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John Wiley & Sons, Inc. © 2005
Managerial AccountingTool for Business Decision Making
Third Edition
Prepared byPrepared byDan R. WardDan R. Ward
Suzanne P. WardSuzanne P. WardUniversity of Louisiana at LafayetteUniversity of Louisiana at Lafayette
Managerial AccountingManagerial Accounting
Weygandt Weygandt •• Kieso • Kimmel Kieso • Kimmel
CHAPTER 1
MANAGERIAL ACCOUNTING
Study Objectives
Explain the distinguishing features of managerial accounting.
Identify the 3 broad functions of management.
Define the 3 classes of manufacturing costs.
Distinguish between product and period costs.
Study Objectives: Continued
Explain the difference between a merchandising and a manufacturing income statement.
Indicate how cost of goods manufactured is determined.
Explain the difference between a merchandising and a manufacturing balance sheet.
Identify trends in managerial accounting.
MANAGERIAL ACCOUNTING BASICS
Definition of Managerial Accounting
A field of accounting that provides
economic and financial information
for managers and other internal users
Also called Management Accounting
MANAGERIAL ACCOUNTING BASICS
Managerial Activities
Explain manufacturing and nonmanufacturing costs and how they are
reported (Chapter 1).
Compute cost of providing a service or manufacturing a product (Chapters 2, 3, and 4).
Determine behavior of costs and expenses as activity changes (Chapter 5).
MANAGERIAL ACCOUNTING BASICS
Managerial Activities: Continued
Gather and present relevant data for
management decision making (Chapter 6).
Evaluate effect of alternative ways to cost inventory (Chapter 7).
Determine prices for external and internal transactions (Chapter 8).
MANAGERIAL ACCOUNTING BASICS
Managerial Activities: Continued
Assist in profit planning and formalizing plans in the form of budgets (Chapter 9).
Help to control costs by comparing actual results with planned objectives and standard costs (Chapters 10 and 11).
Collect and present data for capital expenditure decisions (Chapter 12).
MANAGERIAL ACCOUNTING BASICS
Distinguishing Features
Applies to all types of businesses –
service, merchandising, and manufacturing
Applies to all forms of businesses – proprietorships, partnerships, and corporations
Applies to not-for-profit and profit-oriented companies
MANAGERIAL ACCOUNTING BASICS
Distinguishing Features: Continued
More responsible for strategic cost management.
Team includes members from production, marketing, engineering, etc.
Aid in making critical decisions.
COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING
Study Objective 1
Similarities
Both deal with economic events of a business.
Both require that economic events be quantified and communicated to interested parties.
COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING
Differences
MANAGEMENT FUNCTIONSStudy Objective 2
Management’s activities and responsibilities can be classified into the following three broad functions:
Planning
Directing
Controlling
MANAGEMENT FUNCTIONS
Planning
Look ahead
Establish objectives such as Maximize short-term profit Commit to environmental protection
Key Objective: Add value to the business Value measured by trading price of stock and
by potential selling price of the company
MANAGEMENT FUNCTIONS
Directing
Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including executives, managers, and supervisors
MANAGEMENT FUNCTIONS
Controlling
Keep activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or a formal system of evaluation
Good decision making is the outcome of good judgment in planning, directing, and
controlling.
ORGANIZATIONAL STRUCTURE
Organizational Chart
Assists in carrying out management’s functions
Prepared by most companies
Organizational charts show: The interrelationships of activities The delegation of authority The delegation of responsibility
A TYPICAL COMPANY’SORGANIZATIONAL CHART
GOOD ETHICS - GOOD BUSINESSBusiness Ethics
Business scandals caused massive investment losses and employee layoffs.
Corporate fraud has increased 13 percent in last five years.
Employee fraud - 60% of all fraud expense account abuse, theft of assets,
etc.
Intentional misstatement of financial reports, or financial reporting fraud, - most costly to companies.
