Introduction to Managerial Accounting

Chapter M1

Financial Vs Managerial Financial – public use of information

– Accuracy and consistency are important Managerial – internal use

– Estimates are used

Managerial Characteristics

Provides estimates of future operations

Used by mgmt in conducting daily operations, planning, and developing strategies

Organizational Chart

V P o f P rod u ction

D irec to r o f A d v er tis ing D irec to r o f M arke ting

V P o f S a les V P o f D is tr ib u tion

P ay ro ll A cc ts R ec A ccts P a ya b le

C on tro lle r

C o s t B ud ge ting

D ire c to r o f B u dg e ting D irec to r o f T a xa tion

C h ie f F in a nc ia l O ff ice r

C E OC h ie f E xe xcu tive O ffice r

Managerial Terms Cost

– A payment of cash or its equivalent or the commitment to pay cash in the future

Manufacturing– Converts materials

into finished product

Materials Direct –

– cost of materials that are an integral part of the product

Indirect –– Cost of materials

that are not a significant portion of the total product cost

Labor Direct

– Cost of wages of employees who are directly involved in the converting materials into the manufactured product

Indirect– Labor that do not enter

directly into the manufacture of a product

Factory Overhead Costs other than

direct materials cost and direct labor costs– Manufacturing

overhead– Factory burden– Depreciation– utilities

Costs Product costs

– Direct materials, direct labor, and factory overhead

– Associated with the production of the product

Conversion costs– Costs of converting

materials into finished products

– Direct Labor plus factory overhead

Cost Accounting Systems Job order cost

– Provides separate record of the cost of each quantity of the product that passes through the factory

Process cost system– Costs are

accumulated for each of the department or processes within the factory

Inventory Accounts Materials inventory Work in process inventory Finished goods inventory

Purchase of Materials Materials Inventory DR

– Accts payable CR

Example 1: Purchased $8,000 of materials on account

Materials inventory 8,000 Accts payable 8,000

Requisition of Materials Work in process DR (DM) Factory overhead DR (indirect) Materials inventory CR total

Example 2 Material usage

Job # Materials

125 $4,500

126 $4,250

127 $4,000

128 $3,500

129 $3,000

Indirect $2,000

TOTAL $21,250

Example 2 Record the usage of materials WIP $19,250 FO 2,000 Material inventory $21,250

Factory Labor Work in process DR (direct labor) Factory overhead DR (indirect labor) Wages payable CR

Example 3Job # Labor Direct labor

hours

125 $5,000 200

126 $4,900 175

127 $4,500 150

128 $4,000 125

129 $3,500 100

Indirect $1,500

TOTAL $23,400 830

Example 3 Record labor usage Work in process $21,900 Factory overhead 1,500

– Wages payable $23,400

Factory Overhead Costs Factory overhead DR Utilities payable CR record the factory overhead costs

incurred.

Allocating Factory Overhead

Cost allocation – the process of assigning factory overhead costs to a cost object

Activity Base – measure used to allocate factory overhead

Predetermined factory overhead rate =

Estimated total FO Estimated Activity

Base

Examples Example 4: The

corporation estimates FO at $500,000 for the next period. The corporation uses direct labor hours as its activity base and estimates 50,000 total direct labor hours

Rate = $500,000/50,000

Rate = $10 per hour

Examples FO costs at

$500,000 for the next period. Factory overhead is determined as a % of direct labor costs. If direct labor costs is $750,000

Rate– 500,000/750,000

Rate is 2/3 or 67% Rate is 67% of

direct labor costs

Applying Factory Overhead

Work in process DR Factory overhead CR

Applied based on the predetermined overhead rate

Example 6: Apply factory overhead at a rate of $50 per direct labor hour.

Example 6Job # Mtrls Labor DL hr FO

125 4500 5000 230

126 4250 4900 175

127 4000 4500 150

128 3500 4000 125

129 3000 3500 100

Indirect 2000 1500

Totals 21250

23400 780

Example 6

Job # DLhr FO

125 230 $50 X 230 = 11500

126 175 175 x 50 = 8750

127 150 150 x 50 = 7500

128 125 125 x 50 = 6250

129 100 100 x 50 = 5000

Indirect

Totals 780 39000

Example 6 Work in process 39,000 Factory overhead 39,000

Example 7 Apply factory overhead at the rate of

75% of direct labor costs.

Example 7Job

#Labor Factory

125 $5000 $5000 x 75% = 3750

126 $4900 $4900 X 75% = 3675

127 $4500 $4500 X 75% = 3375

128 $4000 $4000 X 75% = 3000

129 $1500 $1500 X 75% = 1125

TOTAL 14925

Example 7 Work in process $14,925 Factory overhead $14,925

Factory Overhead

Debit Credit

Disposal of Factory Overhead

Cost of goods sold DR Factory overhead CR Example 8: The balance is FO is

$50,000 and $60,000 is applied to WIP

Balance 50000 60000 applied

10,000 over applied

Factory overhead

Disposal Factory overhead 10,000 Cost of good sold 10,000

Transfer of Finished Goods

Finished goods DR Work in process CR Total cost of production DM + DL + FO

Example 9: jobs 125, 126, & 127 are completed

Job Mtrl Labor FO Total

125 $4500 $5000 $6900 $16400

126 $4250 $4900 $5250 $14400

127 $000 $4500 $4500 $13000

Total $43,800

Transfer to Finished Goods

Finished goods $43,800 Work in process $43,800

Transferred to COGS Example 10: Job 125 sold for $75,000 Accts rec $75,000 Sales $75,000 We record the transfer at the COST

not the sales price. Cost of goods sold $16,400 Finished goods $16,400

Classroom Example

Complete the Cycle

Record the materials WIP $33070 FO 9100 Materials inventory 42170 Record the labor WIP 20900 FO 11500 Wages payable 32400

Factory overhead applied 120% of direct labor costs

Job DL FO

531 6000 7200

532 5900 7080

533 3500 4200

534 3000 3600

535 2500 3000

TOTAL 25080

Factory overhead WIP 25080 FO 25080 Completed jobs

Job Mtrl Labor FO Total

533 8709 3500 4200 16409

534 3500 3000 3600 10100

Total 26509

Continuation Finished goods 26509 WIP 26509 Sale of job 533 Accts rec 100000 Sales 100000 Cost of goods sold 10100 Finished goods 10100

Period Costs Are expenses that

are use din generating revenue during the current period and not involved in the manufacturing process

Selling expenses Administrative

expenses

Homework Exercises 1-11,-12,1-13,1-14