Managerial Accounting - 7.1
Introduction toManagement Accounting
Chapter 19
Managerial Accounting - 7.2
Dell Computer
Dell’s first quarter 1997 net income soared to $198 million, more than double the income in the first quarter of 1996.
How did Michael Dell turn his company from a $40 million loss in 1994 to this net income?
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Dell Computer
Michael Dell knew that cost control would drive the computer business.
Why? Most customers want a good price more
than a specific brand name. Dell executives also had to market and
distribute the computers.
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Dell Computer
Accounting information helps executives such as Dell make business decisions.
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Dell Computer
The accounting system provides managers with cost and profit information broken down by:
– Type of product– Marketing strategy– Geographic business units
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Chapter Objectives
1 Distinguish between financial accounting and management accounting, and use management accounting information for decision making.
2 Describe the value chain and classify costs by value chain functions.
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Chapter Objectives
3 Distinguish direct costs from indirect costs.4 Distinguish among full product costs,
inventoriable product costs and period costs.
5 Prepare the financial statements of a manufacturing company.
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Chapter Objectives
6 Identify major trends in the business environment and use cost-benefit analysis to make business decisions.
7 Use reasonable standards to make ethical judgments.
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The Functions of Management
Planning - choosing goals and deciding how to achieve those goals.
Controlling - taking action to implement the plans and then evaluating results.
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The Functions of Management
Budget - a tool that helps management implement plans.
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Objective 1
Distinguish between financial accounting and management
accounting, and use management accounting information for decision
making.
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Primary Users -Financial Accounting
– Investors– Creditors– Government authorities (IRS, SEC, etc.) Financial accounting reports information to
outsiders based on past performance.
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Primary Users -Management Accounting
– Internal managers of the business Management accounting presents
information for insiders to use in planning the future of the business.
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Focus
An important characteristic of management accounting information is relevance.
Characteristics of financial accounting information include reliability and objectivity.
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Reports and Scopeof Information
Management accounting has no GAAP-type standards.
Managers tailor the company’s management accounting system to provide detailed reports on parts of the company.
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Reports and Scopeof Information
Financial accounting is restricted by GAAP. Reports present summarized information on
the company as a whole. These reports are usually on a quarterly or
annual basis.
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Behavioral Implications
Management accounting concern is about how reports will affect the behavior of employees.
Financial accounting concern is about adequacy of disclosure.
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Management’s Use of Accounting Information
– Three purposes:1 To determine the cost of products and
services.2 To plan and control business operations.3 To report the company’s financial position
and results of operations to external parties.
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Manufacturing Firms
A manufacturing business uses labor, plant and equipment to convert materials into new finish products.
Manufacturers have three kinds of inventory:1 Materials inventory2 Work in process inventory3 Finished goods inventory
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Manufacturing Firms
Materials inventory - materials for use in the manufacturing process.
For example, a glass container factory’s raw material inventory includes sand, soda ash and limestone.
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Manufacturing Firms
Work in process inventory - goods that are partially completed.
Finished goods inventory - completed goods that have not yet been sold.
Finished goods are what the manufacturer sells to a merchandising business, another manufacturer or the ultimate consumer.
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Objective 2
Describe the value chain and classify costs by value chain
functions.
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Value Chain
Research and development (R&D) - conducted to determine what new or improved products are to be introduced to the market.
Design - the detailed engineering of products and services, or the process for producing them.
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Value Chain
Production of products and services or purchases of merchandise inventory - the use of resources to produce the product or service or to purchase merchandise inventory.
Marketing - the promotion of the product or service.
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Value Chain
Distribution - the delivery of the product or service to the customer.
Customer service - the support provided for customers after the sale.
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Value Chain
Upstream costs (research and development) occur before manufacturing.
Downstream costs (marketing and distribution) occur after manufacturing.
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Objective 3
Distinguish direct costs
from indirect costs.
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Cost Objects, Direct Costsand Indirect Costs
Cost objects are anything for which a separate measurement of costs is desired.
Cost drivers are any factors that affect cost.
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Cost Objects, Direct Costsand Indirect Costs
Cost objects may include...– individual products (laptop computers,
desktop models).– alternative marketing strategies (telephone
sales, sales to retailers).– geographic segments of the business (U.S.,
Europe).– departments (personnel, accounting).
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Cost Objects, Direct Costsand Indirect Costs
Direct costs are those costs that can be specifically traced to the cost object.
Indirect costs are costs that cannot be specifically traced to the cost object.
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Objective 4
Distinguish among full product costs, inventoriable product
costs and period costs.
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Product Costs...
– are the costs to produce (or purchase) tangible products intended for sale.
There are two types of product costs:1 Full product costs2 Inventoriable product costs
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Product Costs
Full product costs include all resources used from designing a product to delivering it to a customer.
Full product costs are the costs of all resources used throughout the value chain.
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Inventoriable Product Costs Versus Period Costs
Inventoriable product costs are used for external reporting.
They do not include costs from all elements of the value chain.
They are narrower in scope than full product costs.
Inventoriable product costs must conform to GAAP.
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Inventoriable Product Costs Versus Period Costs
For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods.
These costs are included in the third element of the value chain.
Costs incurred in other elements of the value chain are period costs.
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Inventoriable Product Costs Versus Period Costs
Inventoriable costs are an asset. They become an expense when the items
are sold. Period costs flow as expenses directly to
the income statement.
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Inventoriable Product Costs Versus Period Costs
For external reporting, manufacturer’s inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.
Inventoriable product costs are incurred only in the third element of the value chain.
Costs incurred in other elements of the value chain are period costs.
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Major Categories ofInventoriable Product Costs
– Direct materials– Direct labor– Manufacturing overhead
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Major Categories ofInventoriable Product Costs
Direct materials must meet two requirements:
They must become a physical part of the finished product.
