Introduction to Management Accounting

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Introduction toManagement Accounting

• Chapter 19

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The Functions of Management
Planning
Acting
Controlling
Feedback
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Objective 1

• Distinguish between financial
• accounting and management
• accounting.

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Management Accounting and Financial Accounting
Primary Users
Internal managers of the business

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

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Management Accounting and Financial Accounting
Purpose of Information
Help managers plan and control business operations
Help investors, creditors, and others
make investment, credit, and other decisions
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Management Accounting and Financial Accounting
Focus and Time Dimension
Relevance
Reliability, objectivity, and focus on the past
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Management Accounting and Financial Accounting
Type of Report
Internal reports not restricted by GAAP
Financial statements restricted by GAAP
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Management Accounting and Financial Accounting
Verification
No independent audit
Annual independent audit by CPAs
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Management Accounting and Financial Accounting
Scope of Information
Detailed reports on parts of the company
Summary reports primarily on the company as a
whole
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Management Accounting and Financial Accounting
Behavioral Implications
Concern about how reports will affect employees
behavior
Concern about adequacy of disclosure
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Service, Merchandising, and Manufacturing
Companies
Service Company provides intangible
services, rather than tangible products
Merchandising Company resells products
previously bought from suppliers
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Service, Merchandising, and Manufacturing
Companies
Manufacturing Company uses labor, plant, and
equipment to convert raw materials into finished
products
Materials inventory Work in process
inventory Finished goods inventory
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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
Design
Production or Purchases
Marketing
Distribution
Customer Services
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Objective 3

• Distinguish direct costs
• from indirect costs.

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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.

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Cost Objects, Direct Costs,and Indirect Costs

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

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Cost Objects, Direct Costs,and Indirect Costs

• 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.

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Objective 4

• Distinguish among full product
• costs, inventoriable product
• costs, and period costs.

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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

• Inventoriable
• product
• costs

Full product costs
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External Reporting

• Inventoriable
• product
• costs

• Period
• costs

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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.

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Inventoriable Product Costs

• 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.

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Inventoriable Product Costs
Direct Materials
Direct Labor
Indirect Labor
Indirect Materials
Other
Manufacturing Overhead
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Inventoriable Product Costs
Direct Materials
Direct Labor
Prime Costs Direct Materials Direct Labor
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Inventoriable Product Costs
Direct Labor
Indirect Labor
Indirect Materials
Other
Conversion Costs Direct Labor Manufacturing
Overhead
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Objective 5

• Prepare the 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
INCOME STATEMENT
BALANCE SHEET
Sales Revenue
Inventoriable Costs
deduct
when sales occur
Purchases of Inventory plus Freight-In
Inventory
Cost of Goods Sold
equals Gross Margin deduct
Operating Expenses
Period Costs
equals Operating Income
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Financial Statements forManufacturing Companies
INCOME STATEMENT
BALANCE SHEET
Inventoriable Costs
Sales Revenue
Materials Inventory
deduct
when sales occur
Finished Goods Inventory
Cost of Goods Sold
equals Gross Margin deduct
Work in Process Inventory
Operating Expenses
Period Costs
equals Operating Income
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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.

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Manufacturing Company Example

• 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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Manufacturing Company Example

• Kendall Manufacturing Companys beginning
  finished goods inventory was 60,000 and its
  ending finished goods inventory was 55,000.
• How much is the cost of goods sold?

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Manufacturing Company Example

• 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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Manufacturing Company Example

• 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

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Manufacturing Company Example

• 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 Kendalls operating income?

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Manufacturing Company Example
Gross margin 300,000 Operating expenses
120,000 Operating income 180,000
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Flow of Costs through a Manufacturers Accounts

• Direct Materials Inventory
• Beginning inventory
• Purchases and freight-in
• Direct materials available for 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

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Flow of Costs through a Manufacturers Accounts

• Finished Goods Inventory
• Beginning inventory
• Cost of goods manufactured
• Cost of goods available for sale
• Ending inventory
• Cost of goods sold

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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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Shift to a Service Economy
In the U.S., 55 of the workforce is employed in
service companies.
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Competing in the Global Marketplace
Foreign operations account for over 30 of GEs
revenues.
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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.

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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.

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Total Quality Management
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 7

• 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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Standards of Ethical Conduct for Management
Accountants
Integrity
Competence
Confidentiality
Objectivity
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End of Chapter 19