Essentials of Managerial Finance

1
Chapter 16 Introduction to Managerial Accounting
2
Financial Accounting versus Managerial
Accounting

• Financial accounting is for external reporting
• Responsible to
• Owners and creditors for their investment
  decisions
• Regulatory agencies, such as the Securities
  Exchange Commission, the Federal Trade
  Commission, and the Internal Revenue Service
• Customers and society to ensure that the company
  acts responsibly

3
Financial Accounting versus Managerial Accounting

• Managerial accounting is for internal planning
  and controlling
• Responsible to
• Customers for safe and defect-free products and
  services
• Creditors for repaying principal and interest
• Employees for a safe and productive work
  environment
• Suppliers and vendors for timely payments
• Owners for providing a return on the owners
  investment
• Others governments and communities

4
Planning and Controlling

• Planningchoosing goals and deciding how to
  achieve them
• Common goalto increase operating income
  (profits)
• Achieved by raising prices or advertising more
• Budgeta mathematical expression of the plan
• Used to coordinate the businesss activities
• Shows the expected financial impact of decisions
• Helps identify the resources needed to achieve
  goals
• Controllingimplementing the plans and evaluating
  operations
• By comparing actual results to the budget
• Cost data helps managers make decisions

5
Management versus Financial Accounting
6
S16-1 managerial accounting vs. financial
accounting

• Managerial and financial accounting differ in
  many aspects.
• 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.

FA
MA
MA
FA
FA
7
Todays Business Trends

• Shift toward a service economy
• Health care, communication, banking, other
• Global competition
• Moving operations to be closer to new markets
• Time-based competition
• Advanced information systems
• E-commerce
• Just-in-time management
• Total quality management
• A philosophy
• To provide customers with superior products and
  services while meeting organizational goals

8
S16-3 Business trends terminology

• Consider the terms and definitions that follow.
  Match the term with the correct definition.
• 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.
• Use of the Internet for such business functions
  as sales and customer service. Enables companies
  to reach thousands of customers around the world.

1. ERP c. E-commerce
2. Just-in-time (JIT) d. Total quality management

Total quality management
E-commerce
9
S16-3 Business trends terminology (continued)

• Consider the terms and definitions that follow.
  Match the term with the correct definition.
• Software systems that integrate all of a
  companys worldwide functions, departments, and
  data into a single system.
• 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.

1. ERP c. E-commerce
2. Just-in-time (JIT) d. Total quality management

Enterprise Resource Planning (ERP)
Just-in-time (JIT)
10
Ethical Standards

• Requires ethical behavior without regard to
  personal consequences
• Doing the right thing
• Ethical violations
• Enron
• Bernie Madoff
• Bank of America/Merrill Lynch

11
Ethical Standards

• Institute of Management Accountants (IMA)
• Developed standards to help meet ethical
  challenges
• Require management accountants to
• Maintain their professional competence
• Preserve the confidentiality of the information
• Act with integrity and credibility

12
IMA Statement of Ethical Professional Practice

• The standards of ethical practice include the
  following
• I. Competence
• 1. 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.

13
IMA Statement of Ethical Professional Practice

• The standards of ethical practice include the
  following
• II. Confidentiality
• 1. 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.

14
IMA Statement of Ethical Professional Practice

• The standards of ethical practice include the
  following
• III. Integrity
• 1. 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.

15
IMA Statement of Ethical Professional Practice

• The standards of ethical practice include the
  following
• IV. Credibility
• 1. Communicate information fairly and
  objectively.
• 2. Disclose all relevant information.
• 3. Disclose delays or deficiencies in
  information, timeliness, processing, or internal
  controls.

16
Service Company

• Service companies sell their time, skills, and
  knowledge
• Seek to provide services with
• High quality
• Reasonable prices
• Timely delivery
• Simplest accounting
• No inventory or products for sale
• All costs are period costs
• Incurred and expensed in same accounting period

17
Income Statement of a Service Company
18
Income Statement of a Service Company

• Cost per service
• Helps to set the price of each service provided
• Consider all operating expenses (period costs)
• Unit cost per service

19
S16-5 Calculating income and unit cost for a
service organization

• 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............................
  805
• Building rent expense ............................
  1,150
• Utilities.........................................
  ......... 184
• Depreciation 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?

