is called called management by exceptionmanagement by exception..


ImprovingImproving

o Continuous process improvementContinuous process improvement is the is the philosophy of continually improving philosophy of continually improving employees, business processes, and employees, business processes, and products.products.

o The objective of continuous process The objective of continuous process improvement is to eliminate the improvement is to eliminate the sourcesource of of problems in a process.problems in a process.


Decision MakingDecision Making

o Inherent in each of the preceding Inherent in each of the preceding management processes is management processes is decision decision makingmaking. Management must continually . Management must continually decidedecide among alternative actions. among alternative actions.



ObjectiveDescribe and illustrate the following

Describe and illustrate the following

costs: (1) direct and indirect costs,

costs: (1) direct and indirect costs,

(2) direct materials, direct labor,

(2) direct materials, direct labor,

and factory overhead costs, (3)

and factory overhead costs, (3)

product and period costs.

product and period costs.

22

MANUFACTURIMANUFACTURING NG

OPERATIONSOPERATIONS


Direct and Indirect CostsDirect and Indirect Costs

o A A costcost is a payment of cash or the is a payment of cash or the commitment to pay cash in the future for commitment to pay cash in the future for the purpose of generating revenues.the purpose of generating revenues.



o Costs are often classified in terms of how Costs are often classified in terms of how they relate to an object or segment of they relate to an object or segment of operations, called a operations, called a cost objectcost object..

o The cost object may be a product, a sales The cost object may be a product, a sales territory, a department, or some activity.territory, a department, or some activity.



o Direct costs Direct costs are identified with and can be are identified with and can be traced to a cost object. Wood used to traced to a cost object. Wood used to make guitars is a direct cost.make guitars is a direct cost.



o Indirect costs Indirect costs cannot be identified with or cannot be identified with or traced to a cost object. A production traced to a cost object. A production supervisor’s salary is an indirect cost supervisor’s salary is an indirect cost because it cannot be traced to any because it cannot be traced to any individual guitar.individual guitar.



o The process of classifying a cost as direct The process of classifying a cost as direct or indirect is illustrated in or indirect is illustrated in Exhibit 5Exhibit 5 below.below.

MANUFACTURIMANUFACTURING COSTSNG COSTS


Manufacturing CostsManufacturing Costs

o To be classified as a To be classified as a direct materials costdirect materials cost, , the cost must be both of the following:the cost must be both of the following: An integral part of the finished productAn integral part of the finished product

A significant portion of the total cost of the A significant portion of the total cost of the productproduct



o The cost of employee wages that is an The cost of employee wages that is an integral part of the finished product is integral part of the finished product is classified as classified as direct labor costdirect labor cost. A direct . A direct labor cost must be both of the following:labor cost must be both of the following: An integral part of the finished productAn integral part of the finished product

A significant portion of the total cost of the A significant portion of the total cost of the productproduct



o Costs other than direct materials cost and Costs other than direct materials cost and direct labor cost that are incurred in the direct labor cost that are incurred in the manufacturing process are combined and manufacturing process are combined and classified as classified as factory overheadfactory overhead costcost (sometimes called (sometimes called manufacturing manufacturing overhead overhead oror factory burden factory burden). ).



o Some examples of factory overhead costs Some examples of factory overhead costs include the following:include the following: Heating and lighting the factoryHeating and lighting the factory

Repairing and maintaining factory equipmentRepairing and maintaining factory equipment

Property taxesProperty taxes

InsuranceInsurance

Depreciation of factory plant and equipmentDepreciation of factory plant and equipment



o Costs that do not enter directly into the Costs that do not enter directly into the finished product, such as oil used to finished product, such as oil used to lubricate the machinery and janitorial and lubricate the machinery and janitorial and supervisory wages, are considered factory supervisory wages, are considered factory overhead.overhead.

o Some costs that are part of the product, Some costs that are part of the product, but are considered insignificant, are but are considered insignificant, are treated as factory overhead, such as glue treated as factory overhead, such as glue and string.and string.


Prime Costs and Conversion CostsPrime Costs and Conversion Costs

o Prime costsPrime costs consist of direct materials and consist of direct materials and direct labor costs. direct labor costs.

o Conversion costsConversion costs consist of direct labor consist of direct labor and factory overhead costs. Conversion and factory overhead costs. Conversion costs are the costs of converting the costs are the costs of converting the materials into a finished product.materials into a finished product.

PRIME COSTS PRIME COSTS AND AND

CONVERSION CONVERSION COSTSCOSTS


Product Costs and Period CostsProduct Costs and Period Costs

o Product costsProduct costs consist of the three consist of the three elements of manufacturing costs: direct elements of manufacturing costs: direct materials, direct labor, and factory materials, direct labor, and factory overhead.overhead.


Product Costs and Period CostsProduct Costs and Period Costs

o Period costsPeriod costs are generally classified as: are generally classified as: Selling expensesSelling expenses, which, which are incurred in are incurred in

marketing the product and delivering the sold marketing the product and delivering the sold product to the customer, product to the customer, oror

Administrative expensesAdministrative expenses, which, which are incurred are incurred in managing the company and are not directly in managing the company and are not directly related to the manufacturing or selling related to the manufacturing or selling functions.functions.

