Explain the distinguishing features of managerial accounting.

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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.

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• 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.

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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

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MANAGERIAL ACCOUNTING BASICSDistinguishing
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

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COMPARING MANAGERIAL AND FINANCIAL
ACCOUNTINGStudy Objective 1Similarities

• Both deal with economic events of a business.
• Both require that economic events be
  quantified and communicated
  to interested parties.

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COMPARING MANAGERIAL AND FINANCIAL
ACCOUNTINGDifferences
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MANAGEMENT FUNCTIONSStudy Objective 2

• Managements activities and responsibilities can
  be classified into the following three broad
  functions
• Planning
• Directing
• Controlling

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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

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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

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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.
  

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MANAGERIAL COST CONCEPTSManufacturing
CostsStudy 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

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MANAGERIAL COST CONCEPTSManufacturing 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 include
• Flour in the baking of bread
• Syrup in the bottling of soft drinks
• Steel used in making automobiles

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MANAGERIAL COST CONCEPTSManufacturing 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

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MANAGERIAL COST CONCEPTSManufacturing 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

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MANAGERIAL COST CONCEPTSManufacturing 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

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MANAGERIAL COST CONCEPTSManufacturing Costs
Manufacturing Overhead

• Costs that are indirectly associated with
  manufacturing the product
• Examples include
• Indirect materials
• Indirect labor
• Depreciation on factory buildings
• Insurance, taxes, maintenance on
  factory
  facilities
• Basically manufacturing overhead includes all
  manufacturing costs except direct materials and
  direct labor.

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PRODUCT VERSUS PERIOD COSTSStudy Objective
4Product 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

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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
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PRODUCT VERSUS PERIOD COSTS
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MANUFACTURING COSTS INFINANCIAL STATEMENTSStudy
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.

CGS
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MANUFACTURING COSTS INFINANCIAL STATEMENTS Cost
of Goods Sold ComponentsMerchandiser versus
Manufacturer
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MANUFACTURING COSTS INFINANCIAL STATEMENTS
Cost of Goods Sold Section of the Income
Statement
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DETERMINING THE COST OF GOODS MANUFACTUREDStudy
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

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COST OF GOODS MANUFACTURED SCHEDULE
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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

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BALANCE SHEET - Inventories
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MANAGERIAL ACCOUNTING TODAYStudy Objective
8Service 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

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MANAGERIAL ACCOUNTING TODAYManagerial Accounting
Practices

• Value Chain
• Refers to all activities associated with
  providing a product or service.
• For a manufacturing firm, these include the
  following

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MANAGERIAL ACCOUNTING TODAYManagerial 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

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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 needed
• Total 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

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MANAGERIAL ACCOUNTING TODAYManagerial 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 fashion
• Uses both financial and non-financial measures
• Links performance measures to overall company
  objectives