3,015
9.50
20
Merchandising Company

• Resell products purchased from suppliers
• Keep an inventory of products
• Cost of goods sold is a major expense
• Product costs flow through the inventory
• GAAP requires companies to record inventoriable
  product costs as an asset until sold

21
Product Costs

• 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

22
Product versus Period Costs
23
Merchandising Company Income Statement
24
Unit Cost Per Product

• Unit cost per producthelps managers set
  appropriate selling prices
• Formula

25
S16-6 Computing cost of goods sold

• The Tinted View, a retail merchandiser of auto
  windshields, has the following information
• Web site maintenance . . . . . . . 7,100
• Delivery expense . . . . . . . . . . 900
• Freight in . . . . . . . . . . . . . . . . 2,
  900
• Purchases . . . . . . . . . . . . . . . .
  39,000
• Ending inventory . . . . . . . . . . 4,900
• Revenues . . . . . . . . . . . . . . . .
  57,000
• Marketing expenses . . . . . . . . 9,900
• Beginning inventory . . . . . . . . 7,900
• Compute The Tinted Views cost of goods sold.

26
Manufacturing Companies

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

Finished goods inventory
Work in process inventory
Materials inventory
27
Types of Cost

• Cost object
• Anything for which managers want a separate
  measurement of cost
• Examples
• A product, department, or activity

• Direct costs
• Can be directly traced to a cost object
• Direct materials
• Direct labor

• Indirect costs
• Needed to finish products
• Cannot be directly traced to a cost object
• Manufacturing overhead

28
Inventoriable Product Costs

• Direct materials
• Become a physical part of the finished product
• Direct labor
• Wages of employees who convert materials into
  the companys products
• Manufacturing overhead
• All other costs other than direct materials and
  labor

Conversion Cost
29
Manufacturing Overhead

• 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 labor
• Manufacturing wages that are not easily traced to
  products
• Plant managers maintenance

30
Manufacturers Inventoriable Product Costs
31
Comparison of Product and Period Costs
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 CEOs salary
32
Manufacturing Company Income Statement
33
Inventoriable Product Costs and Period Costs
Materials Inventory
Purchases of materials
INCOME STATEMENT
Sales
Work in Process Inventory
Direct labor manufacturing overhead
-
When sales occur
Cost of Goods Sold
-
Finished Goods Inventory
Operating Expenses
Period Costs
Operating Income
34
Cost of Goods Manufactured
35
Flow of Costs Through a Manufacturers Inventory
Account
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
Direct materials available for use Manuf. overhead Cost of goods available for sale
- Ending inventory - Ending inventory - Ending inventory
Direct materials used Cost of goods manufactured Cost of goods sold
36
S16-9 Computing direct materials used

• You are a new accounting intern at Cookie
  Messages. Your boss gives you the following
  information
• Purchases of direct materials . . . . . . . . . .
  . . . 6,400
• Freight in . . . . . . . . . . . . . . . . . . .
  . . . . . . . . . 200
• Property taxes . . . . . . . . . . . . . . . . .
  . . . . . . . 900
• Ending inventory of direct materials . . . . . .
  . 1,500
• Beginning inventory of direct materials . . . . .
  4,000
• Compute direct materials used.

37
S16-12 Compute cost of goods manufactured

• All Pro Golf Company had the following inventory
  data for the year ended January 31, 2012
• Direct materials used . . . . . . . . 12,000
• Manufacturing overhead . . . . . 20,000
• Work in process inventory
• Beginning . . . . . . . . . . . . 7,000
• Ending . . . . . . . . . . . . . . 5,000
• Direct labor . . . . . . . . . . . . . . .
  11,000
• Finished goods inventory . . . . . 9,000
• Compute All Pros cost of goods manufactured for
  2012.