GOOD ETHICS - GOOD BUSINESS
Creating Proper Incentives
Monitoring and evaluating employees may produce incentives to act unethically
For example, overly ambitious budgets may produce unethical management actions to meet targets
Employees may feel that they must succeed no matter what
Ineffective and unrealistic controls may result in declining quality of product
GOOD ETHICS - GOOD BUSINESS
New Legislation – Sarbanes Oxley Act of 2002
Clarifies management’s responsibilities
CEO and CFO must certify fairness of financial statements and adequacy of internal control
Board of Directors, especially the Audit Committee, must meet certain criteria
Penalties for misconduct are substantially increased
Codes of Ethics are now required
MANAGERIAL COST CONCEPTSManufacturing Costs
Study Objective 3
Manufacturing consists of activities to convert raw materials into finished goods.
In contrast, a merchandising firm sells goods in the form in which they were bought.
Typical Classification of Manufacturing Costs
MANAGERIAL COST CONCEPTS
Manufacturing Costs - Materials
Direct Materials
Raw materials - basic materials used in manufacturing.
Raw materials that can be physically and directly associated with the finished product are called direct materials.
Examples includeFlour in the baking of breadSyrup in the bottling of soft drinksSteel used in making automobiles
MANAGERIAL COST CONCEPTS
Manufacturing Costs- Materials
Indirect Materials
Raw materials that cannot be easily associated with the finished product are called indirect materials.
Indirect materials do not physically become part of the finished product or represent too small a part of the finished product in terms of cost
Considered part of manufacturing overhead
MANAGERIAL COST CONCEPTS
Manufacturing Costs - Labor
Direct Labor
Work of factory employees that can be physically and directly associated with converting raw materials into finished goods
Examples include Bottlers at Coca-Cola Bakers at Sara Lee Typesetters at a newspaper
MANAGERIAL COST CONCEPTS
Manufacturing Costs - Labor
Indirect Labor
Work of factory workers that have no physical association with the finished product or for which it is impractical to trace to the goods produced
Examples include Wages of maintenance workers Supervisors Time-Keepers
MANAGERIAL COST CONCEPTS
Manufacturing Costs – Manufacturing Overhead
Costs that are indirectly associated with manufacturing the product
Examples includeIndirect materialsIndirect laborDepreciation on factory buildingsInsurance, taxes, maintenance on
factory facilities
Basically manufacturing overhead includes all manufacturing costs except direct materials and direct labor.
PRODUCT VERSUS PERIOD COSTSStudy Objective 4
Product Costs
Consist of the direct material cost, the direct labor cost, and the manufacturing overhead cost
A necessary and integral part of producing the product
Recorded as inventory when incurred
Do not become expenses until the finished goods inventory is sold
PRODUCT VERSUS PERIOD COSTS
Period Costs
Matched with revenue of a specific time period and charged to expense as incurred.
Non-manufacturing costs
Deducted from revenues in period incurred to determine net income
Include all Selling expenses General and Administrative expenses
FOR RENT
PRODUCT VERSUS PERIOD COSTS
MANUFACTURING COSTS INFINANCIAL STATEMENTS
Study Objective 5
Income Statement
The income statement for a manufacturer is similar to that of a merchandiser
except for the cost of goods sold section.
MANUFACTURING COSTS INFINANCIAL STATEMENTS Cost of Goods Sold ComponentsMerchandiser versus Manufacturer
MANUFACTURING COSTS INFINANCIAL STATEMENTS
Cost of Goods Sold Section of the Income Statement
DETERMINING THE COST OF GOODS MANUFACTURED
Study Objective 6
Work in Process – partially completed units of product
Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the
current year
COST OF GOODS MANUFACTURED SCHEDULE
BALANCE SHEET - InventoriesStudy Objective 7
Merchandising Company One category of
inventory:
Merchandise Inventory
Manufacturing Company May have three
inventory accounts: Raw Materials Work in Process Finished Goods
BALANCE SHEET - Inventories
Let’s ReviewLet’s Review
Direct Materials are a:
Product Manufacturing Period Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No
Let’s ReviewLet’s Review
Direct Materials are a:
Product Manufacturing Period Cost Overhead Cost
a. Yes Yes No
b. Yes No No
c. Yes Yes Yes
d. No No No
MANAGERIAL ACCOUNTING TODAYStudy Objective 8
Service Industry Trends
U.S economy in general has shifted toward an emphasis on providing services
Today over 50 percent of U.S. workers are employed by service companies
Trend is expected to continue in future
Most of the techniques learned for manufacturing firms are applicable to service companies
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
Value Chain Refers to all activities associated with providing a
product or service.
