introduction to management accounting

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 16

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.2

Distinguish managerial accounting from financial accounting

Identify trends in the business environment and the role of management accountability

Apply ethical standards to decision making


Classify costs and prepare an income statement for a service company

Classify costs and prepare an income statement for a merchandising company

Classify costs and prepare an income statement and statement of cost of goods manufactured for a manufacturing company


Distinguish managerial accounting from financial accounting

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Financial accounting is for external reportingResponsible to:

Owners and creditors for their investment decisionsRegulatory agencies, such as the Securities Exchange Commission, the Federal Trade Commission, and the Internal Revenue ServiceCustomers and society to ensure that the company acts responsibly

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Managerial accounting is for internal planning and controlling

Responsible to:Customers for safe and defect-free products and servicesCreditors for repaying principal and interestEmployees for a safe and productive work environmentSuppliers and vendors for timely paymentsOwners for providing a return on the owners’ investmentOthers: governments and communities

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Planning—choosing goals and deciding how to achieve them

Common goal—to increase operating income (profits)Achieved by raising prices or advertising more

Budget—a mathematical expression of the planUsed to coordinate the business’s activities Shows the expected financial impact of decisionsHelps identify the resources needed to achieve goals

Controlling—implementing the plans and evaluating operations

By comparing actual results to the budgetCost data helps managers make decisions

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Management versus Financial AccountingManagement versus Financial Accounting


Managerial and financial accounting differ in many aspects.1.For each of the following, indicate whether the statement relates to managerial accounting (MA) or financial accounting (FA):

_____a. Helps investors make investment decisions.

_____ b. Provides detailed reports on parts of the company.

_____ c. Helps in planning and controlling operations.

_____ d. Reports must follow generally accepted accounting principles (GAAP).

_____ e. Reports audited annually by independent certified public accountants.

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FA

MA

FA

FA

MA


Identify trends in the business environment and the role of management accountability

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Shift toward a service economyHealth care, communication, banking, other

Global competitionMoving operations to be closer to new markets

Time-based competitionAdvanced information systemsE-commerceJust-in-time management

Total quality managementA philosophyTo provide customers with superior products and services while meeting organizational goals

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S16-3: BUSINESS TRENDS TERMINOLOGY

Consider the terms and definitions that follow. Match the term with the correct definition.

1.A philosophy designed to integrate all organizational areas in order to provide customers with superior products and services, while meeting organizational objectives. Requires improving quality and eliminating defects and waste.

2.Use of the Internet for such business functions as sales and customer service. Enables companies to reach thousands of customers around the world.

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a. ERP c. E-commerceb. Just-in-time (JIT) d. Total quality management

Total quality management

E-commerce


Consider the terms and definitions that follow. Match the term with the correct definition.

3.Software systems that integrate all of a company’s worldwide functions, departments, and data into a single system.

4.A system in which a company produces just in time to satisfy needs. Suppliers deliver materials just in time to begin production, and finished units are completed just in time for delivery to customers.

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a. ERP c. E-commerceb. Just-in-time (JIT) d. Total quality management

Enterprise Resource Planning (ERP)

Just-in-time (JIT)


Apply ethical standards to decision making

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Requires ethical behavior without regard to personal consequences

Doing the right thing

Ethical violationsEnronBernie Madoff Bank of America/Merrill Lynch

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Institute of Management Accountants (IMA) Developed standards to help meet ethical challenges

Require management accountants to:Maintain their professional competencePreserve the confidentiality of the informationAct with integrity and credibility

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The standards of ethical practice include the following:

I. Competence1. Maintain an appropriate level of professional expertise.2. Perform professional duties in accordance with laws, regulations, and standards.3. Provide information and recommendations that are accurate, clear, concise, and timely.4. Recognize and communicate professional limitations.

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II. Confidentiality1. Keep information confidential except when authorized or legally required.2. Inform relevant parties regarding appropriate use of confidential information.3. Refrain from using confidential information to your advantage.

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III. Integrity1. Mitigate actual conflicts of interest.2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.3. Abstain from engaging in activity that might discredit the profession.

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IV. Credibility1. Communicate information fairly and objectively.2. Disclose all relevant information.3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls.

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Classify costs and prepare an income statement for a service company

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Service CompanyService CompanyService companies sell their time, skills, and knowledgeSeek to provide services with:

High qualityReasonable prices Timely delivery

Simplest accountingNo inventory or products for sale

All costs are period costsIncurred and expensed in same accounting period

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Income Statement of a Service Income Statement of a Service CompanyCompany

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Cost per serviceHelps to set the price of each service provided

Consider all operating expenses (period costs)Unit cost per service

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Duncan and Oates provides hair cutting services in the local community. In February, the business incurred the following operating costs to cut the hair of 230 clients:Hair supplies expense............................ $ 805Building rent expense ............................ 1,150Utilities.................................................. 184Depreciation on equipment ................... 46 Duncan and Oates earned $5,200 in revenues from haircuts for the month of February.1. What is the net operating income for the month?