PRODUCT PRODUCT COSTS AND COSTS AND

PERIOD COSTSPERIOD COSTS

(continued)

PRODUCT PRODUCT COSTS AND COSTS AND

PERIOD COSTSPERIOD COSTS



ObjectiveDescribe and illustrate the following

Describe and illustrate the following

statements for a manufacturing

statements for a manufacturing

business: balance sheet, statement

business: balance sheet, statement

of cost of goods manufactured,

of cost of goods manufactured, income statement

income statement

33


Balance Sheet for a Manufacturing Balance Sheet for a Manufacturing BusinessBusiness

o Materials inventory Materials inventory (sometimes called raw (sometimes called raw materials inventory) consists of the costs materials inventory) consists of the costs of the direct and indirect materials that of the direct and indirect materials that have not yet entered the manufacturing have not yet entered the manufacturing process.process.



o Work in process inventory Work in process inventory consists of consists of direct materials costs, direct labor costs, direct materials costs, direct labor costs, and factory overhead costs for products and factory overhead costs for products that have entered the manufacturing that have entered the manufacturing process, but are not yet completed (in process, but are not yet completed (in process).process).



o Finished goods inventory Finished goods inventory consists of consists of completed (or finished) products that have completed (or finished) products that have not been sold.not been sold.

BALANCE SHEET BALANCE SHEET FOR A FOR A

MANUFACTURING MANUFACTURING BUSINESSBUSINESS


Income Statement for a Manufacturing Income Statement for a Manufacturing CompanyCompany

o Income statements for merchandising and Income statements for merchandising and manufacturing businesses differ primarily manufacturing businesses differ primarily in the reporting of the cost of merchandise in the reporting of the cost of merchandise (goods) (goods) available for saleavailable for sale and and soldsold during during the period (as shown in the next slide). the period (as shown in the next slide).

INCOME INCOME STATEMENT FOR STATEMENT FOR

A A MANUFACTURING MANUFACTURING

COMPANYCOMPANY


Income Statement for a Manufacturing Income Statement for a Manufacturing CompanyCompany

o The total cost of making products that are The total cost of making products that are available for sale during the period is available for sale during the period is called the called the cost of goods manufacturedcost of goods manufactured..

o The cost of goods manufactured is often The cost of goods manufactured is often determined by preparing a determined by preparing a statement of statement of cost of goods manufactured cost of goods manufactured (shown on the (shown on the next slide).next slide).

INCOME INCOME STATEMENT FOR STATEMENT FOR

A A MANUFACTURING MANUFACTURING

COMPANYCOMPANY

INCOME INCOME STATEMENT FOR A STATEMENT FOR A MANUFACTURING MANUFACTURING

COMPANYCOMPANY

Legend’s Cost of Goods ManufacturedLegend’s Cost of Goods Manufactured

STEP 1STEP 1: Determine the cost of materials : Determine the cost of materials usedused

Materials inventory, January 1, 2014 $ 65,000Add: Materials purchased 100,000Cost of materials available for use $165,000Less: Materials inventory, Dec. 31, 2014 35,000

Cost of direct materials used $130,000

to total manufacturing costs incurred

(continued)


STEP 2: STEP 2: Determine the total manufacturing Determine the total manufacturing costs incurred.costs incurred.

from Step 1


(continued)


Factory overhead 44,000Total manufacturing costs incurred $284,000

to cost of goods manufactured

section

Direct labor 110,000

(continued)


STEP 2: STEP 2: Determine the total manufacturing Determine the total manufacturing cost incurred.cost incurred.

Work in process inventory, Jan. 1, 2014 $ 30,000

from Step 2

Add: Total manufacturing costs incurred 284,000


STEP 3: STEP 3: Determine the cost of goods Determine the cost of goods manufactured.manufactured.

Total manufacturing costs $314,000Less: Work in process inventory, Dec. 31, 2014 24,000

Cost of goods manufactured $290,000

Work in process inventory, Jan. 1, 2014 $ 30,000Add: Total manufacturing costs incurred 284,000


STEP 3: STEP 3: Determine the cost of goods Determine the cost of goods manufactured.manufactured.

(continued)

LEGEND LEGEND GUITARS’ GUITARS’

FINANCIAL FINANCIAL STATEMENTSSTATEMENTS

LEGEND LEGEND GUITARS’ GUITARS’

FINANCIAL FINANCIAL STATEMENTSSTATEMENTS



ObjectiveDescribe the uses of managerial

Describe the uses of managerial

accounting information.

accounting information.

44


Uses of Managerial AccountingUses of Managerial Accounting

o Managerial accounting provides the cost Managerial accounting provides the cost of manufacturing a product, which can be of manufacturing a product, which can be used to determine its selling price.used to determine its selling price.



o Managerial accounting allows for Managerial accounting allows for comparing the costs of manufacturing and comparing the costs of manufacturing and can be used to monitor and control the can be used to monitor and control the cost of direct materials, direct labor, and cost of direct materials, direct labor, and factory overhead.factory overhead.



o Performance reports allow management to Performance reports allow management to identify any large amounts of scrap identify any large amounts of scrap materials or employee downtime.materials or employee downtime.



o A report could analyze the potential A report could analyze the potential efficiencies and dollar savings of efficiencies and dollar savings of purchasing computerized equipment to purchasing computerized equipment to speed up the production process.speed up the production process.



o A report could analyze how many units A report could analyze how many units need to be sold to cover operating costs need to be sold to cover operating costs and expenses. and expenses.

o Such information could be used to set Such information could be used to set monthly selling targets and bonuses for monthly selling targets and bonuses for sales personnel.sales personnel.


Managerial Managerial

Accounting Accounting

Concepts and

Concepts and

PrinciplesPrinciples

The EndThe EndThe EndThe End

Managerial Accounting Concepts and Principles

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