19 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

19 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Introduction toManagement Accounting

Chapter 19


Planning Acting

Feedback

Controlling

The Functions of Management


Distinguish between financial

accounting and managementaccounting.

Objective 1


Management Accounting and Financial Accounting

Internal managers of the businessInternal managers of the business

Investors, Creditors,Government authorities (IRS, SEC, etc.)

Investors, Creditors,Government authorities (IRS, SEC, etc.)

Primary Users



Help managers plan andcontrol business operations

Help managers plan andcontrol business operations

Help investors, creditors, and others makeinvestment, credit, and other decisions

Help investors, creditors, and others makeinvestment, credit, and other decisions

Purpose of Information



RelevanceRelevance

Reliability, objectivity, and focus on the pastReliability, objectivity, and focus on the past

Focus and Time Dimension



Internal reports not restricted by GAAPInternal reports not restricted by GAAP

Financial statements restricted by GAAPFinancial statements restricted by GAAP

Type of Report



No independent auditNo independent audit

Annual independent audit by CPAsAnnual independent audit by CPAs

Verification



Detailed reports onparts of the company

Detailed reports onparts of the company

Summary reports primarilyon the company as a wholeSummary reports primarilyon the company as a whole

Scope of Information



Concern about how reportswill affect employees behavior

Concern about how reportswill affect employees behavior

Concern about adequacy of disclosureConcern about adequacy of disclosure

Behavioral Implications


Service, Merchandising, and Manufacturing Companies

Service Company:provides intangible services,rather than tangible products

Service Company:provides intangible services,rather than tangible products

Merchandising Company:resells products previously

bought from suppliers

Merchandising Company:resells products previously

bought from suppliers


Service, Merchandising, and Manufacturing Companies

Manufacturing Company:uses labor, plant, and equipment to convert

raw materials into finished products

Manufacturing Company:uses labor, plant, and equipment to convert

raw materials into finished products

Materials inventoryWork in process inventoryFinished goods inventory

Materials inventoryWork in process inventoryFinished goods inventory


Describe the value chain

and classify costs byvalue-chain functions.

Objective 2


Value Chain

Research andDevelopment

DesignProduction or

Purchases

Marketing Distribution CustomerServices


Distinguish direct costs

from indirect costs.

Objective 3


Cost Objects, Direct Costs,and Indirect Costs

Cost objects are anything for which a separate measurement of costs is desired.

Cost drivers are any factors that affect cost.



What are examples of cost objects?– individual products– alternative marketing strategies– geographic segments of the business– departments



What are direct costs? Direct costs are those costs that can be

specifically traced to the cost object. What are indirect costs? Indirect costs are costs that cannot be

specifically traced to the cost object.


Distinguish among full product

costs, inventoriable productcosts, and period costs.

Objective 4


Inventoriableproduct

costs


costs

Fullproduct

costs

Fullproduct

costs

Product Costs

What are product costs? They are the costs to produce (or purchase)

tangible products intended for sale. There are two types of product costs:


External Reporting


costs


costs

PeriodcostsPeriodcosts


Inventoriable Product Costs

For external reporting, merchandisers’ inventoriable product costs include only costs that are incurred in the purchase of goods.

Inventoriable costs are an asset. Period costs flow as expenses directly to the

income statement.



For external reporting, manufacturers’ 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.


DirectMaterials

DirectLabor

IndirectLabor

IndirectMaterials

Other

Manufacturing Overhead




DirectMaterials

DirectLabor

Prime Costs = Direct Materials + Direct Labor



Conversion Costs = Direct Labor + Manufacturing Overhead

DirectLabor

IndirectLabor

IndirectMaterials

Other


Prepare the financial statements

of a manufacturing company.

Objective 5


Revenues – Expenses = Operating income

Financial Statements forService Companies

There is no inventory and thus no inventoriable costs.

The income statement does not include cost of goods sold.


Financial Statements for Merchandising Companies

Purchases ofInventory plus

Freight-In Inventory

Sales Revenue

Cost ofGoods Sold

INCOME STATEMENT

Operating Expenses

InventoriableCosts

BALANCE SHEET

equals Operating Income

whensalesoccur

deduct

equals Gross Margindeduct

PeriodCosts


Financial Statements forManufacturing Companies

MaterialsInventory

FinishedGoods

Inventory

Sales Revenue

Cost ofGoods Sold

INCOME STATEMENT

Operating Expenses

InventoriableCosts

BALANCE SHEET

equals Operating Income

whensalesoccur

deduct

equals Gross Margindeduct

Work inProcess

Inventory

PeriodCosts


Manufacturing Company Example

Kendall 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.



What is the cost of goods manufactured?

Beginning work in process $ 20,000Direct labor $100,000Direct materials 70,000Mfg. overhead 150,000 320,000Ending work in process 18,000Cost of goods manufactured $322,000



Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.

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



Kendall Manufacturing Company 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



Kendall Manufacturing Company had operating expenses as follows:

Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 30,000 Total$120,000

What is Kendall’s operating income?



Gross margin $300,000– Operating expenses 120,000= Operating income $180,000


Flow of Costs through a Manufacturer’s Accounts

Direct Materials Inventory Beginning inventory+ Purchases and freight-in

= Direct materials availablefor use

– Ending inventory= Direct materials used

Work in Process Inventory Beginning inventory+ Direct materials used+ Direct labor+ Manufacturing overhead= Total manufacturing costs

to account for– Ending inventory= Cost of goods manufactured


Flow of Costs through a Manufacturer’s Accounts

Finished Goods Inventory Beginning inventory+ Cost of goods manufactured= Cost of goods available for sale– Ending inventory= Cost of goods sold


Identify major trends in thebusiness environment, and

usecost-benefit analysis to make

business decisions.

Objective 6


Shift to a Service Economy

In the U.S., 55% of the workforceis employed in service companies.

Service Industries Other


Competing in the Global Marketplace

Foreign Operations Other

Foreign operations accountfor over 30% of GE’s revenues.


Just-in-Time

JIT philosophy means that the company schedules production just in time to satisfy needs.

Speeding up of the production process reduces throughput time.

Throughput time is the time between buying raw materials and selling the finished products.


Total Quality Management

The goal of total quality management (TQM) is to please customers by providing them with superior products and services.

TQM emphasizes educating, training, and cross-training employees.

Quality improvement programs cost money today.

The benefits usually do not occur until later.


Total Quality Management

Initial benefits and costs $170 million $200 million

Additionalexpected benefits 68 million

Total $238 million $200 million

Total Benefits Total Cost


Use reasonable standards to

make ethical judgments.

Objective 7


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.


Standards of Ethical Conduct for Management Accountants

Confidentiality

Integrity

Objectivity

Competence


End of Chapter 19

19 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

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