Their costs must be separately and conveniently traced to the finished product.
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Major Categories ofInventoriable Product Costs
Direct labor is the compensation of employees who physically convert materials into the company’s products.
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Major Categories ofInventoriable Product Costs
Manufacturing overhead includes all manufacturing costs other than direct materials and direct labor.
– Indirect materials– Indirect labor– Factory utilities, rent, insurance– Depreciation
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Manufacturing Overhead Includes:– Indirect materials. These cannot be conveniently or economically
traced to a particular finished product. Indirect materials are part of the manufacturing
overhead cost.– Glue, nails– Thread, buttons– Bolts, squirt of oil
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– Indirect labor. This is a cost difficult to trace to
a specific product.– Forklift operators– Janitors– Plant managers– Supervisors– Machine helpers
Manufacturing Overhead Includes:
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Prime Cost andConversion Costs
Prime costs are the direct costs incurred in the manufacturing process (direct materials plus direct labor).
Conversion costs are the costs of converting direct materials into finished products (direct labor plus manufacturing overhead).
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Objective 5
Prepare financial statements of a manufacturing company.
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Financial Statements forService Companies
There is no inventory and thus no inventoriable costs.
The income statement does not include cost of goods sold.
Revenues - Expenses = Operating income
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Financial Statements for Merchandising Companies
A merchandising company buys goods that are ready for immediate resale.
Inventoriable costs are for the purchase of these goods plus freight-in.
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Financial Statements for Merchandising Companies
Beginning inventory+ Purchases and Freight-in= Cost of goods available for sale – Ending inventory= Cost of goods sold
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Financial Statements for Merchandising Companies
When sales occur, Inventory decreases and Cost of Goods Sold increases.
On the income statement, cost of goods sold is deducted from sales revenue to obtain the gross margin.
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Financial Statements for Manufacturing Companies
Manufacturing firms have the most complicated accounting with three types of inventory accounts.
1 Materials2 Work in process3 Finished goods
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Financial Statements for Manufacturing Companies
Materials inventory is the cost of materials on hand intended for use in manufacturing.
Work in process inventory is the cost of goods that are in the manufacturing process but not yet complete.
Finish goods inventory is the cost of the completed goods that are not yet sold.
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Financial Statements for Manufacturing Companies
Hickory, Inc., is a small furniture manufacturing company.
Beginning and ending work in process inventories were $20,000 and $18,000.
Direct materials used were $70,000. Direct labor was $100,000. Manufacturing overhead incurred was
$150,000.
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Financial Statements for Manufacturing Companies
What is the cost of goods manufactured? Beginning work in process $ 20,000+ Direct labor $100,000+ Direct materials 70,000+ Mfg. Overhead 150,000 320,000– Ending work in process 18,000= Cost of goods manufactured $ 322,000
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Financial Statements for Manufacturing Companies
Hickory, Inc.’s, beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.
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Financial Statements for Manufacturing Companies
How much is the cost of goods sold? Beg. finished goods inventory $
60,000+ Cost of goods manufactured 322,000= Cost of goods available for sale $ 382,000– Ending finished goods 55,000= Cost of goods sold $327,000
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Financial Statements for Manufacturing Companies
Hickory, Inc., had sales of $627,000 for the period.
How much is the gross margin? Sales $627,000– Cost of goods sold 327,000 = Gross margin $300,000
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Financial Statements for Manufacturing Companies
Hickory, Inc., had operating expenses as follows:
Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 60,000 Total $150,000 What is Hickory’s operating income?
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Financial Statements for Manufacturing Companies
Gross margin $300,000– Operating expenses 150,000= Operating income $150,000
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Flow of Costs through a Manufacture’s Accounts
Beginning direct material inventory+ Purchases= Direct materials available for use– Ending inventory= Direct materials used
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Flow of Costs through a Manufacture’s Accounts
Work in Material Process
Beg. Inv. 10 40 used Beg. Inv. 80
Purchases 50 Material 40
End. Inv. 20 Direct Lab. 90
Overhead 90 200 finished
End. Inv. 100
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Flow of Costs through a Manufacture’s Accounts
Finished Goods Inventory Cost of Goods Sold
Beg. Inv. 50
Finished 200 210 Sold 210
End. Inv. 40
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Objective 6
Identify major trends in the business environment and use cost-benefit analysis to make
business decisions.
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Just-in-Time
JIT philosophy means that the company schedules production just in time to satisfy needs.
Materials are purchased and finished goods are completed only as needed to satisfy customer demand.
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Just-in-Time
Firms adopting JIT report sharp reductions in inventory.
Speeding up of the production process reduces throughput time.
Throughput time is the time between buying raw materials and selling the finished products.
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Quality
The goal of total quality management (TQM) is to please customers by providing them with superior products and services.
Each business function examines its own activities and works to improve by setting higher and higher goals.
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Quality
TQM emphasizes educating, training and cross-training employees to do multiple tasks.
Quality improvement programs cost money today.
The benefits usually do not occur until later.
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Quality
Total Benefits Total Cost Initial benefits
and costs $170 million $200 million Additional expected
benefits 68 million Total $238 million $200 million
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Objective 6
Use reasonable standards to make ethical judgments.
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Professional Ethics for Management Accountants
In many situations the ethical path is not so clear.
The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.
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Professional Ethics for Management Accountants
These standards require management accountants to:
– maintain their professional competence.– preserve the confidentially of the
information they handle.– act with integrity and objectivity.
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Professional Ethics for Management Accountants
Management accountants have an obligation to the organizations they serve, their profession, the public and themselves to maintain the highest standards of ethical conduct.
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