2. What is the cost of one haircut?

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$3,015

$ 9.50


Classify costs and prepare an income statement for a merchandising company

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Merchandising CompanyMerchandising CompanyResell products purchased from suppliersKeep an inventory of productsCost of goods sold is a major expense

Product costs flow through the inventoryGAAP requires companies to record inventoriable product costs as an asset until sold

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Includes cost to purchase goods plus freight-in

Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold

Managerial accounting distinguishes inventoriable product costs from period costs

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Unit cost per product—helps managers set appropriate selling prices Formula:

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The Tinted View, a retail merchandiser of auto windshields, has the following information:

Web site maintenance . . . . . . . $ 7,100Delivery expense . . . . . . . . . . 900Freight in . . . . . . . . . . . . . . . . 2, 900Purchases . . . . . . . . . . . . . . . . 39,000Ending inventory . . . . . . . . . . 4,900Revenues . . . . . . . . . . . . . . . . 57,000Marketing expenses . . . . . . . . 9,900Beginning inventory . . . . . . . . 7,900

Compute The Tinted View’s cost of goods sold.

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Classify costs and prepare an income statement and statement of cost of goods manufactured for

a manufacturing company

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Use labor, plant, supplies, and facilities to convert raw materials into finished productsThree kinds of inventory

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Materials inventory

Work in process inventory

Finished goods inventory


Cost object: Anything for which managers want a separate measurement of costExamples:

A product, department, or activity

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Direct costsCan be directly traced to a cost objectDirect materialsDirect labor

Indirect costsNeeded to finish productsCannot be directly traced to a cost objectManufacturing overhead


Direct materialsBecome a physical part of the finished product

Direct laborWages of employees who convert materials into the company’s products

Manufacturing overheadAll other costs other than direct materials and labor

Conversion Cost


Includes only indirect costs related to manufacturing

Does NOT include costs for selling, general, or administrative functions

Examples:Indirect materials

Become part of finished product, but cannot be conveniently or cost-effectively traced

Indirect laborManufacturing wages that are not easily traced to products

Plant managers & maintenance

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Type Inventoriable product costs Period costs (Expenses)

Service company

None Salaries, depreciation, utilities, insurance, property taxes, advertising expenses

Merchandising company

Purchases plus freight in Salaries, depreciation, utilities, insurance, property taxes on storage building, advertising, delivery expenses

Manufacturing company

Direct materials, direct labor, and manufacturing overhead (including indirect materials; indirect labor; depreciation on the manufacturing plant and equipment; plant insurance, utilities, and property taxes

Delivery expense; depreciation expense, utilities, insurance, and property taxes on executive headquarters (separate from the manufacturing plant); advertising;CEO’s salary

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MaterialsInventory

FinishedGoods

Inventory

Sales

Cost ofGoods Sold

INCOME STATEMENT

Operating Expenses

=Operating Income

Whensalesoccur

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-

Work inProcessInventory

PeriodCosts

Purchases of materials

Direct labor & manufacturing overhead


Direct materials inventory Work in process inventory

Finished goods inventory

Beginning inventory Beginning inventory Beginning inventory

+ Purchases and freight-in + Direct materials used + Cost of goods manufactured

= Direct materials available for use

+ Direct labor = Cost of goods available for sale

+ Manuf. overhead

- Ending inventory - Ending inventory - Ending inventory

= Direct materials used = Cost of goods manufactured

= Cost of goods sold


You are a new accounting intern at Cookie Messages. Your boss gives you the following information:

Purchases of direct materials . . . . . . . . . . . . . $ 6,400Freight in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Property taxes . . . . . . . . . . . . . . . . . . . . . . . . 900Ending inventory of direct materials . . . . . . . 1,500 Beginning inventory of direct materials . . . . . 4,000

Compute direct materials used.

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All Pro Golf Company had the following inventory data for the year ended January 31, 2012:

Direct materials used . . . . . . . . $ 12,000Manufacturing overhead . . . . . 20,000Work in process inventory:

Beginning . . . . . . . . . . . . 7,000Ending . . . . . . . . . . . . . . 5,000

Direct labor . . . . . . . . . . . . . . . 11,000Finished goods inventory . . . . . 9,000

Compute All Pro’s cost of goods manufactured for 2012.

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Managerial accounting focuses on the information needs of internal users. Generally, managerial accounting reports provide more details so that managers have the information they need to plan and control costs. The benefits of the managerial accounting system must outweigh its cost.

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Developed economies have shifted from a manufacturing focus to a service focus. Global competition, e-commerce, and the Internet have expedited both the need and the speed with which information must be available to decision makers. JIT production and TQM mean producing just in time to satisfy customer demand, while constantly improving the quality of goods and services offered to customers.Issues where professional judgments must be made arise often. Determining the ethical action is usually easy. Acting ethically is where integrity and credibility prevail. The excerpt from the IMA’s Statement of Ethical Professional Practice guides managerial accountants in ethical matters.

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Service companies sell their time, skills, or knowledge. All of their operating expenses are normally considered period costs and are considered part of the cost of providing each service unit. In larger, more advanced service companies, the operating expenses (period costs) may be split between service costs (part of the cost per unit of service) and non-service costs (expenses unrelated to the service).Merchandising companies resell products they buy from suppliers. Merchandisers keep an inventory of products, and managers are accountable for the purchase, storage, and sale of the products. Inventory is an asset until it is sold. Cost of goods sold is the total cost of merchandise inventory sold during the period, and includes the freight to get the goods into the warehouse. COGS divided by total units sold equals the cost per unit for the merchandiser.

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The manufacturer creates a product from raw materials by adding direct labor and manufacturing overhead. Because at any point in time products are at various stages of completion, manufacturers have three inventory accounts: Raw materials, Work in process, and Finished goods. The schedule of cost of goods manufactured captures these production costs to determine the cost of goods manufactured for a period. Product cost per unit is calculated by dividing cost of goods manufactured by the total number of units produced.

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Copyright

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introduction to management accounting

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financial accounting

business trends

total quality management1

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