For a manufacturing firm, these include the following:
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
Technological Change
Computerization and automation
Enterprise resource planning (ERP) - software systems that manage the value chain
In large companies an ERP system might replace as many as 200 individual software packages
Computer-integrated manufacturing (CIM) - make products untouched by human hands
Internet and business-to-business (B2B) e-commerce
MANAGERIAL ACCOUNTING TODAYManagerial Accounting Practices
Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or
purchased just in time for use
Quality Increased emphasis on product quality because goods are
produced only as neededTotal Quality Management (TQM) - a philosophy of zero
defects
Activity-Based Costing (ABC) Allocates overhead based on use of specific activities or
functions of the company (number of orders or number of machine set ups)
Results in more accurate product costing and scrutiny of all activities in the value chain
MANAGERIAL ACCOUNTING TODAY
Managerial Accounting Practices
Theory of Constraints Used to identify and manage constraints or “bottlenecks”
Helps achieve overall goals of the company, particularly profits
Balanced Scorecard A performance-measurement approach to evaluate
operations in an integrated fashionUses both financial and non-financial measures
Links performance measures to overall company objectives
Summary of Study Objectives
Explain the distinguishing features of managerial accounting
The primary users of reports are internal users such as officers, department heads in the company
The internal reports are issued as needed
Special-purpose reports Provide information for a particular user for a
particular decision Pertain to subunits of the business May be very detailed and extend beyond the
double-entry accounting system
The reporting standard is the relevance of the information to the decision being made
Summary of Study Objectives Identify the three broad functions of management
PlanningDirectingControlling
Define the three classes of manufacturing costsDirect MaterialsDirect LaborManufacturing Overhead
Distinguish between product and period costsProduct costs are
an integral part of producing the product also called inventoriable costs do not become expenses until the product is sold.
Period costs are identified with a specific time period rather than a product selling and administrative expenses.
Summary of Study Objectives Explain the difference between a merchandising and a
manufacturing income statementIncome statements are similar except for the cost of goods sold section. CGS section shows beginning and ending finished goods
inventories and the cost of goods manufactured
Indicate how cost of goods manufactured is determinedBeginning work-in-process + total manufacturing costs for the period – ending work-in-process = cost of goods manufactured
Explain the difference between a merchandising and a manufacturing balance sheet
The difference is in the current asset section
Manufacturing firm - three inventories: finished goods, work-in-process, and raw
materials
Merchandising firm - only one inventory account: merchandise inventory
Summary of Study Objectives
Identify trends in managerial accounting
Shift toward the addressing the needs of service companies
Improving practices to better meet the needs of managers
Managing the value chain
Just-in-time inventory (JIT)
Enterprise resource planning (ERP)
Theory of Constraints
Activity based costing (ABC)
The balanced scorecard for a
comprehensive view of operations
Let’s ReviewLet’s Review
Which of the following is not an element of manufacturing overhead?
a. Plant manager’s salary
b. Sales manager’s salary
c. Factory repairman’s wages
d. Product inspector’s salary
Let’s ReviewLet’s Review
Which of the following is not an element of manufacturing overhead?
a. Plant manager’s salary
b. Sales manager’s salary
c. Factory repairman’s wages
d. Product inspector’s salary
Appendix Accounting Cycle
for a Manufacturing Company
Accounting cycle for a manufacturer is the same as for a merchandiser when a periodic inventory system is used.
Journalizing and posting transactions are the same with the manufacturer having additional
manufacturing inventories and manufacturing cost accounts.
Preparation of a trial balance and adjusting entries are also the same for both types of companies.
Appendix Accounting Cycle
for a Manufacturing Company
Changes occur in the use of a work sheet and in preparation of closing entries.
Worksheet has an additional set of columns between those for the adjusted trial balance and the income statement; these columns are for the Cost of Goods Manufactured.
In closing, a Manufacturing Summary account is used to close all accounts that appear in the cost of good manufactured schedule. The balance of the Manufacturing Summary account is then closed to Income Summary.
Closing Entries
Closing Entries
Closing Entries
After posting the summary accounts will show the following:
COPYRIGHT
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.